Sector Report

Agriculture Products: Sugar

November 2018
Sector Snapshot Indian Sugar Sector

Sector Analysis: Sugar

Agriculture Segments

Agriculture

Plantations Seeds/Grains/Edible Fertilizers and

Sugar Tractors
(Tea/Coffee) Oils Chemicals

Sugar
Overview
• India is the largest consumer of sugar and second largest producer after Brazil.
• 46% of the sugarcane is produced in UP while 20% is produced in Maharashtra
(2018)1
• Sugar season is October to September, the following year.
• Classification of sugar based on crystal sizes (S, M, L) and on color grade (out of 31,
31 being the highest quality). M-30 and S-30 are the typically traded in domestic and
international markets.

Business Model
Sugarcane
Farmers

Seeds Sugar Mills Jaggery

Sugar

Co-generation
Ethanol
Power

1
“Agri Inputs, Sector Update”, Prabhudas Lilladhar, 24th September 2018.
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Sector Snapshot Indian Sugar Sector

• 25% of mills in India have distillery unit to manufacture ethanol. Others either sell it
to standalone distillery’s or scrap the molasses.2
• Farm to mill process should take less than 24 hrs for efficient extraction. Thus, the
mills are located near farms and have informal contracts to buy cane.
• 44% of cane production was used for sugar and ethanol, 31% for jaggery and 25% for
re-sowing (2017 estimates)3
• Ethanol is a by-product of the sugar manufacturing process. 5% of the processed
sugarcane juice gets diverted towards molasses and then ethanol.4
• Bagasse is another by-product which is used primarily for steam generation, which
runs the mills. Surplus energy is exported to the grid, within the state.

Industry Income Structure

Figure: Typical Revenue

Structure for Integrated Sugar
mills (5-year Average)
10.3%
(Source: Bloomberg)
14.9%
Sugar is the predominant source
of revenue for the mills and
fluctuates in the range of 70 to
74.8% 80%.

Ethanol forms the major

component of chemicals. Mills
typically have annual contracts
Sugar Chemicals Power with Oil Marketing Companies
(OMCs) to supply ethanol.

2
https://economictimes.indiatimes.com/markets/expert-view/balrampur-chini-dhampur-sugar-clear-
beneficiaries-of-ethanol-blending-abhishek-roy-stewart-mackertich/articleshow/66238378.cms
3
“India, Sugar, Annual Report”, USDA Foreign Agricultural Service, April 2018
4
http://www.bajajhindusthan.com/by-products.php
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Sector Snapshot Indian Sugar Sector

Industry Cost Structure

Figure: 5 Year Industry

2.7% 4.5% Average Cost structure
4.9% Raw Materials

5.2% Sugarcane procurement

Power & Fuel Cost
1.4% costs are the
Employee Cost predominant costs for
the industry. Around
Other Manufacturing 10kg of cane is required
Expenses for 1kg of sugar.
Selling and
81.3% Administration Expenses Operating costs are not
Miscellaneous Expenses that significant due to
the co-generation of
power from sugarcane
byproducts.
(Source: Capitaline)

350 Figure: Minimum Support

Prices for Sugarcane
300

250 The UP government sets an

Price (Rs./quintal)

SAP higher than the FRP set

200
by the central government.
150 This is to appease to the
100
large voting bloc of cane
farmers. Therefore, the cost
50 of raw materials for UP
0 based mills is likely to be
higher and margins are
6

9
1

-1

-1

-1

-1
-1

-1

-1

-1

-1

likely to dip.
15

16

17

18
10

11

12

13

14

20

20

20

20
20

20

20

20

20

Fair and Renumerative Price UP State Advisory Price

(Sources: http://www.indiansugar.com/PDFS/Current_sugarcane_pricing_policy__0405-
Tarun_Sawhney.pdf; CRISIL Research; http://dfpd.nic.in/sugar-sugarcane-policy.htm)

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Sector Snapshot Indian Sugar Sector

Cyclicity
The industry operates in a cyclical nature with 2-3 years of high production followed by 2-3
years of low production.

