Some hope for sugar companies' stocks

UP govt's compensation some respite; to fix surplus issue, more cane should be diverted to ethanol

Sugar stocks have seen a hope rally of late. Balrampur Chini Mills is up 14 per cent in the past four trading sessions, while Bajaj Hindusthan has gained 10 per cent. This rally has been fuelled by the Uttar Pradesh (UP) government fulfilling its commitment to provide an incentive of Rs 40 a quintal announced at the start of the current sugar year (SY, which runs from October 1 to September 30).

UP had maintained the State Advised Price (SAP) for procuring cane at Rs 280 a quintal but ceded to millers’ demand for Rs 11.40 a quintal relief immediately. The remaining Rs 28.60 a quintal relief was announced only a few days ago. The effective SAP works out to Rs 240 a quintal.

The development is positive, given that UP’s sugar mills owe Rs 6,800 crore to farmers. The Rs 40-a-quintal relief works out to Rs 2,070 crore gains for millers. It also removes doubts over the future. Last year, the government had promised Rs 20 a quintal relief but the net compensation came lower due to the conditions it laid down.

The government has not yet addressed the primary issue of linking SAP with market prices of sugar. The major reason why arrears have been rising is because sugar realisations are subdued, with production outpacing demand ,and sugarcane procurement prices are not adjusted accordingly. India could see its sugar surplus rise to 9.8 million tonnes (mt) at the end of SY2015, against the mandated six mt. SY16 is also likely to see strong production, increasing the surplus further. The surplus issue can be addressed either through exports, not viable currently due to subdued international prices, or if the government procures the surplus and keeps it as a buffer. With the latter, it will make way into the system at some time. The option is to divert molasses for ethanol production.

  The recent ethanol procurement tenders by oil companies indicates 10 per cent ethanol blending against five per cent earlier. This is the second trigger that has boosted stock prices. Abinash Verma, director-general, Indian Sugar Mills’ Association, says the government’s efforts on ethanol blending are in the right direction, although some bottlenecks such as excise relief, issues related to inter-state movements and import duty need to be addressed.

These impediments need to be resolved before the tenders close. Sageraj Bariya at East India Securities says the ongoing ethanol tenders, once successful, can turn around things for sugar companies.