The profitability of sugar firms rated by Crisil may increase by 50% if recommendations of Dr C Rangarajan Committee pertaining to full decontrol of the sector are implemented, according to the rating agency's report.
Profitability of sugar companies rated by Crisil will increase by Rs 600 crore in 2012-13, if suggestions made by the panel on total decontrol of the sector are implemented, the report said.
This represents a 50% increase in profits for the 47 rated companies over their estimated profits under the current regulated scenario, besides strengthening their credit risk profiles. Sugarcane farmers, too, stand to benefit from decontrol through reduction in cane arrears and share the upside in sugar prices, it said.
An expert committee headed by Dr C Rangarajan recommended abolishing state-advised cane prices (SAP) and removal of regulatory control on the sale of sugar in the domestic market, quantitative restrictions in international trade and mandatory jute packaging.
"Decontrol will improve players' cash flows, reduce their working capital requirements, and thereby strengthen their credit risk profiles," Crisil Senior Director, Bank Loan Ratings, Subodh Rai said.
The Government advises on the cane purchase price--known as the fair and remunerative price (FRP)---for companies. However, the key sugarcane-producing states (Uttar Pradesh, Tamil Nadu and Punjab) also announce SAP for sugarcane. The committee has recommended abolishing SAP, and suggested that 70% of companies' realisation from sugar and its by-products be shared with the farmers.
"We believe that linking sugarcane prices to prices of end products will be positive for the industry and will improve CRISIL-rated companies' profits by Rs 450 crore," Rai said.