Rising consumption of ethanol in India will protect the country's sugar mills from a slide in earnings expected next year when prices of the sweetener go into reverse, Fitch has said

Sugar groups look poised to be crushed in 2011 by a fall in the price of the sugar they sell, a drop fostered by "better visibility of cane output and a declining supply deficit", at a time of resilient cane costs, the ratings agency said in an industry briefing.

"Operating profitability margins could decline," the report said.

However, the slide will be largely offset by larger contributions from mills' distillery businesses, which will feed India's growing demand for ethanol at "remunerative prices".

"This is mainly due to the Indian government's renewed focus on strongly implementing the ethanol-blending programme," the briefing said.

The government in November beefed up demands on oil companies to blend ethanol in petrol at a rate of 5%, after they failed to produce the levels of the biofuel needed to meet earlier targets.

Debts paid off 

Sugar mills would also enjoy a cushion from the downturn from debt paydowns enabled by the current boom, fostered by the bull market in sugar caused by disappointing output in Brazil and India, the world's two biggest producers.

While mills have been, at 200-205 rupees per quintal, been paying 40% more for their sugar cane in 2009-10 than the state recommended price of 165-175 rupees, prices of processed sugar have doubled to 40.5-41 rupees per kilogramme over the last year.

"Operating margins will remain comfortable," the report said.

"Fitch expects improved internal cash generation on account of higher operating profitability to reduce the sector's reliance on external funds, and for the general trend to be towards deleveraging."

Bajaj Hindustan, India's largest sugar manufacturer should see "profitability continue" for now, thanks to a pick-up in volumes fostered by greater sales of raw sugar, the rating agency said.

Raw sugar imports should remain a "key profits driver" for Shree Renuka Sugars in 2009-10, Fitch said, noting that the group had already bought all its sugar needs for the year "at competitive rates".