Decontrol to boost sugar companies' profits by 50%: CRISIL
Oct 26 2012, 12:33 | By Moneycontrol.com
Farmers to benefit through reduction in cane arrears
CRISIL believes the profitability of sugar companies rated by it will increase by Rs.6.0 billion in 2012- 13 (refers to the financial year from April 1 to March 31), if the recommendations of the C Rangarajan Committee pertaining to full decontrol of the sector are implemented. This represents a 50% increase in profits for the rated companies over their estimated profits under the current regulated scenario, and will strengthen their credit risk profiles. Sugarcane farmers, too, stand to benefit from decontrol through reduction in cane arrears and share the upside in sugar prices. These are the findings of a study conducted by CRISIL on 47 of its rated sugar companies.
An expert committee headed by Dr. C Rangarajan has recommended full decontrol of the sugar sector. The recommendations include abolishing state-advised cane prices (SAP) and removal of regulatory control on the sale of sugar in the domestic market, of quantitative restrictions in international trade and of mandatory jute packaging. Says Subodh Rai, Senior Director, Bank Loan Ratings, CRISIL, "Decontrol will improve players' cash flows, reduce their working capital requirements, and thereby strengthen their credit risk profiles."
The Government of India (GoI) advises the cane purchase price—known as the fair and remunerative price (FRP)-for companies. However, the key sugarcane-producing states (Uttar Pradesh, Tamil Nadu and Punjab) also announce SAP for sugarcane. The committee has recommended abolishing SAP, and suggested that 70% of companies' realisation from sugar and its by-products be shared with the farmers. Adds Mr. Rai, "We believe that linking sugarcane prices to the prices of end products will be positive for the industry and will improve CRISIL-rated companies' profits by Rs.4.5 billion."
As per the existing regulations, sugar companies are required to sell 10% of their sugar produce at a subsidised rate of Rs.19.05 per kilogramme-significantly lower than the market price. In addition, GoI imposes export embargos, restricting companies' opportunities to benefits from higher export realisations. Companies are allowed to use only jute bags for packing sugar-this increases costs by Rs.400 per tonne. Says Manish Gupta, Director, Bank Loan Ratings, CRISIL, "We believe that removal of sale of sugar under the levy quota and flexibility to use plastic bags will increase profits by Rs.1.5 billion, resulting in stronger cash flows for sugar companies."
Improved cash flows to sugar companies will enhance their liquidity and help them settle their dues to farmers on time. CRISIL believes that cane arrears will reduce substantially from their usual peaks of six to seven months, following decontrol. Moreover, unlike in the past, farmers will get a share in the upside on sugar prices-payout to farmers has been recommended at 70% of realisation from sugar and by-products. This will bring stability to farmers' income, in contrast to the past five years, when payout was between 55 and 80%.
Disclaimer: CRISIL has taken due care and caution in preparing this Press Release. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of information on which this Press Release is based and is not responsible for any errors or omissions or for the results obtained from the use of this Press Release. CRISIL, especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Press Release.
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