The COVID-19 pandemic is expected to exert a downward pressure on credit quality of sugar mills by eroding operating profitability and shoring up debt in FY21, Crisil Ratings said in a report.
"The expected decline in operating profitability of millers this fiscal is despite sugar production declining by a fifth in the current sugar season. Sugar millers could thus be looking at operating profitability of 7.5-9.5 per cent in the current fiscal, down from 9-12.5 per cent in the last fiscal," Crisil Ratings Director Gautam Shahi said.
One of the reason for decrease in profitability is the expected reduction in industrial usage, which accounts for nearly two-thirds of the annual demand of 26 million tonne, as several food manufacturing units -- including soft beverages, chocolates, confectionery, bakeries, hotels, restaurants and cafes -- are either shuttered or running at low capacities, it said.
As a result, overall domestic demand is expected to be lower by 1.5-2 million tonnes in the current sugar season, as reflected in softening prices over the past few weeks, it added.
The second reason is that the oil marketing companies would reduce ethanol offtake because the lockdown has lowered demand for fuel.
Besides, they have limited storage capacity available and production of potable alcohol from ethanol would also be impacted because demand from distillers would have declined, the report said.
Also, international sugar prices have fallen by 23 per cent between January and April as large supplier nations, including Brazil, are switching from ethanol to sugar due to slack global oil demand and low crude oil prices.
Thus, exports from India are likely to remain flattish compared with a 25-30 per cent growth expected earlier, it added.
Crisil Ratings further said that India had started the current sugar season (October 1, 2019 – September 30, 2020) with an opening stock of 14.5 million tonnes.
However, despite 20 per cent lower production, the closing inventory is likely to be high at 12.8-14 million tonne, which is equal to six months' consumption, because of slack industrial demand and exports, it added.
The saving grace for domestic sugar mills is the minimum selling price of Rs 31 per kg fixed by the government.
If not for it, sugar realisations would have fallen further, given the high stocks, and led to a sharper decline in profitability, the report said.
"The current sluggishness in sales due to the pandemic will push up inventories, resulting in elevated debt levels this fiscal.
"This, coupled with lower profitability, will moderate the ratios of cash accruals to total debt and interest coverage to 0.09 time and 1.6 times from 0.13 time and 2 times, respectively, in fiscal 2020–21, indicating downward pressure on credit metrics," Crisil Ratings Associate Director Kiran Kavala sdid. SM RVK