Crisil expects Rs 1000cr loss for sugar cos on price gap

Moneycontrol Bureau

The sugar industry is likely to post over Rs 1,000 crore (10 billion) loss in 2012-13 (Oct-Sept) due to disparity in sugarcane cost and the price of end-product, (in the case sugar), states research firm Crisil in its latest report on the sector.
Citing reasons on why the sector will not be profitable in current year, the firm said, in last three seasons, the average price paid by mills toward purchase of cane has increased 14 percent, whereas, sugar cost has gone up 3 percent, making operation unfeasible for sugar makers.
"Both sugar production and mill profitability will remain highly volatile as a result of this growing price disparity. The issue can be resolved only by linking sugarcane price to the prices of end-product," stated the report. Must Read: 3 OMCs, 17 sugar mills in CCI net for cartelisation
In India, sugar price is determined by demand-supply dynamics, whereas sugarcane prices are regulated by the central and state governments.
The research firm has said due to this reason, 74 companies which together account for 50 percent of domestic sugar produce are impacted. Also, nearly 40 percent of them posted net loss in 2011-12
Also, about 30 percent companies had interest cover of less than onetime, up from 17 percent in sugar seasons (SS) 2009-10. Thus, the proportion of companies finding it difficult to service their interest is increasing.
For SS 2013-14, the Central government has announced a 24 per cent hike in the minimum price payable for sugarcane – the Fair and Remunerative Price (F&RP) – whereas as per CRISIL Research's estimates, the increase in sugar prices is likely to be only 8-9 per cent. The financial performance of sugar mills will, therefore, deteriorate, the report said.
The worst hit will be mills in Uttar Pradesh and Tamil Nadu, where the state governments announce a state advised price (SAP) for sugarcane that is higher than the F&RP.
In October 2012, the Rangarajan Committee had recommended that the SAP should be abolished and 70 percent of revenues from the sale of sugar and its by-products should be shared with farmers. The government is yet to act on this recommendation.
"Although recent reform measures on the marketing front and increased impetus on blending of ethanol with petrol will provide some relief to mills, cane pricing still remains the key issue. Linking sugarcane prices to end-product prices is critical for safeguarding the long-term financial health of the industry. In the last three seasons ending SS 2012-13, the ratio of sugarcane costs to revenues from the sale of sugar and its by-products has soared to 76-79 per cent from an average of 67 per cent in the previous decade, pushing several mills into losses," said Ajay Srinivasan, Director, Industry Research, CRISIL Research.
Rationalising sugarcane pricing will also help in reducing the volatility in sugar production and farmer income.
"Sugarcane arrears and diversion of cane for other purposes have influenced sugar production. Linking sugarcane prices to end-product prices will result in more efficient transmission of price signals to farmers and thereby help curb volatility in sugar production to some extent," he added.