Industry Risk Score : Sugar

Executive Summary

Sugar is the second largest agro-based industry in India after cotton, with more than 50 million sugarcane farmers and 0.5 million sugar mill workers depending on it for their livelihood. The industry stood at an estimated Rs. 80,000 crore as of FY 2017-18 . India is the largest consumer of sugar worldwide with around 26 million tonnes per annum (MTPA) and the second largest producer at more than 30 MTPA, accounting for around 15% of the global production.

While domestic demand is expected to remain robust, backed by rising population and growing income, supply is likely to outpace demand. In sugar season (SS, which typically begins from October and ends in September next calendar year) 2017-18 and 2018-19, surplus production of more than 5 million tonnes is expected owing to higher area under cultivation of sugarcane backed by consequent good monsoons and lucrative cane prices. Initial estimates indicate that the sugar production is expected to be significantly higher at around 35 million tonnes in SS 2018-19. This is likely to keep domestic sugar prices under pressure. Further, lower global prices on account of surplus production in the European Union (EU), Thailand, and China in SS 2017-18, are likely to render sugar exports unviable. This is expected to have an adverse impact on the profitability of the industry in the medium term.

The domestic industry is highly competitive and fragmented with 493 mills operational in SS 2016-17. Price is the only differentiating factor, and players' ability to charge premium for their products is extremely constrained given the demand supply gap. Nevertheless, sugar mills with large scale of operations, sufficient cane availability and better forward integration in terms of ethanol/alcohol production from molasses and power co-generation through bagasse, are better positioned to weather cyclical downturns.

Sugar industry continues to be highly affected by government regulations in terms of allocation of sugarcane, cane pricing and by-product pricing. Though the government provides support through subsidies, soft loans during cyclical downturns and stock and price control measures, populist measures toward sugarcane farmers by both central and state governments undermine the overall support to the sugar industry, which is reflected in the industry's deteriorating financial performance over the last few years. Hence, the industry is subject to a high regulatory risk. Also, lack of control on sugarcane procurement and pricing poses a significant input risk to the industry. With regards to marketing and distribution of sugar (levy and release mechanism), government has recently implemented measures like stock holding limits, introduction of floor prices for retail sugar sales among others with a view to ease the pricing pressure.

Key Risks& Attributes

  • Cyclical nature of the sugar industry and agro-climatic risks related to cane availability
  • Profitability of sugar mills vulnerable to the State government's policy on cane prices
  • Being a regulated Industry, it is susceptible to sudden changes in Government policies

Demand & Supply Scenario


Supply-side dynamics play a critical role in the demand-supply situation of the sugar industry. The industry is highly cyclical in nature. A typical sugar cycle lasts for 3-5 years (assuming normal monsoon) – higher sugarcane and sugar production leads to lower sugar prices, thus resulting in lower profitability for the sugar mills and consequently delayed payments to farmers, which, in turn, results in lower area under cultivation in the coming years. A decrease in area under cultivation results in lower sugarcane and sugar production, an increase in sugar prices and thus higher and prompt payments to farmers, which, in turn, leads to an increase in area under cane cultivation.

In SS 2014-15, surplus production of sugar owing to higher acreage under cultivation backed by good monsoon in 2013 led to a downward pressure on prices. Conversely, in SS 2016-17, production declined sharply owing to drought like conditions in key sugarcane producing states, especially, Maharashtra and Karnataka. As a result, there was a sharp increase in ex-mill sugar prices to Rs. 3,610 per quintal in SS 2016-17 from Rs. 2,492 per quintal in SS 2014-15.

Cane pricing plays an important role in determining the supply situation of the industry. While central government determines fair and remunerative price (FRP), states also determine their own State Advised Prices (SAP), which are generally higher than FRP. While Uttar Pradesh (UP) still follows SAP for the purpose of cane pricing, few states like Maharashtra, Karnataka and Tamil Nadu have begun using revenue sharing model (based on Rangarajan Committee recommendations), wherein cane prices are determined as a percentage of sugar realisations.

Since SS 2009-10, FRP has almost doubled to Rs. 255 per quintal in FY2017-18 from Rs. 129 per quintal, making it highly lucrative for farmers to grow sugarcane vis-a-vis other crops. On the other hand, ex-mill sugar prices have not risen commensurately, impacting sugar manufacturers adversely, particularly in the states where FRP/SAP is administered.

In the states where revenue sharing model is in place, lower ex-mill sugar prices may result in lower cane realisations to the farmers, which in turn might lead them to grow alternate crops with relatively better realisation. However, sugar mills are positively impacted, as the model has resulted in lower cane arrears for them.

Going forward, in SS 2017-18 and 2018-19, surplus production to the tune of 4-5 million tonnes is expected owing to higher area under cultivation of sugarcane backed by consequent good monsoons in 2016 and 2017 and lucrative cane prices. This is likely to pull down sugar prices in the near term, leading to lower realisations and higher cane arrears. Globally also, sugar prices are expected to remain under pressure on account of surplus global production, thus leaving little scope for sugar exports. This is likely to have an adverse impact on the profitability of players in the industry in the medium term.

On the other hand, domestic demand is largely steady and growing, driven by rising consumption in sectors such as confectionaries, sweets and soft drinks, which comprise almost 65% of the total consumption of sugar, while rest of the demand comes from retail consumers. At present, there is no major demand risk as such.

Acuité believes that though demand is likely to remain steady, production glut, both domestically and globally, will pressurise sugar prices and render exports unviable. Lower sugar realisations are likely to have a negative impact on profitability of the industry.

