NEW DELHI: High cost of production and fall in sugar prices are likely to pull down the operating profits of sugar mills in the second quarter of the 2012-13 season (October-September), according to rating agency Icra.
"Icra expects some decline in profitability performance for sugar mills in the second quarter of the 2012-13 season given the decline in prices coupled with the fact that sales for the quarter would be made out of relatively higher stocks produced during the current season," Icra said in a statement.
Sugar mills in Uttar Pradesh and Tamil Nadu are expected to see an improvement in margins due to higher volumes and improved recoveries, while profit of most sugar mills in Karnataka and Maharashtra could be affected due to reduced crushing, it noted.
The operating profits of most mills had improved in the first quarter ended December 2012 because of higher volumes and improved realisation from sugar sales, it said.
The removal of two key government controls on sugar sector in last month is likely to improve the cash flow and profitability of sugar companies.
"However, in the short-term, the decontrol is likely to result in some temporary pressure on sugar prices as several cash strapped mills are likely to liquidate their sugar stocks in order to meet dues, including cane arrears to farmers," the Icra observed.
In the entire 2012-13 season, Icra said that sugar mills are likely to benefit from partial decontrol and steady realisation from sugar and by-products. But the rise in sugarcane prices will "adversely" impact profitability of sugar mills.
According to Icra estimate, the long-term sugar prices and profitability of sugar companies would remain highly cyclical and dependent on domestic and international supply-demand trends.
It pegged sugar production to be around 24-24.5 million tonnes for this year, as against 26 million tonnes in the 2011-12 season. Domestic demand is forecast at 23.5 million tonnes for this year.
The rating agency said that surplus sugar stocks would be around 5.5-6 million tonnes, sufficient to meet three months demand.