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CRISIL projects not-so-sweet time for sugar units

Credit Rating Information Services of India Limited, in its outlook for the sugar industry, expects that the depressed realisations are unlikely to improve significantly during the current year and this is expected to result in increased pressure on the relatively smaller units operating with suboptimal capacities.

CRISIL believes that in the face of the increasingly difficult cycles that the industry is now passing through, strong operating efficiencies, optimum capacities, favourable capital structure and good liquidity management would be the key rating sensitivities.

CRISIL said the domestic sugar industry continues to be characterised by its inherent seasonality and cyclicality, high degree of government regulations over cane price fixation, distribution and pricing of sugar, vulnerability to cane availability and high working capital intensity of operations.

CRISIL feels that the extent of government regulation related to the sugar industry continues to remain high and would remain the key driver for performance of the various players in this business.

The sugar industry has witnessed steady demand growth in the past and its performance is determined largely by any supply-related issues such as cane costs and availability, production levels, sugar stocks and quantum of imports.

According to CRISIL, during the 1997-98 sugar season, while the demand was around 14.8 million tonnes, sugar production stagnated at the 1996-97 levels of around 12.9 million tonnes. Any upward movement of prices to a significant extent was however restricted on account of the shortfall being met out of stocks of 6.5 million tonnes and imports of around 900,000 million tonnes.

The industry has been facing increasing incidence of imports due to declining international prices. In addition, the protection to the industry arising out of the import duty levied in April 1998 has been largely eroded due to increased export subsidies being provided by the exporting countries including Pakistan, European Union, Brazil and Mexico.

CRISIL feels that any substantial increase in quantum of cheap imported sugar during the current season would result in a glut in the domestic market thereby impacting the realisations, profitability, inventory levels and liquidity profile of the players in the industry. In addition, the increase in cane prices being contemplated in the major sugar producing states would result in incremental cost pressures and is expected to further erode profitability.

CRISIL expects that in the emerging scenario only established players with high operating efficiencies, strong cane procurement mechanism, good capital structure and comfortable liquidity position would be able to tide over the difficult cycles that the industry is exposed to. However, any government intervention in the form of stronger import barriers could have a favourable impact on prices and performance of the industry.

UNI

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