Allahabad HC asks UP govt to reconsider SAP

Allahabad HC has asked the UP government to reconsider its State Advised Price (SAP) for sugar , reports CNBC-TV18. The UP government had fixed the SAP at Rs 125 per quintal.  

The Allahabad HC has also asked the UP government not to take action on mills with cane arrears, the report added.

The Lucknow bench of the Allahabad High Court today asked the UP government to scrap the state advised price, or SAP, for cane. It recommends fixing a lower price of Rs 81.18 per 100 kg for this season. Sugar producers have been paying Rs 110 per 100 kgs of sugarcane to farmers.

Mills have more reason to celebrate, as the Allahabad HC has also asked the state government not to take coercive action against mills, which have pending cane arrears from the 2006-07 season.

The sugar companies themselves haven’t got the chance to read the complete order, but they have been asked to rework the SAP pricing formula, reports CNBC-TV18’s Niraj Shah quoting unnamed sources. According to Shah, whether this is a continuation of the order that was passed earlier wherein the Allahabad High Court said that the SAP should be fixed at Rs 110, remains to be seen. But according to his sources, the implication of such an order is that SAP should be priced closer to the SMP. Now SMP, depending on the calculation, would vary and with the kind of additional charges that come into the fixation of the price, it would be closer to Rs 90-95, as against the Rs 110 that the companies are paying right now and as against an official Rs 125 that exists right now.

Shah said that this is just an implication that this is the single biggest positive news that has come in for the sugar industry in probably the last two years. With the SAP coming closer to Rs 90, it would essentially mean that sugar companies, standalone or even integrated sugar mills like Balrampur , Bajaj Hindustan and otherwise, would be able to show profits at the EBITDA level itself and in this current year itself.

This order is very significant as a lot of sugar mills in the northern state of UP are not necessarily integrated. They also do not have the ethanol and the cogen plants to actually support the ancillary revenue streams, which is why they have been posting heavy losses, Shah reported. “This could actually prove to be the turning of the tide for the sugar industry which has been down in the dumps. There is a lot of inventory pile up that is happening and this is the shot in the arm that the UP sugar industry definitely needs,” he said.

According to Shah, sugar prices still remain in question. Also, how much of an EBITDA or how much of a net profit that the companies would be able to clock in remains to be seen. But considering the kind of losses that they have posted in the year gone by, this is definitely the single biggest positive news for the industry, he added.

However, clarity still needs to be given out in terms of what prices essentially have been fixed and also whether this is an extension of the previous order given out by the Allahabad high court, Shah clarifies.

“Since the court has gone ahead and asked the government, which has actually said that it will even go to the Supreme Court to fight for an SAP of Rs 125, if the Allahabad High Court is actually stating that, in continuation after passing an interim order stating that the SAP should be Rs 110, and again passing an order stating that the SAP should be reworked, if the bias is towards fixing the SAP, or at least towards changing the methodology of fixing the SAP closer to the SMP, then this is something which is really significant,” Shah said. If it is indeed priced closer to the SMP, or even anything less than Rs 100 per quintal, then it is definitely the single biggest positive news for the sugar industry, he added.  

So would this mean a whole lot for these companies which have been bleeding for many quarters now?

“Yes, simply because of the fact that these companies have not been able to show profits even at the EBITDA level,” said Shah. This is apart from the high interest cost and the depreciation that most of these companies have or will have to incur in the current year and also because of the expansion plans that most of the sugar companies have had.

Why this is very important is simply because of the fact that the companies, which have been posting heavy losses at the net profit and EBITDA level, will finally be able to break in the green. The standalone or the integrated mills could probably have even broken in the green with the SAP fixed at Rs 110 per quintal, Shah explained.

The point remains that if SAP is indeed priced closer to SMP, then the integrated mills like Balrampur, Bajaj Hindustan etc would actually be able to show much higher profits at the EBITDA and the net profit level. Also, the standalone sugar mills, the smaller ones in the state of UP, listed or otherwise, will actually be able to sustain the current sugar financial year itself, Shah said.