Sugar production is likely to decline to around 30 million tonne in SS 2018-19 from the record high of 32.3 million tonne in SS 2017-18.
Mumbai: Even as there is lower sugar production due to deficient rainfall in sugar season (SS) 2018-19, surplus situation continued following high carry-over stock from the last season, according to a report.
Sugar production is likely to decline to around 30 million tonne in SS 2018-19 from the record high of 32.3 million tonne in SS 2017-18 due to deficient rainfall, white grub and red rot infestations in the key cane producing states of Uttar Pradesh and Maharashtra, India Ratings said in a report.
Despite being lower than the last season, production in SS 2018-19 is likely to exceed sugar demand of around 26 million tonne (MT), it added.
With a high opening stock of 10.7 MT(2017-18: 3.9 MT), India is likely to end the season with a stock of around 11 MT (including a buffer stock of 3 MT).
Adjusting for this buffer stock, the stock-to -consumption ratio could exceed 30 percent compared to the normal carry forward requirement of 16-18 percent, the report said.
Meanwhile, Ind-Ra expects that the minimum support price (MSP) hike will push up the domestic wholesale prices to around Rs 33-34 per kg from the level of Rs 31-32 per kg that has been prevailing since November 2018.
This is likely to improve the EBITDA margins of millers.
The MSP hike is primarily aimed at addressing the issue of mounting cane arrears, which stood at Rs 20,200 crore as on February 13, 2019, according to the Indian Sugar Mills Association (ISMA).
The hike in MSP will boost realisations and free up about Rs 3,000 crore for payment towards cane arrears.
However, cane arrears are likely to remain high in the medium term, considering the higher cost of production, the supply glut restricting the increase in wholesale domestic prices, and the already suppressed export prices.
While the MSP remains below the cost of production of around Rs 34 per kg for Uttar Pradesh and Rs 33 per kg for Maharashtra, realisations from allied segments such as distillery and cogen will continue to be the key profit drivers for integrated sugar mills.
However, working capital requirements could increase as stocks build up on account of regulated domestic sales, leading to a rise in interest costs.