P. Narasimhan

Manufacturers expect export growth owing to firm commitments

Hectic activity in Uttar Pradesh Capitalising on firm sugar prices

CHENNAI: Sugar manufacturers have been aggressively enhancing capacities over the past two years (2004 to 2006), in the expectation of a turnaround in the long-term prospects for sugar in India.

Manufacturers also expect export growth owing to export commitments, and opportunities thrown up following the World Trade Organization ruling requiring the European Union to reduce export subsidies on sugar.

Capacity expansions have mainly occurred in Uttar Pradesh (U.P.), where the State government has announced incentives for sugar manufacturers. Sugar companies in other states such as Tamil Nadu have also announced significant investments to increase capacity.

A recent CRISIL study reveals that the large capacity expansions under way at some CRISIL-rated sugar companies are unlikely to hurt their credit risk profiles over the medium term. This is primarily due to the expectation of firm sugar prices, resulting in strong cash accruals for these entities. Also, the proposed capacity expansions will de-risk the entities' business profiles, with a larger proportion of revenue post-expansion from by-products (co-generation and ethanol).

Moreover, CRISIL expects the proposed expansions to be judiciously funded through a mix of internal accruals, fresh equity, and debt, ensuring that these companies' capital structures are maintained at prudent levels. The steady increase in domestic demand, and enhanced export opportunities, will help sugar manufacturers contain increases in inventory at reasonable levels, and thus maintain prices. Moreover, according to Mr. Raman Uberoi, Director Corporate and Infrastructure Sector Ratings, CRISIL, "Unlike the previous expansion phase in the late 1990s, when expansion was mainly confined to sugar capacity, and involved a large debt component, companies have been more prudent this time. They have concurrently expanded their by-product capacity, and have used a mix of equity and low-cost debt financing. CRISIL believes that this changed business model will assist companies in maintaining their credit risk profiles despite the large capital outlays envisaged."

CRISIL has ratings outstanding on four sugar companies, with a total crushing capacity of more than 100,000 tonnes of cane a day. The aggregate outlay on capacity expansions announced by the companies in CRISIL's rated portfolio is more than Rs. 20 billion by March 2008.