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Stocks of sugar producing companies have gained momentum in recent days, following the Uttar Pradesh government’s clarity on the state advised price (SAP) for cane and subsidies for the current sugar year (SY; season ends in September every year). Beside, hope has risen that the Union government will incentivise ethanol blending in fuels, as well as double the blending limit to 10 per cent.
Following the SAP news, a major issue for UP-based companies, the share prices of Balrampur Chini, Bajaj Hindusthan and Triveni Engineering rose 18-28 per cent in the past four sessions. Shree Renuka Sugars, in anticipation of ethanol blending and other reforms, has gained about 10 per cent.
However, some key areas need to be addressed for the real gains to start flowing in.
As sugar supplies have continued to exceed demand in the past few years, prices have remained soft. However, the sugarcane SAP has been rising. It was Rs 210 a quintal for SY2010-11 and went up to Rs 280 in SY2012-13. It is still at those levels. To clear the deadlock with millers and strike a balance, the Uttar Pradesh government has kept SAP at the same level for SY2014-15 but has relaxed the payment schedules. Millers will have to pay Rs 240 a qtl to farmers within 14 days of procurement. For timely payment, millers will get a subsidy of Rs 8.40 a qtl from the government. The remaining Rs 40 a qtl will have to be paid within 90 days of the crushing season ending.
There is also talk that millers will get waivers from paying society tax (Rs 6.6 a qtl), purchase tax (Rs 2 a qtl) and welfare tax (Rs 2.8 a qtl). If these taxes are applicable, the cost of cane is Rs 291.40 a qtl. Add transportation costs from procurement centres to the mill (Rs 6-7 a qtl) and the total cost is nearly Rs 300 a qtl.
The UP government will also consider an additional subsidy of Rs 20/qtl if the average price realisation (during October 1, 2014 to May 31, 2015) of sugar goes below Rs 3,100/qtl (Rs 31 a kg), below Rs 390 a qtl for molasses, Rs 167 a qtl for bagasse and Rs 26 a qtl for press mud. A committee will determine the extent of subsidy on these.
Still, as analysts say, even as some of these are temporary and will lead to gains, the industry needs a permanent solution, correlating to the fundamentals. The ultimate benefits will follow only if cane prices are linked to sugar realisations. The Rangarajan panel has given its recommendations and the Maharashtra and Karnataka governments have decided to follow these.
The industry says it is essential for UP to do likewise, as the state accounts for a large part of India’s sugar production. The SAP in UP is much higher than the Union government’s Fair and Remunerative (FRP) sugarcane price of around Rs 220 a qtl. With a typical recovery rate of about nine per cent and a cane price of Rs 280 a qtl, the cost of producing a kg of sugar works out to Rs 24.4. This, along with others costs, results in a loss for companies.
Analysts at CARE Ratings say, “Given the challenging operating environment in UP, the mills’ fortunes are largely dependent upon a long-term government policy on cane pricing and timely commencement of crushing operations.”
For now, profitability will depend on how soon millers start crushing. Many had decided not to operate this year, due to the losses. Triveni Engineering’s management plans to start crushing by early December.
While the industry is also hoping the Union government continues the subsidy on export of raw sugar, Rs 3.3-3.4 a kg for SY2013-14, implementation of ethanol blending is considered key. Announcements have been made many times in the past but implementation has lagged.