Nature & Extent of Competition


The domestic sugar industry is highly competitive and fragmented with 493 mills operational as of SS 2016-17. Thus, the players' ability to charge premium for their products is highly constrained. Players with large scale of operations, sufficient cane availability, and better cost structure and manufacturing process efficiencies, will be better placed to deal with raw material pricing pressures.

Over the last decade, several industry players have forward integrated into ethanol/alcohol production from molasses and power co-generation through bagasse, and are thus better positioned to face cyclical downturns. Companies benefit from such integrated business model with cash flows from distillery and co-gen providing cushion against the cyclical sugar business. Rising oil prices are expected to help push higher ethanol production in the near to medium term, which is expected to provide cushion to the players. Additionally, in June 2018, Central Government has announced soft loans of Rs.4440 crore for augmenting ethanol blending capacity. The government would provide interest subvention of up to Rs.1332 crore over a period of five years with one-year moratorium on the loans sanctioned by banks over a period of three years.

Acuité believes that the industry being competitive and fragmented, players' ability to charge premium for products is extremely constrained. However, players who are forward integrated into by-product manufacturing, are relatively better positioned to compete with only sugar producing manufacturers.   

Input Related Risk


As the government determines allocation of sugarcane and regulates cane and by-product pricing, the industry continues to face significant input risk. FRP of sugarcane too needs to be in tandem with the rise in minimum support prices (MSP) of other competing cash crops, in order to secure sugarcane production.Also, availability of sugarcane in a given command area is highly dependent on various factors including monsoons, access to irrigation facilities, cane variety, yield per acre, and ratio of ratoon crop to fresh crop. Thus, a change in any of these factors poses a significant risk to the industry.

Higher sugarcane arrears (Rs. 8,396 crore and Rs. 16,867 crore on FRP and SAP basis, respectively, as on July 15, 2018 ) to farmers also disincentives them to continue sugarcane production, as it largely impacts their working capital, cash available for future production. Sugarcane arrears will continue to impact the industry till the cane prices are not entirely linked to sugar realisations

Acuité believes lack of control on sugarcane procurement and pricing poses a substantial risk to the industry.   

Regulatory Risk


The industry continues to remain highly regulated in terms of allocation of sugarcane, cane pricing and by-product pricing. The central government regulates FRP for sugarcane, and levies import-export duty to maintain sugar availability in the country. State governments also determine their own FRPs, called state advised prices, which sometimes are higher than ex-mill prices, leading to lower profitability and higher cane arrears.

Since December 2017, sugar prices have been on a declining trend owing to excess supply in the market, and the Government of India has stepped in with certain measures. The government doubled import duty on sugar to 100% in the beginning of February 2018 and abolished export duty on sugar in the third week of March 2018. In June 2018, the government has fixed ex-mill floor price at Rs. 29 per kg and has also imposed stock holding limits on sugar mills and created buffer stock of 3 MT, while stock limit on the sale of sugar by mills has also been imposed after a hiatus of more than five years. However, such measures are only expected to have a transient impact with the sugar business continuing to be exposed to inherent supply-side cyclicality

The populist measures toward sugarcane farmers by central and state governments continue to pressurize sugar manufacturers' financial performance. Deregulation of cane prices and their link to sugar price realisation continues to be a key determinant for the industry to realise its full potential.

Acuité believes that the industry remains highly regulated in terms of sugarcane pricing.Populist measures continue to outweigh government support to the industry. Thus, we put regulatory risk unfavourable for the industry.

Technology Risk


Technology obsolescence is not a major risk for the Indian sugar industry. Sugar manufacturers derive maximum revenue from sugar sales, and by-products also add to their bottom-line. To remain competitive and achieve better product realisations, players have to keep investing in technology upgradation. However, technology risk is not a major threat to the overall profitability of the industry.

Acuité believes that the technology risk is not a major risk for the industry.

Operating Margin


Net sales and operating profit witnessed a healthy increase of about 9-10% in the last three years - FY2014-15 to FY2016-17. Median EBITDA margins showed an improvement from 4.25% in FY2014-15 to 18.93% in FY2016-17. Income growth was mainly supported by higher sugar realisations along with increase in distillery income supported by both higher volumes and realisations.

Interest Coverage


With high leverage situation, overall interest coverage remained highly unfavourable, at being less than 1 X during FY2014-15 and FY2015-16. Interest coverage, nevertheless, improved to around 2.58 times during 2016-17 supported by improvement in operating profitability.

Return on Capital Employed


Industry's RoCE remained severely stressed with negative RoCE during FY2014-15 and FY2015-16. There was a recovery in FY2016-17 with median RoCE of 6.35% for the year. RoCE of sugar companies is adversely impacted by the high working capital cycle. The production period is from the middle of November to early April and, as a result, sugar companies carry more than 70% of the annual sugar volumes as inventory at the end of March.

Debt / Equity


Sugar industry showed a high debt-equity ratio with an average of 2.25 times during the three-year period of FY2014-15 to FY2016-17. The Industry median was at 2.21 times in FY2016-17.



Sugar industry has a moderately unfavourable liquidity profile in terms of working capital cycle, with an average gross current assets of 230 days for the three-year period FY2014-15 to FY2016-17. Median performance ranged between 220-250 days during the assessment period.

IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating 'High Risk' and 6 indicating 'Highest Safety'. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable

Data Sources & Credits

  • Indian Sugar Mills Association
  • Commission for Agricultural Costs and Prices
  • Department of Consumer Affairs
  • Department of Agriculture Cooperation & Farmers Welfare
  • United States Department of Agriculture
  • Global Agricultural Information Network
  • International Sugar Organization
  • Ventura Capital




Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.

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