ICRA RESEARCH SERVICES

INDIAN SUGAR SECTOR

ICRA RATING FEATURE
Glut in the Domestic Market, Falling Domestic and International Sugar Prices, and High Contacts:
Sabyasachi Majumdar
Cane Costs Further Add to the Woes of Indian Sugar Mills +91 124 4545304
sabyasachi@icraindia.com

Avneet Kaur
+91 124 4545319
avneetk@icraindia.com

Anupama Reddy
+91 40 40676516
anupama.reddy@icraindia.com

July 2015

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 WHATS INSIDE?

1. Summary Opinion 3
2. Domestic Demand-Supply Scenario and Outlook 5
Trends in domestic sugar production, consumption and closing stock over the years
Domestic & State wise sugar production during SY15
Impact assessment of export subsidy on domestic sugar stocks
3. Trends in Domestic Sugar Prices 8
WITH RANGE BOUND SUGAR
4. International Scenario and Price trendsREALIZATIONS, RATIONALIZATION OF CANE PRICES TO DETERMINE FINANCIAL
11 PERFORMANCE OF SUGAR
INDUSTRY
Global IN 2014-15
sugar supply, demand and balances
Supply-demand scenario in major sugar producing countries
International price trends
5. Cane Pricing and Outlook on Conversion Margins 15
Trends in SAP and FRP cane prices over the years
State wise cane pricing in SY15
State wise cane arrears
Impact assessment of prevailing sugar prices and cane costs on conversion margins for SY15
6. By-products: Alcohol and Power 20
By-product revenue contribution to total revenues
Distillery volumes and realizations during FY14 and FY15
State wise cogeneration tariffs
Power tariff and volume trends in short term trading market
7. Segmental Profitability Analysis 25
Financial performance of the Cogeneration division
Financial performance of the Distillery division
8. Financial Performance of Sugars Mills 28
9. Outlook for Sugar Industry 30
10. Company Section
Bajaj Hindusthan Limited 33
Balrampur Chini Mills Limited 35
Dalmia Bharat Sugar and Industries Limited 37
Dhampur Sugar Mills Limited 39
Dwarikesh Sugar Industries Limited 41
EID Parry India Limited 43
Shree Renuka Sugars Limited 45
Triveni Engineering & Industries Limited 47

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INDIAN SUGAR SECTOR
Glut in the Domestic Market, Falling Domestic and International Sugar Prices, and High Cane Costs Further Add to the Woes of Indian
Sugar Mills
Industry Update July 2015

Summary Opinion
ICRA expects that given the continued sugar surplus scenario in the domestic market coupled with the limited exports on account of falling international sugar prices, domestic sugar
prices will continue to remain under pressure in the near term. Sugar mills are likely to liquidate their sugar stocks at low prices on account of pressure from various state governments to
clear the high cane arrears. Thus, in the domestic market, high cane costs along with low sugar realizations continue to weigh heavily on the profitability and liquidity of the sugar mills.
While government assistance to sugar mills in the form of interest free loans to the tune of Rs. 6000 crore provides some support in the short term in clearing the cane arrears, the debt
burden on the industry is expected to increase. This coupled with pressure on profitability is likely to continue to impact the debt coverage metrics in the near term. Though major sugar
producing states, Uttar Pradesh (UP) and Maharashtra, have come forward to support the mills by providing subsidy on cane prices and higher export subsidy respectively, which is
expected to mitigate the losses to some extent, timely payment of subsidy continues to be mired in uncertainty.

