Twin Troubles For Indian Sugar Mills

India's sugar mills have lost half of their value so far this year as demand fell during the Covid-19 lockdown in the world's second-biggest producer that's already grappling with a surplus.

Shares of Balrampur Chini Mills Ltd., Triveni Engineering & Industries Ltd. and Dhampur Sugar Mills Ltd. have tumbled 48-52 percent year-to-date, according to Bloomberg data. That compares with a 24 percent slump in the benchmark Nifty 500 Index during the period.

Makers of the sweetener have been struggling with record stockpiles for the last two years. Output, according to Indian Sugar Mills Association, declined 20 percent year-on-year to 25.8 million tonnes as of April. But that's still higher than the domestic consumption requirement as the industry carried forward a record opening stock of 14.5 million tonnes in the ongoing sugar season—October 2019-September 2020.

Its woes aggravated as the world's biggest lockdown to contain the Covid-19 spread disrupted transport, causing the prices to fall even though the commodity was classified as an essential item.

“Due to the lockdown, sugar sales in March and April 2020 were lower than last year by about 10 lakh tonnes,” ISMA said in a media statement.

According to India Ratings & Research, demand from end users also fell. “With institutional sales constituting around 65 percent of the total sugar sales in India, mills face reduction in demand as most FMCG companies are operating at reduced capacities and beverage makers such as Hindustan Coca-Cola Beverages Pvt. Ltd., Varun Beverages, etc. have suspended operations,” the ratings agency said in a note. Consumption will also be affected due to the closure of eateries, ice cream outlets and confectionaries, it said.

India has also been seeking to boost export of the raw sugar to countries such as Indonesia and Malaysia to reduce the domestic glut. In September last year, the government announced a Rs 6,268-crore subsidy for export of six million tonnes of the sweetener. But the virus outbreak dimmed that hope as the lockdown led to shortage of labour at ports and mills.

“As of April 30, sugar mills had entered into a contract for exporting 3.5 million tonnes, with major quantities being signed for Indonesia and Iran,” ISMA said.

According to Rahil Shaikh, managing director at trading company Meir Commodities India, ports are not working properly as labour-intensive operations are stalled. “The contracts will only be executed once the Covid-19 situation becomes normal, and till then the force majeure clause has to be invoked,” he told Bloomberg.

India Ratings expects India to end the 2019-20 sugar season with a stock of 11.5-12 million tonnes compared to an earlier estimate of 10.5 million tonnes on account of a reduction in domestic consumption and lower-than-estimated exports. “Any increase in lockdown period can widen this gap.”

High-margin ethanol business, however, can help reduce excess sugar production and aid millers' earnings. The distilleries business, according to exchange filings of India's three large sugar makers, accounted for around 50 percent of their profit before interest and tax in financial year 2018-19.

But brokerage JM Financial said there has been a drop in ethanol offtake too because of reduced petrol consumption and lack of storage space at depots of oil marketing companies.