450.00 100

400.00 90

350.00 80
70
300.00
60
250.00
50
200.00
40
150.00
30
100.00 20
50.00 10
0.00 0
20 01

20 02

20 03

20 04

20 05

20 06

20 07

20 08

20 09

20 10

20 11

20 12

20 13

20 14

20 15

20 16

20 17

8
/1
/

/
00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17
20

Year

Total Sugarcane Production (MMT) (Left Axis) Drawal for Sugar (MMT) (Left Axis)

Average Price (Rs./kg) (Right Axis) Sugar Production (MMT) (Right Axis)

(Sources: CRISIL Research; “India, Sugar, Annual Report”, USDA Foreign Agricultural Service,
April 2018)

Sugar Sugar
supply price
rises drops

Sugarcane Profitability drops

production rises for mills

Arrears High cane

cleared arrears

Margins improve Sugarcane

for mills Production cutback

Lower
Sugar
sugar
prices rise
production

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Sector Snapshot Indian Sugar Sector

Impact of General Elections

Figure: Revenues of top 5 sugar mills

4,00,000.0
3,50,000.0
Revenue (millions INR)

3,00,000.0
2,50,000.0
2,00,000.0
1,50,000.0
1,00,000.0
50,000.0
0.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

DHAMPUR BALRAMPUR EID

SHREE RENUKA BAJAJ HINDUSTAN Total

(Source: CMIE, Moneycontrol.com)

• The revenue shows no disturbances during election years. Since the

consumption/demand is constantly growing and price of sugar is cyclical, the
revenues of individual firms show a slight cyclicity.
• The cane and sugar production graph show higher fluctuations in output. This would
imply a buildup and draw down of inventories with the sugar cycle.

Figure: Net profit Margins for Balrampur Chini and Dhampur Sugars

20

15
Net Profit Margin (%)

10

0
8

8
00

-0

-1

-1

-1

-1

-1

-1

-1

-1

-1

-5
-2

08

09

10

11

12

13

14

15

16

17
07

20

20

20

20

20

20

20

20

20

20
20

-10

-15

Balrampur Chini Mills Ltd. Dhampur Sugar Mills Ltd.

(Source: CMIE)

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Sector Snapshot Indian Sugar Sector

The net profit margins seem to react to the election year government interventions. Post
2008-2009 and 2013-2014, the margins recovered for both the companies. The production
in each of these years was lower than the previous years and increased the following year.
This could be due to the higher margins clearing the arrears and thereby increasing
production of cane once again.

(Source: Money Control)

In 2008, due to a bad harvest, the government intervention was greater than average with
subsidies and incentives to sugar mills to pass on the benefit to the farmers and to
encourage production of sugarcane the year after instead of crop switching5. Thus, the
uptrend in stock prices is more pronounced for 2008 as opposed to 2014.

Future Trends
Demand6
• Industrial consumption expected to grow at 2% CAGR (lower than previous years’
CAGR of 3%, owing to the lower offtake by beverage companies)
• Household consumption shows steady growth trend of 1.5% to 2% CAGR over next 5
years.

Export
• Increased government push for exports in light of production reduction by global
players, Brazil and Europe. Export target set at 9 million tonnes for next 2 years.
Government to send delegation to Asian countries and Brazil to kickstart contracts.7
• Tax of 20% on exports scrapped by central government in March, incentivizing mills
to export 2 million tonnes of sugar to cut surplus.8

5
https://www.nytimes.com/2009/08/05/business/global/05sugar.html
6
CRISIL Research
7
https://economictimes.indiatimes.com/news/economy/agriculture/maharashtra-mills-gear-up-to-export-15-
lakh-tonnes-of-sugar-by-march-18/articleshow/66205686.cms
8
https://in.reuters.com/article/india-sugar/india-prepares-sweeteners-for-sugar-mills-cane-growers-
idINKCN1J20BL
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Sector Snapshot Indian Sugar Sector

