 "Stocks of sugar firms rally on partial decontrol")
The decision is set to improve cash flow of sugar mills resulting into an estimated 3% additional profit this year.
The share price of Thiru Arooran Sugars shot up by 20% followed by 19.16% spurt in Uttarm Sugar.
Industry leaders including Bajaj Hindusthan, Balrampur Chini, Shree Renuka Sugars and Simbhaoli Sugars also witnessed an increase in their share prices, albeit lower than small players.
The share price is reflection of the improved industry sentiment towards this sector which was under tremendous pressure until now. According to a report by the rating agency Icra, the partial decontrol would result in some pressure on sugar prices in the short term as several cash strapped mills, which currently have substantial cane dues as well as bank borrowings, are likely to liquidate their sugar stocks to meet arrears.
On Thursday, however, the government abolished this mandatory levy mechanism and decided to continue PDS sugar sell at the current price by procuring the sweetener from open market. Hence, sugar mills are set to sell the produce at their own convenience to manage cash flow better. However, the decision will be reviewed in two years.
“With the 10% mandatory levy criterion is out, the industry would get an additional cash flow of 3% to add the same to their net profit,” said Abinash Verma, Director General of the apex industry body the Indian Sugar Mills Association (ISMA).
Under the existing guidelines, sugar mills had to sell 10% of their output at Rs 13.50 a kg to the government for its distribution at Rs 19.05 a kg to the weaker section of the society through the public distribution system (PDS) across the country. This, however, was accruing a loss of Rs 10-11 a kg for sugar mills on the average cost of production of Rs 30 a kg depending upon the location and availability of cane for crushing.
“Sugar mills were dependent on government’s release order. Hence, they did not have any option but to the sell the sweetener, immediately after the release order, irrespective of the prevailing market price. As a consequence, sugar mills were generating losses. The loss will be controlled,” said a senior industry official.
“The estimated 3% additional income will be added to our annual profit which was otherwise under tremendous pressure,” said Sanjay Tapriya, chief financial officer of Simbhaoli Sugar Industries, one of the largest sugar mills in Uttar Pradesh.
Sugar mills have not sold any quantity under the mandatory levy mechanism this year. Hence, the profitability would be for the entire sugar year (October 1, 2012 – September 30, 2013). India’s largest sugar refiner Shree Renuka Sugars would get an additional benefit of Rs 70 crore this year, said Narendra Murkumbi, managing director in an interview.
The apex industry body the Indian Sugar Mills Association (ISMA) has estimated an annual savings of Rs 3000 crore in addition to a reduction in inventories and insurance of smooth cane payment to farmers.
“Apart from that, the industry will be able to clear arrears with around 3% of additional cash flow,” said Kishore Shah, chief financial officer of Balrampur Chini.
“This move by the government can be taken as a step towards liberalization which could be a major source of foreign direct investment (FDI) in the country. No foreign investors would be interested unless the sector is decontrolled,” said the official.
Tapriya further said that consumers need no worry as retail price of sugar would remain lower due to surplus availability.