New Delhi, India Ratings and Research (Ind-Ra) has said policy measures can boost profitability of the sugar sector in the second half of 2020-21.

In the sugar sector credit report's quarterly edition, Ind-Ra said a Rs 2 per kg rise in the minimum selling price (MSP) might support profitability in H2FY21 and could increase sugar mills' cash flow by around Rs 5,000 crore.

"Along with the cabinet note to raise the sugar MSP, the Ministry of Consumer Affairs, Food and Public Distribution has floated a note to increase the fair and remunerative price of sugarcane by Rs 10 per quintal to Rs 285 per quintal for the sugar season 2021," it said.

Ind-Ra expects the move to result in net improvement in Ebitda (Earnings before interest, taxes, depreciation and amortisation) margins as realisations could increase 6-6.5 per cent against a rise of 3.5 per cent in the cost, causing around Rs 2,500 crore net cash inflow.

The agency said it expected the oversupply to persist in sugar season 2021 because of rise in production coupled with the high carryover stocks.

"While the 18 per cent year-on-year decline in production to 27.2 million tonnes in sugar season 2020 is likely to reduce the closing stock to 12 million tonnes (sugar season 2019 -- 14.3 million tonnes), it would remain almost twice of the normative carry-forward requirement," Ind-Ra said.

Ind-Ra expects 1.5 million tonnes fall in sugar demand in sugar season 2020. "Ind-Ra expects the Covid-19 outbreak to result in a demand decline of around 5 per cent in sugar season 2020. The agency expects a gradual resurrection in Q2 onwards, with Q3 and Q4 registering some growth, resulting in an overall decline of around 3 per cent in FY21," it said.

"The imposition of fresh lockdowns due to spike in coronavirus cases, however, remains a key monitorable," the rating agency said.