Tailwinds from global sugar demand supply balance driving exports and higher sucrose diversion towards ethanol would allow the industry to curtail its closing inventory levels which in turn would result in lower total debt for the industry.

Reduced debt levels in addition to expanded operating profits emanating from favorable pricing as well as increased share of ethanol in revenue mix would support industry’s credit metrics despite recent hike in cane prices that can constrain profit expansion to an extent.

With domestic sugar production expected at 30.5 million MT (after considering sugar sacrifices towards ethanol), consumption likely at around 26.7 million MT and exports at 4.0-6.0 million MT in SY2022, the closing stock is expected to be around 6.1-8.1 million MT as on September 30, 2022 (lower than sugar stock of 7.1 million MT as on September 30, 2021 if exports are more than 5.0 million MT).

ICRA expects the industry to manage its closing inventory levels in SY2022 in light of healthy exports and higher than last sugar year’s sucrose diversion towards ethanol at 3.4 million MT (previous SY around 2.1 million MT).

Giving more insights, Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA said, “Higher sucrose diversion towards ethanol that would limit domestic sugar production in addition to healthy export prospects for current fiscal emanating from firmed up international prices is likely to support domestic demand-supply balance. This would result, not only, in reduced inventory levels and thus lower debt, but would also support domestic sugar prices which would allow expansion of operating profits despite hiked cane prices for the current sugar year. With improved operating profits and reduced debt levels, the coverage metrics and capital structure would emerge stronger by the end of fiscal year.”

With a favorable mix of ethanol towards B-heavy/juice (feedstock) coupled with higher sugar realizations; operating margins are expected at 12.5%-13.5% in FY2022 (slightly higher than FY2021 levels), moderated by the cane price hike.

Anupama Arora, Vice President & Sector Head, ICRA said, “With majority of the expanded distillation capacities becoming commercialized in FY2023 for the ICRA sample of sugar companies, their credit profile would strengthen materially in FY2024 driven by growth in profits, cash accruals, reduced working capital intensity and thus lower debt level; assuming that the government policies would continue to favor the industry.”