Sugar companies expect tough times as UP govt scraps incentives

The going has got tougher for sugar companies in Uttar Pradesh, already facing the heat in the times of supply glut and declining revenues.

In the latest turn of events, the recently installed Mayawati government in the major sugar producing state on Friday scrapped the Sugar Industry Promotion Policy, 2004, that was initiated by her predecessor Mulayam Singh Yadav.

The state government said it will soon formulate a new farmer-friendly scheme to replace the scrapped policy. Three years ago, the state had announced 5-10 year incentives for mills that undertook investment projects "" in two slabs: over Rs 300 crore and Rs 500 crore "" to promote the sugar industry. The sops included 10 per cent capital subsidy on investment, remission of stamp duty and registration charges on land purchase, reimbursement of transport cost from factory up to a distance of 600 km from state border, etc.

Most industry officials said they had been caught unawares with the government's latest move, lamenting it will put further pressure on sugar companies' already thin margins.

Sugar mills in Uttar Pradesh were accruing benefit of around Rs 1.50-2.00 on every kg sugar due to the incentives under the policy, industry analysts said.

"This (policy scrapping) would come as a big negative for sugar mills in the state. While they have already invested the desired amount, they will not be able to avail of any benefit promised," said SP Tulsian of Premium Investments.

Industry officials said there were a rush of investment in the state following the incentives "" with companies having lined up over 20 new plants.

Sugar majors such as Triveni Engineering, Bajaj Hindusthan, Mawana Sugar, Balrampur Chini had all announced expansion plans in the state, with total investments pegged at over Rs 5,000 crore. Tulsian also said the other major concern was that the policy was scrapped with retrospective effect "" implying mills may have to cough up some of the benefits reaped earlier through the scheme. However, more clarity is required on the decision regarding this aspect. "Mayawati has proposed a farmer-friendly policy"" which can only mean that mills will come under further pressure," he said.

Sanjay Tapriya, director finance, Simbhaoli Sugar Mills, said the main problem will be halt of capital subsidy. "Our revenues have been consistently falling as sugar prices in the country have been declining. This (withdrawal of incentives) would only aggravate our losses," Tapriya said. Simbhaoli had invested over Rs 350 crore to expand the crushing capacity of its plants in Uttar Pradesh.

Most sugar companies were in the red last quarter as sales realisations slumped on the back of higher output projections. India is likely to produce over 27 million tonne sugar in the current season to September compared with 19.3 million tonne produced in 2005-06.

With annual domestic consumption estimated at 18-19 million tonne, India will have carryover stocks of around 11.36 million tonne this year against 4.36 million a year ago.