Lower realisations to worsen sugar firms' losses

All short-term relief offered by govts don't alter the issue of mismatch between the price of sugar and production cost

Sugar mills’ financial health is unlikely to see a significant change soon, due to a continued price decline in the sweetener and uncertainty on allied products, despite the government’s short-term relief measures.

Fundmentally, mills’ cost of producing sugar is substantially more than the price they get. And, the latter continues to decline. The average price (M-30 variety) at the major wholesale Agricultural Produce Marketing Committee market at Vashi (Navi Mumbai) near here fell 13 per cent to Rs 3,124 a quintal in the October-December quarter, compared to Rs 3,583 a qtl a year ago. The price has fallen a further four per cent this month, to Rs 3,000 a qtl. This spot price is at least Rs 250-300 a qtl lower than the cost of production in major producing states.

“Sugar mills in Uttar Pradesh will continue to suffer losses due to high cane prices (Rs 280-290 a qtl), despite their close integration with by-products, including co-generation and distillation. But by-products will prove a saviour for integrated mills in Maharashtra, as their cane cost stands at Rs 240-250 a qtl,” said Chaitanya Raut, an analyst with CARE Ratings. Port-based sugar mills are able to export at competitive prices, enabling them to recover the production cost, a benefit not available to UP mills.

In the past two financial years, this situation has persisted, of a higher cost of production than actual realisation from core and allied activities. The losses have deepened steadily in the past two quarters, due to a rising interest burden on the working capital raised by companies during the crushing season. Poor offtake by state governments for supply through the Public Distribution System has swelled the inventory.

Leading producer Bajaj Hindusthan incurred a loss of Rs 509 crore in the September quarter, on a turnover of Rs 1,327 crore; it was one of the biggest quarterly losses in the company’s history. In the June quarter, it had a loss of Rs 157 crore on a turnover of Rs 1,256 crore.

Shree Renuka Sugars had a loss of Rs 63.6 crore on a turnover of Rs 1,937 crore in the June quarter, deepening to a Rs 120-crore loss on a turnover of Rs 1,535 crore in the September quarter.

Sugar mills' fortune will not change till a long-term formula is devised to align the cane price with sugar realisation, said Sanjay Tapriya, chief financial officer, Simbhaoli Sugar Mills.

Last month, an Empowered Group of Ministers (EGoM) recommended to the Cabinet Committee on Economic Affairs to allow four million tonnes more of sugar export. The sector has this much surplus but prices in the global markets are lower than in India, said Abinash Verma, director-general, Indian Sugar Mills Association.

The EGoM’s other recommendation was to raise the compulsory blending of ethanol with petrol up to 10 per cent from five per cent. However, oil marketing companies (OMCs) are not willing to pay the Rs 44 a litre demanded by the mills. In the first tender for five per cent mandatory ethanol blending, the OMCs had invited supply orders at Rs 34-36 a litre.

In the Indian markets, the average cost of sugar production works out to Rs 3,250 a qtl against the average realisation between Rs 2,900 and Rs 3,100 a qtl. There has been a further fall of Rs 150 a qtl in the past month.

“The government must adopt the Rangarajan committee recommendations as a long-term solution for mills, with specific focus on (the recommendation of) linking cane payment with the sugar price. But, this being an election year, the government would not like to antagonise farmers. Hence, the mills’ profitability will continue to remain under pressure,” said Raut.

The EGoM decided to grant loans to mills at a subsidised interest rate to clear farmers' cane dues.

However, not a single mill has been able to avail of the loan, six weeks after the EGoM decision.

As on January 8, mills reported total dues of Rs 4,600 crore, including a Rs 1,881 crore carry-over from the last year. Mills were able to pay only Rs 970 crore in cane payment as on January 8.