• Domestic price level set at Rs.29/kg. Global white sugar price at Rs.28/kg (as of 18th
October). The 15-day trailing average shows an increasing trend that may surpass
the minimum support price in domestic market.9

• However, the impact is greatly attributable to currency changes in the rupee and the
Brazilian real. Experts are uncertain about whether this rise in prices is sustainable
given the excess supply in the global markets that would be created by India. 10
• Minimum Indicative Export Quota set at 15% (5 million tonnes) of 2018-2019
expected production. Mills given prorated quotas for import with assured export
clearances.11
• Subsides totaling Rs 11/kg to be given to mills, including incentives and transport
subsidies likely to boost export by making prices competitive in global markets.12

Sugarcane Production
• Domestic production rose by 50% in SS Oct 17-Sept 18 driven by high yields in
Maharashtra and UP. Area under cultivation was thought to increase further by 9%
in June 2018. 13 However, June to September 2018 saw 23% less rainfall than normal.
This is expected to reduce the production of cane and in-turn impact the production
of sugar. 14 This may reduce the glut in 2019, increasing prices beyond the FRP price
of Rs.29/kg, which in turn would raise margins for mills.

Ethanol
• Sugar mills have expanded ethanol manufacturing capacity in 2017-2018 and are
expected to expand further due to (1) Higher margins (by 3-4%), (2) ethanol prices
pegged at 47.5 for ethanol from B molasses, 6.6% higher than 2017-2018, (3) 7000

9
https://www.isosugar.org/prices.php?pricerange=last30
10
https://www.bloomberg.com/news/articles/2018-10-12/little-love-for-sugar-even-with-one-of-the-best-
rallies-in-years
11
https://www.business-standard.com/article/international/sugar-exports-may-pick-up-despite-weak-
international-prices-crisil-report-118100300724_1.html
12
https://economictimes.indiatimes.com/news/economy/agriculture/maharashtra-mills-gear-up-to-export-
15-lakh-tonnes-of-sugar-by-march-18/articleshow/66205686.cms
13
CRISIL Research
14
Thomson Reuters Eikon (Grub Infestation may be the fix to India’s sugar problem its farmers do no want)
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Sector Snapshot Indian Sugar Sector

crore invective package for distillery upgradation.15

Figure: Ethanol Price Hikes

50
48
46
44
Price (Rs./liter)

42
40
38
36
34
32
30
2014-15 2015-16 2016-17 2017-18 2018-19

• Only 25% of mills have ethanol manufacturing capacity, giving established

companies advantage to meet the increased demand. Government’s target of 10%
ethanol blending in petrol by 2022 cannot be met at current capacity ensuring a
shortage in ethanol in domestic markets, thereby keeping prices high for mills.16
• Government approved hike in prices of ethanol by 25% for blending in petrol. This
will help reduce surplus inventories and stabilize sugar markets in India. Although
stocks rose up to 20% due to the policy news, the sector is down 20 to 50% on a year
to date basis.17
• New incentive to divert all sugar to ethanol, by setting ethanol procurement price at
Rs.53.15/liter for mills diverting 100% of their production to ethanol.18 Mills can
produce up to 72 liters of ethanol for every tonne of cane as opposed to the current
production of 10 liters of ethanol and sugar.19
• Ethanol MSP kicks in from December, which is when profit margins are expected to
rise. Government incentives for B molasses with MSP set at Rs.47.5/liter as opposed
to Rs.43.6/liter.20

Cost/Margin
• Due to the election year, government support for farmers and mills is likely to
continue into 2019, as is the trend in the past, with an increase in minimum support
prices for cane, sugar and ethanol. Sugarcane costs are expected to rise by 3% and
6-7% for mills in the north and south respectively, put further pressure on

