The profitability of sugar companies is expected to remain stable with the Government setting a higher minimum selling price and keeping the fair and remunerative price for cane unchanged at last year’s level.
This apart, the distillery segment has also witnessed an improvement in profitability, with an increase in ethanol prices as well as an increase in sale volumes.
While the performance is likely to remain subdued in the seasonally-weak second quarter, India Ratings and Research in a report said it expects sugar segment margins to benefit from higher realisations and stable raw material costs in FY20, as the fair and remunerative price of cane remains unchanged in the sugar season 2019-20 (October 2019–September 2020).
The distillery segment profit is increasingly seen as the potential solution to the cyclicality and volatility of earnings of sugar companies in the medium-term on account of the short supply situation, coupled with the government’s focus to incentivise ethanol production.
Historically, the distillery has been the most stable performer of the three segments, consistently yielding profits even in the seasonally-weak first and second quarters for the last 10 years.
The aggregate distillery segment, EBIT, for major entities grew 40 per cent y-o-y to about Rs 400 crore in 1QFY20, accounting for 65 per cent of the total EBIT, said the report.
Ind-Ra expects aggregate EBITDA margins from the cogeneration segment to decline in FY20 as the Uttar Pradesh Electricity Regulatory Commission has reduced power tariffs by as much as 35 per cent in its new draft policy and most large companies have operations in Uttar Pradesh. Companies with power operations in Maharashtra and Karnataka could, however, witness stable-to-improved pricing.