Govt plans changes in sugar policy: See impact on stocks

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Govt plans changes in sugar policy: See impact on stocks

The government plans to hike the sugar price levy from the current Rs 13 per kg for a 10% quota. As per the new structure, the levy quota may increase from 10% to 20% while the levy price may increase from Rs 13 to Rs 20.

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The government plans to hike the sugar price levy from the current Rs 13 per kg for a 10% quota. As per the new structure, the levy quota may increase from 10% to 20% while the levy price may increase from Rs 13 to Rs 20.

What is the likelihood of the hike?

Agriculture Minister Sharad Pawar says the sugar levy price hike is imminent and the government is working on the modalities for the same. However, he assured that it would still be lower than the market price. "The price is being calculated. It is different from area to area. Also, the cost of transportation among others needs to be taken into account as well."

What is this levy all about?

India produces about 240-250 lakh tonne of sugar each year. The government imposes a 10% levy on sugar mills  and procures about 24-25 lakh tonne. In the coming season, as per estimates, sugar production is not expected to cross more than 60 lakh tonne. The government wants to preserve its levy quantity (25 lakh tonne) in absolute terms and hence this levy may rise to about 16% or 18%.

Sugar millls cannot supply that levy to the government at Rs 13 because the cost of production has gone up. All state governments have increased the state advised price (SAP). The highest increase has happened in Uttar Pradesh with the SAP at Rs 140 per quintal for sugarcane. "This translates into about Rs 15-15.5 per kg cost for sugar if recovery stands at 9.5%. Add Rs 4.50 as the production cost per kg and total cost comes to about Rs 20.," says SP Tuslian of sptulsian.com.

Impact on realisations:

According to CNBC-TV18's Gautam Broker, at the base case realization of about Rs 29 which sugar sellers may realize currently, average realizations work out to about Rs 27.4. "At a levy price of Rs 20 for 20% quota, the average realsiation is about 27.2, a marginal decline of 7%. So, earnigs are not affected much. However, millers are also demanding from the government that the quota or release mechanism should be completely done away with. If this were to happen, then they would be able to decide on a quantity, time, and price of sale. That should be a bigger positive for sugar companies which would offset the negatives from lower realizations, marginally lower."

SP Tuslian of sptulsian.com said even though a hike in the sugar levy quota was imminent, it won't impact the sugar mills in a major way because the government is expected to raise the sugar levy price as well. "It may look negative for sugar companies that realize a higher quantity of levy at a lower price, but they also get compensated for their free sale quantity they hold [because of the higher levy price]. For a formula of 18% levy and Rs 18 per kg as levy price, it would work out to about Rs 0.50 per kg."

Sugar stock sell-off: 

Bajaj Hindusthan, Balrampur Chini, Dhampur Sugar, Dwarikesh Sugar, Oudh Sugar Mills, Rajshree Sugars, Shree Renuka, Simbhaoli Sugar, Triveni Engineering, Upper Ganges Sugar, and Uttam Sugar lost around 1-5% today.