 "Sugar mills to suffer Rs 1600 crore loss in season 2013-14")
Despite an estimated 6-8 per cent decline in the sweetener output, the loss of sugar industry in India is set to increase by 60 per cent in the crushing season 2013-14 (November – October) due to rising cost of production and falling realization from the core activity.
Rating agency Crisil forecasts India’s sugar industry to incur a loss of Rs 1600 crore in the upcoming crushing season beginning November 2013 as compared to an estimated Rs 1000 crore in the current season. The loss of the industry stood at a mere Rs 400 crore in the season 2010-11.
Sugar manufacturing has been a loss making activity for the last two years due to continuous rise in cane prices that are generally influenced by the Central and State governments. Especially, in states like Uttar Pradesh and Tamil Nadu, the state governments declare cane price commonly known as state advised price (SAP) every year which remains substantially higher than that in the previous year and fair and remunerative price (FRP) announced by the Centre. But, unfortunately, sugar price in the open market failed to catch the proportionate increase in raw material price resulting into a loss for mills. Failure to arrest this trend, therefore, may result into closure of many units in future.
Over the last three seasons (2010-11 to 2012-13), the average price paid by mills for cane has increased at 14 per cent compounded annual growth rate (CAGR), whereas sugar prices have gone up by only 3 per cent annually.
“The impact of this incongruity between the increase in prices of inputs and end-products is reflected in the balance sheets of 74 companies (together accounting for about 50 per cent of domestic sugar production). Nearly 40 per cent of them posted net losses in sugar season 2011-12, and about 30 per cent had interest cover of less than 1 times, up from 17 per cent in sugar season 2009-10. Thus, the proportion of companies finding it difficult to service their interest is increasing,” said Ajay Srinivasan, Director, CRISIL Research.
For sugar season 2013-14, the Central government has announced a 24 per cent hike in the minimum price payable for sugarcane – the FRP – whereas the increase in sugar prices is likely to be only 8-9 per cent. The financial performance of sugar mills will, therefore, deteriorate. The worst hit will be mills in Uttar Pradesh and Tamil Nadu, where the state governments announce a SAP for sugarcane that is higher than the FRP.
Interestingly, forward integration into cogen and distillation is a positive for mills as it provides some cushion against the volatility in sugar business profitability. Currently, co-generation and Distillery activities account for around 10 per cent and 5 per cent respectively of overall revenues of sugar companies, but contribute disproportionately to profitability. The continuous incongruity between sugarcane and sugar prices will pull down the overall bottomline of sugar companies, Srinivasan said.
Therefore, there is an urgent need to rationalise sugarcane prices. As suggested by Rangarajan Committee and a practice followed throughout the major sugar producing nations, cane price needs to be directly linked to sugar price realisation. This will not only ensure a fair and stable return to farmers on time, but also assure mills a reasonable return on their investments. The politics in sugarcane pricing has to go for the sugar industry to survive and grow, Verma added.
Karnataka has already decided to adopt a revenue sharing/ cane price-sugar price linkage formula. For this sector to growth, cane pricing has to be rationalised and linked to sugar price realisation as soon as possible.
Rating agency Crisil forecasts India’s sugar industry to incur a loss of Rs 1600 crore in the upcoming crushing season beginning November 2013 as compared to an estimated Rs 1000 crore in the current season. The loss of the industry stood at a mere Rs 400 crore in the season 2010-11.
Sugar manufacturing has been a loss making activity for the last two years due to continuous rise in cane prices that are generally influenced by the Central and State governments. Especially, in states like Uttar Pradesh and Tamil Nadu, the state governments declare cane price commonly known as state advised price (SAP) every year which remains substantially higher than that in the previous year and fair and remunerative price (FRP) announced by the Centre. But, unfortunately, sugar price in the open market failed to catch the proportionate increase in raw material price resulting into a loss for mills. Failure to arrest this trend, therefore, may result into closure of many units in future.
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“Due to unreasonably high sugarcane prices, generally fixed/influenced by most of the states on political considerations, costs of production of sugar have been increasing at a fast pace year after year. The result is that Indian sugar has become uncompetitive globally due to which even though we have surplus sugar, we are unable to export, putting pressure on sugar prices because of which mills lose money continuously,” said Abinash Verma, Secretary General, Indian Sugar Mills Association (ISMA).
Over the last three seasons (2010-11 to 2012-13), the average price paid by mills for cane has increased at 14 per cent compounded annual growth rate (CAGR), whereas sugar prices have gone up by only 3 per cent annually.
“The impact of this incongruity between the increase in prices of inputs and end-products is reflected in the balance sheets of 74 companies (together accounting for about 50 per cent of domestic sugar production). Nearly 40 per cent of them posted net losses in sugar season 2011-12, and about 30 per cent had interest cover of less than 1 times, up from 17 per cent in sugar season 2009-10. Thus, the proportion of companies finding it difficult to service their interest is increasing,” said Ajay Srinivasan, Director, CRISIL Research.
For sugar season 2013-14, the Central government has announced a 24 per cent hike in the minimum price payable for sugarcane – the FRP – whereas the increase in sugar prices is likely to be only 8-9 per cent. The financial performance of sugar mills will, therefore, deteriorate. The worst hit will be mills in Uttar Pradesh and Tamil Nadu, where the state governments announce a SAP for sugarcane that is higher than the FRP.
Interestingly, forward integration into cogen and distillation is a positive for mills as it provides some cushion against the volatility in sugar business profitability. Currently, co-generation and Distillery activities account for around 10 per cent and 5 per cent respectively of overall revenues of sugar companies, but contribute disproportionately to profitability. The continuous incongruity between sugarcane and sugar prices will pull down the overall bottomline of sugar companies, Srinivasan said.
Therefore, there is an urgent need to rationalise sugarcane prices. As suggested by Rangarajan Committee and a practice followed throughout the major sugar producing nations, cane price needs to be directly linked to sugar price realisation. This will not only ensure a fair and stable return to farmers on time, but also assure mills a reasonable return on their investments. The politics in sugarcane pricing has to go for the sugar industry to survive and grow, Verma added.
Karnataka has already decided to adopt a revenue sharing/ cane price-sugar price linkage formula. For this sector to growth, cane pricing has to be rationalised and linked to sugar price realisation as soon as possible.