Mumbai: Sugar prices are expected to remain firm in sugar season 2017 (SS2017), despite government allowing import of 0.5 MT of raw sugar at zero duty through open general licence and fall in production in Maharashtra and Karnataka, says a report.


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Sugar prices are likely to remain firm in sugar season 2017 (SS2017) because closing inventory is expected to be at an 8-year-low following a fall in production in Maharashtra and Karnataka, Crisil Ratings report said here.


The prices are expected to remain firm, despite the government's recent move to allow duty-free import of raw sugar of 0.5 million tonne (MT) upto June 12, 2017 and reduction in consumption due to demonetisation. Closing inventory is expected to be 2.2 months in SS2017 compared with 3.8 months in SS2016, it said.


'We expect sugar prices to remain firm in SS2018 as well, even if production increases to 25 MT  or 4-5 MT more than SS2017 due to better cane availability in Maharashtra and Karnataka.'


"As the government has waited till the end of the crushing season to allow imports of 0.5 MT of raw sugar into the country, we believe imports will remain range-bound and would be towards targeting physical shortages," Crisil Ratings director Manish Gupta said.


However, the government's policy on import, and price control will remain a key monitorable, Gupta said.


The government had allowed import of 0.5 MT of raw sugar at zero duty through open general licence in order to address regional production gaps and to maintain domestic prices at reasonable levels.

Crisil pointed out that the credit risk profiles of sugar manufacturers are likely to improve over the medium term with sugar prices expected to remain firm over the current and next sugar seasons (October 1 to September 30).


The resultant higher profit and cash accrual is expected to be used by manufacturers to either reduce debt or invest in the relatively more stable ancillary business of distillery and electricity co-generation.


Analysis of 45 large sugar companies indicates cash accrual will increase to Rs 5,600 crore over fiscal 2017 and 2018 on the back of healthy sugar prices, compared with a negative Rs 1,200 crore in the past three years.


This was despite the removal of excise incentives on ethanol, lower ethanol prices, and expected increase in cane prices in the next sugar season.


With higher cash accruals and no major greenfield capex, there could be a debt reduction by Rs 4,600 crore, from the levels seen at end of fiscal 2016," Crisil Ratings senior director Subodh Rai said.