The domestic sugar production is expected to increase by ~16.0% Y-o-Y during SY15 to ~28.3 million MT and outstrip domestic consumption for fifth year in a row, mainly driven by
higher sugar production in key sugar producing states, namely, Maharashtra, UP and Karnataka. During 8M SY15 (ending May, 2015), Indian sugar production reported an increase by
~16.3% Y-o-Y to 27.9 million MT as against the corresponding period during the previous season. In Maharashtra and Karnataka, sugar production during 8M SY15 has increased by
36.4% Y-o-Y to 10.5 million MT and by 19.5% Y-o-Y to 7.1 million MT respectively backed by higher cane acreage by about 11.0% and 2.0% Y-o-Y respectively coupled with relatively
higher yields when compared to the previous year. While there has been an overall decline in cane acreage in UP by 8.0% Y-o-Y, higher than expected yields coupled with better
recovery rates by 25 basis points resulted in higher sugar production by 9.2% to 7.1 million MT during 8M SY15.

Despite higher export subsidy of Rs. 4000/MT during SY15 (Rs. 3371/MT during SY14) on raw sugar exports approved by Cabinet Committee on Economic Affairs (CCEA) in February
2015 and additional export subsidy of Rs. 1000/MT from Maharashtra state government on exports for the mills in the state during SY15, exports have been limited at around 0.56
million MT of sugar during 8M SY15 on account of two reasons. Firstly, weak global prices which make exports less lucrative. Secondly, with the significant delay in announcement of the
subsidy, which came only towards the end of crushing season, there is limited window of opportunity for sugar mills to produce raw sugar. In the light of suppressed sugar realizations in
the global market, the government has raised the import duty on sugar to 40% from 25% in April 2015 to make overseas purchases unviable for refiners in the domestic market and
curtail imports. The current season has commenced with relatively high opening stock of ~7.4 million MT which coupled with the surplus production during SY15 and limited exports to
result in continued sugar surplus scenario with the closing stock estimated at around 10.0 million MT. This would be higher by ~4.0 million MT than the normative sugar stocks of
around 6.0 million MT. Further, despite high cane arrears which mills owe to farmers, the cane acreage for SY16 is largely in line with that of the previous year on account of relatively
higher returns to cane growers when compared to other competing crops such as wheat, paddy or cotton.

Domestic sugar prices continue to be impacted by sugar surplus scenario in both the domestic and international markets. Existing surplus situation coupled with the arrival of fresh
1
sugar supply of SY15 season and delay in the notification of export subsidy for SY15 has resulted in a steep decline in the domestic sugar prices to Rs. 23,000/MT by July 2015 from Rs.
29,000/MT in November 2014. Also, threat of revenue recovery proceedings following failure of payments of cane dues to farmers in Maharashtra has resulted in mills liquidating sugar
stock at lower prices during January March 2015, while mills elsewhere have also been forced to sell sugar at un-remunerative prices given their stretched balance sheet positions.
Decline in the global sugar prices has resulted in limited exports and minimal impact on liquidating the surplus domestic sugar stocks; thus impacting the sugar prices which continue to
remain low in the range of Rs. 23,000/MT - Rs. 24,000/MT in June - July 2015. In the medium-term, the sugar price trends will continue to be determined by the following three factors.
Firstly, the domestic sugar balance, secondly, the international crude oil prices, which will determine the raw sugar: ethanol mix in Brazil, the worlds largest producer and exporter, and
finally, the Government of Indias policies regarding exports of sugar and import duties.

1
Domestic sugar prices quoted are ex-mill UP, unless otherwise mentioned

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 The international sugar prices will largely be determined by fluctuations in the world sugar production (as consumption growth has largely been steady) as well as the crude oil prices
which determine the raw sugar: ethanol blend in major exporting countries like Brazil. In the medium term, lower sugar prices will boost consumption, however on the supply side,
farmers will shift to other crops followed by reduced sugar output, and hence a supply correction can be expected. According to initial estimates, period of over production in the world
sugar market may come to an end in 2015-16 with expected supply and demand almost at the matching levels. Further, output may also get considerably affected as many domestic
sugar industries, which have long been selling sugar at unsustainable prices below the cost of production cut down on their output, while on the other hand consumption continues to
rise. However, the significant existing sugar stockpiles will continue to cushion the market prices for a while against any sudden upsurges, even as the production dwindles.

