Rating Criteria for

Sugar Industry
February 2018
 Criteria contacts
Pawan Agrawal Somasekhar Vemuri
Chief Analytical Officer – CRISIL Ratings Senior Director – Rating Criteria and Product
Email: pawan.agrawal@crisil.com Development
Email: somasekhar.vemuri@crisil.com

Sameer Charania Manish Kumar Gupta

Director – Rating Criteria and Product Development Director - CRISIL Ratings
Email: sameer.charania@crisil.com Email: manish.gupta@crisil.com

In case of any feedback or queries, you may write to us at Criteria.feedback@crisil.com

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Executive Summary
Sugar is the most important agriculture-based industry in India after textiles. India is the largest producer, after
Brazil, and the largest consumer of sugar. Sugar production depends on sugarcane output, which depends on
rainfall. Moreover, sugarcane prices are regulated by the government while sugar prices are market-driven. Also,
the industry is cyclical and is susceptible to price fluctuations and trade regulations. While cane production is
concentrated between September and April, demand for sugar lasts through the year. CRISIL's approach to rating
sugar companies involves an evaluation of their financial position and cash flow in the context of their ability to
withstand cyclical downturns. In CRISIL's experience, companies with strong businesses and operational
efficiency, and low interest cost, have consistently withstood sugar price downturns.

Scope
While the broader criteria for manufacturing companies1 applies to all sugar companies, this article2 details the
industry-specific factors impacting the credit risk profiles of sugar producers.

Business Risk

Government policies
The sugar industry is regulated extensively by the government. Hence, CRISIL believes a sugar company's credit
risk profile is significantly vulnerable to government policies. These policies influence cost through cane pricing and
cane availability through the command area concept. The government also controls import/export of sugar through
imposition duty.

Consequently, sugar companies do not have much control over the quantity, quality, or cost of sugarcane they
procure, or the quantity of sugar they sell. These factors significantly affect the economics of their operations.

Market position
In the highly fragmented sugar industry, size is an important determinant of a company’s market position. Large
companies typically have greater ability to withstand external shocks, easier access to capital markets, and greater
bargaining power, and consequently, tend to have strong credit risk profile. However, the benefit of size may be
nullified by a weak capital structure or poor cost position.

1
The detailed criteria is present on the CRISIL website under the ‘Criteria and Methodology’ section—Rating Criteria for
Manufacturing and Services Sector Companies and CRISIL’s Approach to Financial Ratios.
2 For accessing the previous published document on “ Rating Criteria for Sugar Industry”, kindly follow below mentioned link:
https://www.crisil.com/content/dam/crisil/criteria_methodology/consumer-staples/archive/CRISIL-Ratings-crieria-sugar-
industry_2007.pdf

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Other factors affecting market position
Location

Freight is an important cost element. Companies with factories close to sugar-deficit regions command a better
price and save on freight costs. Factories close to high-yielding sugarcane farms are also in a better position.
Similarly, the longer crushing season in southern India enables better utilisation of fixed assets.

Proximity to ports is also a critical factor. Easy accessibility to ports enables import of raw sugar for processing
during cyclical upturns, when sugarcane availability is expected to be lower. It also provides companies with
greater flexibility to export during periods of low domestic prices.

Customer profile

Traditionally, sugar sales have been routed through dealers. Relationships with institutional customers may be
viewed favourably, partly due to the benefits of regular liquidation of inventory outside the government's release
mechanism.

Relationship with farmers

Variability in monsoon and changing crop patterns impact cane output and consequently sugar production. This
makes healthy relationship with farmers a crucial requirement for sugar companies, to ensure availability of cane.
Hence, investments in sugarcane development activity and timely payments for sugarcane are considered pre-
requisites for timely and adequate availability of cane.

Operating efficiency

With prices of sugarcane being regulated through fair and remunerative price (FRP) mechanism, operating
efficiency (determined by recovery rate) and processing cost will determine ability to withstand downturns. CRISIL
believes larger plants are better placed, as their conversion cost will be low.

Level of Integration

Optimal utilisation of by-products such as molasses (used to produce ethanol) and bagasse (used to generate
power), is another key differentiating factor. It will enable companies to capture value across the production chain.
Integrated sugar mills with biomass power plant are more likely to be successful. An integrated sugar company
functions on a de-risked model, which results in higher revenue and stable profitability.

Working capital management

While cane production is concentrated between September and April, demand for sugar lasts through the year.
Therefore, sugar producers have to efficiently manage their seasonal working capital requirements amidst
fluctuating prices, a crucial credit differentiator.

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Financial risk
For the analysis of the financial risk of a sugar company, CRISIL follows the standard criteria used for all
manufacturing companies. This criterion is presented in detail in our publications, 'Rating Criteria for Manufacturing
and Services Sector Companies' and 'CRISIL's Approach to Financial Ratios'.

Management risk
For analysing the management risk of sugar manufacturers, CRISIL follows the standard criteria used for all
manufacturing companies. This criteria is presented in detail in our publication, ‘Rating Criteria for Manufacturing
and Services Sector Companies’.

Conclusion
Thus, in CRISIL's opinion, the key success factors for sugar companies include:

• Scale of operations, recovery rate3

• Forward integration into power and distillery operations
• Location of plant and relationship with farmers
• Diversity in client base and geography

3
Recovery rate is defined as the amount of sugar produced per unit of sugarcane.

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