Given the imbalance between cane and sugar prices, banks not keen to lend more to the sector.
Sugar industry, especially the Uttar Pradesh millers, will have a tough time arranging the working capital requirement for the new crushing season, which starts by the month-end. Working capital requirements have moved up due to higher sugarcane planting, but banks are not keen to have large exposure to the sector, given the imbalance between sugarcane and sugar prices.
DCM Shriram Consolidated Ltd (DSCL), which owns four sugar mills in UP, projects its working capital requirement for the new season at Rs 845 crore, compared to Rs 620 crore last season. “The banks’ view on sugar sector is moderately negative, which implies that they are very selective in taking any fresh exposure to the sector. The existing exposures are also being monitored very cautiously and, in some cases, are being restricted,” said Ajit Shriram, joint managing director, DSCL.
UP’s share in the country’s total sugar production is around 25 per cent. The mills in southern India are also facing similar working capital crunch. Cane prices in Maharashtra are well regulated and, hence, the problem is less severe there.
The working capital requirement assessed by banks is based on the value of peak inventory levels. However, the banks monitor the drawing power of companies’ on a month-to-month basis which gets determined by the market price of sugar. If the sugar prices in the new season decline and goes below the cost of production, then mills working capital funding would be adversely affected which can cause cane arrears.
According to Shriram, the cost of production in the season 2010-11 has been around Rs 3,000 a quintal whereas the average realisation was in the range of Rs 2,600-2,700. Considering cane price rise in the coming season 2011-12, prices of sugar should match up to the increased cost of production otherwise sugar mills will find it difficult to pay the cane price.
Most companies have projected a higher working capital requirement. Balrampur Chini, for instance, expects is requirement to increase to Rs 1,500 crore from Rs 900 crore last year. Dwarikesh Sugar’s requirement is projected at Rs 350 crore against Rs 250 crore last season. Last year, the state government had raised cane price by 24 per cent to Rs 205 a quintal. The industry is apprehensive of another sharp increase this season in view of the Assembly elections next year.
G S C Rao, CEO, Simbhaoli Sugars, said banks are not very comfortable lending to the sector as last year has been a loss-making one. “The industry is already having a high interest burden on debts raised for past investments. The gap between cost and realisation will only widen with a higher sugarcane price. Exports should be allowed to ensure liquidity,” he said. V S Banka, CFO, Dwarikesh Sugar, said the industry will be under stress while making repayment as cash flows is weak.