SAP shall prevail in the sugar sector, says Tulsian

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SAP shall prevail in the sugar sector, says Tulsian

The Supreme Court has directed private sugar mill owners to pay farmers at the special advisory price fixed by state governments. SP Tulsian of sptulsian.com spoke to CNBC-TV18 about his take on the situation.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Balrampur Chini BSE | NSE 29/05/12 Are Mutual Funds betting on Balrampur Chini? Other Stocks in this news Dhampur Sugar Mills | Shree Renuka Sugars | Sakthi Sugars | Simbhaoli Sugars | Upper Ganges Sugar |

The Supreme Court has directed private sugar mill owners to pay farmers at the special advisory price fixed by state governments. UP private sugar mill owners will have to pay approximately Rs 1,000 crore. This is one case that the sugar cane farmers in the area have really lost. They had appealed to pay lower than this because of the problems they face and because of the unrealistically high state advised price (SAP), but this has not been held up by the Supreme Court. SP Tulsian of sptulsian.com spoke to CNBC-TV18 about his take on the situation.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: How deep is the cut going to be?

A: I am not aware about the year for which this direction has been given. If you go by past judgments given by the Supreme Court division bench, they have upped the power of state governments to declare and fix SAP.

Q: I believe it is for the year 2006-2008. My sense is this is with reference to that period?

A: This is pertaining to the old period and the mills have been quite hopeful that they are going to get some relief. They have gone to court for current year as well because current year SAP of Rs 245 per quintal is also very high.

In my view, there is more or less no divisional judgment of Supreme Court already existing. I don't think any relief was warranted. But when you hear the sugar mills of UP case, they have all been saying that this price is not justified. But one has to look into this background that SAP is going to prevail. SAP is a valid price succession which is allowed to the state government. 

In that background, definitely it is negative for the UP sugar mills because the current year itself is not going to be very good. If they have additional liquidity crunch of about Rs 1,000 crore, definitely things are bad for UP based sugar mills.

Q: This is like that 2006 to 2008 period but the sugar mill owners have told us several times in the past that they cannot cope with higher prices at this point. In terms of realizations, what could be the downside of the pressure for some of these companies according to you?

A: If you go by current year, the price is Rs 245-250. If you see the prevailing selling price at about Rs 29, adding the realization from the by-product- bagasse and molasses- I think the UP sugar mills should be able to break-even.

When you talk to the new guys, they say that they do not include the realization from the bagasse and molasses which is to my view to the extent of Rs 4-5 per kg. If you do not include them, then obviously, there will be losses of about Rs 2-3 per kg of the sugar produced. However, if you include that; in my view they should do so; they will be more or less break-even.

I don't think for the current year there should be any loss but they won't perform the way the other sugar mills in Karnataka or Tamil Nadu will be performing. Tamil Nadu has announced their SAP at about Rs 200 while in Karnataka, it is Rs 210-220 in spite of higher recovery of 11.5-12%.

Taking all this into consideration, I think UP will be the most inferior or maybe the worst placed amongst all the sugar producing states even for the current year.

Q: At the moment you have a sell on companies like Balrampur and Dhampur - do you have a buy on Shree Renuka ?

A: There is sell call for all the UP-based sugar mills, but if you see in the last one week, even Shree Renuka and Sakthi Sugar - the Tamil Nadu sugar mills have all risen so much. They have all risen by about 15-20% because yesterday there was a meeting with FM. I have been maintaining my view that nothing will come till the end of the elections in UP or five other states. So till that time, don't expect dismantling of the levy as well as dismantling of the monthly release mechanism. The profit booking will continue in all the sugar mills with more negative view on UP-based sugar mills.

Last week, we have seen a kind of run up in the UP-based sugar mill like Dhampur, Simbhaoli Sugars and Upper Ganges Sugar . I don't think that was really justified, so clear calls exist in the UP-based sugar mill and one can remain invested, but I do not think that trading call or trading view can be taken on any sugar stock at least for next one week or so.