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The long awaited decision on decontrol on sugar finally came through on Thursday. The Cabinet committee did accede to some of important proposals put forward by the Rangarajan committee.
The important decisions that would change the fortunes of the industry include abolition of release order mechanism. In other words the government will no longer direct the sugar companies as to when, how much Sugar they will have to release and they will be free to sell their produce at will as and when they want to.
The Mill owners will also no longer be forced to sell a part of their produce at lower prices to the government. Thus the Millers will be free from levy mechanism for at least two years now. Under the levy mechanism the manufacturers had to sell at least 10 percent of their produce to the government at cheaper rates. The levy price of Sugar had stood at around Rs 13.50 a kg whereas the prices of sugar in the open market are now hovering at around Rs 32 a kg. This move will benefit the sugar millers immensely though is likely to hurt the government. The governments will now have to buy sugar from the open market for selling through the Public Distribution System. The move is likely to double the subsidy payout of the government from around Rs 2,600 crore to Rs 5,300 crore. However the government has capped ex-mill sugar price at Rs 32 per kg for PDS.
While the government has provided respite to Sugar producers on the release order mechanism as-well-as the levy mechanism; however the state governments will be free to decide prices of the Cane as-well-as the present policy on export of Sugar remains unchanged. Thus the Government has gone in for partial decontrol of Sugar. The government has maintained that the decision will not lead to any rise in retail prices of sugar.
The point of cane price being administered by the State government has not been touched upon as these are politically sensitive issues and states especially those in UP and Maharashtra use it to woo farmer voter bank. The UP government had hiked the State Administered price for Sugar cane by Rs 40 a quintal to Rs 280 a quintal in the current Sugar year 2012-13( October’12- September’13). This was despite sugar prices in the country remaining subdued.
Thus analysts had been betting on partial decontrol of sugar only and had observed that the benefits would accrue to integrated players. While partial decontrol will give some respite to the industry, the integrated players will also gain from ethanol blending in petrol at the pan-India level and the shift from a fixed ethanol pricing system to market driven pricing system.
These steps, as per analysts at Antique broking, create a room for at least 20% increase in ethanol price from the current Rs 27 a litre. However, to reap the full benefit, players should have a distillery to produce alcohol and hence integrated players will draw larger benefits. The preferred bet as per them remained Balrampur Chini Mill that is the most efficient sugar manufacturer in UP, has optimum integration level (a play on rising ethanol price as well) and has a very healthy balance sheet (Long term debt: Equity of around 0.47 xs). They had reiterated a target price of Rs 56 on Balrampur chini (current Market Price Rs 50).
Shree Renuka Sugar remained as their second pick with target price of Rs 35. Analysts suggest that the efforts to deleverage the Brazilian operations would yield results though over the next two years.
Balmarpur Chini remains the top pick as per analysts at LKP also with a target price of Rs 65. They also prefer Triveni Engineering (Rs17.80) with price objective of Rs 23, KCP sugar (Rs 21.05) with price objective of Rs 30 and Dharani Sugar (Rs 32.05 with a price objective of Rs 45.