While the domestic sugar prices are under pressure, fixation of cane prices continue to remain mired in uncertainties. In UP, the state government continues to fix the cane price at Rs.
280/quintal for SY15 while in Maharashtra and Karnataka, the mills are paying FRP to farmers. However, in UP the government has announced a subsidy of Rs. 28.60/quintal in addition
to exemption of certain taxes/commission, although considerable uncertainty remains on the ability and willingness of GoUP to make timely payments. Despite subsidies in UP and FRP
cane price in Maharashtra and Karnataka, the weak domestic sugar realizations are impacting the conversion margins and thus liquidity of the sugar mills resulting in high cane arrears
at around Rs. 22,000 crore as on April 2015. Hence, ability of the industry to secure a linkage between cane price and sugar realizations, which works smoothly is critical for the long-
term sustainability of the industry. Despite efforts, such linkage is yet to be established.

The central government on June 10, 2015 has approved Rs. 6000 crore loan package for the mills to support in clearing the cane arrears to farmers. An interest subsidy of 10% is offered
on these loans for a year and only the mills which have cleared 50% of their cane arrears by June 30, 2015 are eligible for these loans, which would be directly credited into farmer
accounts. Though in the short term these loans would aid the mills in clearing the cane arrears to some extent, the debt servicing burden of the sugar mills would increase as they would
start repaying the loans after a year.

Prices of by-products such as bagasse and molasses continue to remain remunerative driven by healthy demand from consuming sectors such as power, paper and alcohol. Further,
forward integration into distilleries and power generation continues to yield healthy returns, driven mainly by supporting regulatory framework and healthy off-take and pricing for
alcohol and power. ICRA observes that a very significant part of the total revenue and profits of sugar mills comes from by-products, especially in the case of forward integrated entities.
Although there are concerns pertaining to timely collections of receivables from state owned utilities especially in the states of UP and Tamil Nadu, ICRA notes that lately there has been
a substantial improvement in the payment from these utilities. However, considerable decline in ethanol procurement by the oil marketing companies due to declining global crude
prices and their demand for renegotiation of ethanol prices is expected to affect the profitability of the industry as a whole due to lower realization for their by products.
Notwithstanding the same, ICRA believes that forward integration will remain crucial for improving profitability and riding through the cyclicality of the sugar industry.

As far as the financial performance during FY15 is concerned, despite an increase in cane crushing, the revenues of the sugar mills have declined in FY15 when compared to FY14 on
account of decline in the sugar realizations coupled with the companies holding on to huge amount of sugar stocks as on March 31, 2015. Profitability continues to remain constrained
in FY15 impacted by the losses from the sugar division due to low sugar realizations on account of which there has been substantial inventory write down as on March 31, 2015. Modest
operating profits coupled with high depreciation and interest expenses resulted in losses at the net level for most of the sugar mills and significantly impacted the liquidity of the mills
resulting in high cane arrears. Low operating profitability coupled with high debt and interest expenses resulted in weak debt coverage metrics in FY15.

As far as the medium to long-term outlook is considered, as in the past, the long-term prices and profitability of Indian sugar companies will remain highly cyclical and dependent on
domestic and international supply-demand trends. The latter in turn depends on the agro climatic conditions in major producing countries and crude oil price trends, which determine
the diversion of cane crop to ethanol. Consequently, the price trends in international markets will be one of the key determinants of future profitability. Further, government/court
action in ensuring removal of mandatory crushing by the sugar mills for the entire cane offered to them by farmers in the command area and a rational linkage between cane prices and
sugar prices will also be a key to long-term viability of sugar operations, especially in states governed by SAP. Within the sugar industry however, players who enjoy the benefit of high
operating efficiencies, forward integration and a strong capital structure will be best placed to ride out the cycles. Removal of mandatory crushing by the sugar mills for all the cane
offered to them by farmers in the command area while purchasing at high cane prices even at times of distressed sugar realizations.

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