Shares of Uttar Pradesh-based sugar companies got hammered on the bourses today as the state government increased State Advisory Price (SAP) for sugarcane.
Shares of Uttar Pradesh-based sugar companies got hammered on the bourses today as the state government increased State Advisory Price (SAP) for sugarcane. Balrampur Chini Mills slipped 9.2%, Dhampur Sugar Mills dropped 6.5%, Triveni Engineering & Industries was down 5.2%, Dwarikesh Sugar Industries fell 4.3% while Simbhaoli Sugars was down 2.3%, Bajaj Hindusthan fell1.43% and Upper Ganges Sugar & Industries fell 2%.
The new SAP will pressurise input cost of UP-based sugar companies shelling out more for procurement. Akhilesh Yadav-led government hiked SAP for sugarcane procurement to Rs 275-290 (that is higher by Rs 40 compared to previous year's price) per 100 kg for 2012-13 crushing season.
SAP is the price below which mills cannot buy cane from farmers. The state government has fixed Rs 290 a quintal for early variety crop, Rs 280 per quintal for normal crop, while Rs 275 a quintal for sub-standard cane. Sugar prices have already dropped significantly.
However, sugar companies still have not lost hopes. In an interview to CNBC-TV18, Vijay Banka, CFO, Dwarikesh Sugar said that sugar companies will be asking the state government for some SOPs. "We will request the state government to give us some SOPs otherwise, given the present market scenario where the prices are hovering at around Rs 3300 per quintal, it will be difficult as it is an unsustainable proposition," he added.
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Most analysts feel that more-than expected SAP for sugarcane price will put pressure on input cost. Foreign research firm Morgan Stanley downgraded Balrampur Chini to underweight with a target price of Rs 48. Explaining that the company is unlikely to make money at current realisations post the steep cane price hike, Morgan Stanley said, "Profitability of north Indian millers is likely to be dented."
Echoing a similar concern, Nirav Shah of Antique warns that companies will definitely make losses in sugar division at the prevailing sugar prices.
"Current average realisation, if adjusted to the levy, would be coming to a similar range, plus one has to bear the interest cost. March quarter onwards, the numbers will show losses, because right now, in December they will be liquidating some amount of previous season’s inventory, which is at a lower cost,” Shah added in an interview to CNBC-TV18.
However, SP Tulsian, sptulsian.com believes there is nothing to worry as these stocks may start stabilising from tomorrow onwards. So, if one wants to enter into in these stocks, they can take a call on the UP-based sugar mills also at those levels.The price of Rs 34-35 will be held by the market in the free sale and if that trend continues, still the UP-based mills will make money.
Agrees Motilal Oswal that hike in SAP may not be a complete surprise as industry participants had become apprehensive about it since mid November given major farmer agitation in Maharashtra demanding higher cane prices and delay in announcement of UP cane price.
"Industry was expecting base cane price of Rs 260 per 100 kg and an effective cost of Rs 272 per 100 kg. Based on net average sale price of Rs 32.3/kg and net cost of production of Rs 29.7/kg, the net sugar spread for FY13 was expected to be Rs 2.5/Kg," the report elaborated.
Experts are still optimistic that pressure will be eased off once government approves recommendations of Rangarajan Committee on sugar decontrol. According to the recommendations, sugarcane pricing should be rationalised and the sugar trade should be liberalized in a calibrated phase-wise manner over a 2-3 year period.