15
Ibid
16
“India. Agribusiness Report”, Fitch Solutions, Q4 2018
17
https://economictimes.indiatimes.com/markets/stocks/news/sugar-stocks-rise-on-latest-government-
ethanol-policy/articleshow/66231178.cms
18
CRISIL Research
19
https://www.thehindubusinessline.com/opinion/columns/harish-damodaran/smoothening-the-sugar-
cycle/article22992125.ece
20
http://chini.com/wp-content/uploads/2018/08/BCML-Q1FY19-results-concall-transcript.pdf
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Sector Snapshot Indian Sugar Sector

margins.21 However, those mills availing raw material subsidy may see a drop in
costs by 4-5%.22
• Due to the 20% drop in domestic sugar prices since April, the margins for mills
reduced and arrears for cane stood at Rs.17480 crore as of July 2018.23 Continued
government is expected to reduce arrears further, with a Rs.5500 crore package
announced by the government.24
• Government subsidiary of Rs.1175 crore for inventory holding costs for 2018-2019 is
likely to arrest falling margins for mills.25

Global Comparison
• A 12% decline in production is expected in Brazil due to weather and decline in
acreage. Moreover, a Brazil diverted a significant amount of production to ethanol
due to declining sugar prices (30% down in SS 2017-18) and 3% rise in ethanol
prices.26 Although India is facing a similar situation, with demand for ethanol,
unmatched, the scale of ethanol production in Brazil is much larger due to usage as
vehicle fuel. This makes the switch more viable. The governments ethanol policy will
be a key determinant for Indian mills to switch to ethanol.
• EU has become a net exporter for the first time in a decade due to the end in
production quota system. Production increased by 13% adding to global supply in
2018.

21
Ibid
22
https://www.business-standard.com/article/international/sugar-exports-may-pick-up-despite-weak-
international-prices-crisil-report-118100300724_1.html
23
https://www.moneycontrol.com/news/business/how-will-the-hike-in-frp-on-sugarcane-impact-sugar-
industry-2750271.html
24
https://economictimes.indiatimes.com/news/economy/agriculture/cabinet-okays-rs-4500-cr-package-to-
sugar-industry/articleshow/65963036.cms
25
CRISIL Research
26
Ibid
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Sector Snapshot Indian Sugar Sector

Stocks to Watch
Dhampur Sugar Mills
Price: Rs.143 Market Cap: 950 Cr Average Vol: 12,97,549 Beta: 0.42

• Located in UP, so most likely to benefit from government subsidiaries to clear

arrears before 2019 elections.
• Expressed strong interest in expanding ethanol capacity. The management expects
the ethanol margins to drive the profitability for FY19. Existing capacity expansion
for ethanol is underway (300 KLPD to 400 KLPD) and is expected to be completed by
November 2018.
• Strong balance sheet with regular CAPEX to improve efficiency of ethanol and co-
generation.

Balrampur Chini
Price: Rs.96 Market Cap: 2200 Cr Average Vol: 10,621,846 Beta: 0.87

• Existing Ethanol plants can switch to manufacturing of B Molasses. Not all existing
mills can do that due to logistical and technological compatibility.
• Higher recovery for the plants at 10.8% as opposed to average of 9.5%.
• Board approved a 160KLPD plant running 360 day to meet 6 crore liter target
• Sale of export quota to Maharashtra. Focus on boosting ethanol and power
generation.

DuPont Analysis
Dhampur Sugar 2016 2017 2018
Profit Margin 1.16 8.85 4.53
Asset Turnover 0.71 0.79 1.04
Financial Leverage 5.65 4.09 3.40
Return on Common Equity 4.70 28.61 15.94

Balrampur Chini 2016 2017 2018

Profit Margin 3.63 17.14 5.33
Asset Turnover 0.73 0.90 1.12
Financial Leverage 3.23 2.77 2.43
Return on Common Equity 8.51 42.51 14.58

(Source: Moneycontrol)

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