North-based sugar mills in dire straits

Debt payment together with cane arrears amount higher than inventories in most cases, may create a problem for raising working capital next season

Most sugar mills in India’s northern states especially in UP owe to banks substantially higher than the value of inventories they possess. This indicates that even after selling all their sugar stocks, mills would not be able to clear their dues which pose a threat for their potential to raise working capital for the next season.

Data for the quarter ended March 2014 show that Bajaj Hindusthan (BHL) had a total loan fund in its books at Rs 5,585.71 crore (both short and long term) as against the value of total inventory worth Rs 2,673.50 crore.

This includes a short term loan of Rs 3073.10 crore and a long term borrowing of Rs 2,509.60 crore. Interestingly, India’s largest sugar manufacturer – BHL – has total cane arrears to the tune of Rs 1,937.10 crore as of May 23. Both short term borrowings and cane arrears to farmers, total payables work out to Rs 5,013.2 crore, 53% higher than the value of inventories in BHL’s possession as on May 23.

Since sugar mills have agreed to give undertaking to the government to pay cane arrears as a mandatory clause to obtain incentives, the government is set to notify the package for revival of sugar mills.

“The incentives on production and exports followed by restrictions on import are likely to raise sugar prices in domestic markets and the realisation for sugar mills thereupon. The sentiment will further change in the industry’s favour post budget (scheduled on July 10),” said Harish Vasudevan, Strategist, SVS Securities.

Bitter pills for sugar mills (Rs crore)
Company	Net profit	Loan funds	Inventories	Cane arrears*
Bajaj Hindusthan	-423.9	5,585.71	2,673.5	1,937.1
Oudh Sugar Mills	53.93	1,036.54	951.19	353.3
Upper Gang. Sug.	38.6	626.58	591.57
Rana Sugars	28.46	751	638.65	187
Dalmia Bharat	76.22	749.81	629.31	--
Mawana Sugars	17	327.7	530.2	623.7
Simbhaoli Sugars	-10.91	1,156.29	476.5	321.7
Uttam Sug.Mills	13.35	536.54	330.28	183.4
Source: BS Research Bureau, Figures for March 31, 2014, * as of May 23, 2014

Other companies including Simbhaoli Sugars, Mawana Sugars and Rana Sugars also have payable higher than the value of cane arrears they possess. For example, total payables (short term borrowings and cane arrears) for Simbhaoli Sugars stands at Rs 1,315.9 crore as against the value of arrears Rs 476.5 crore. Similarly, total payment outstanding for Mawana Sugars and Rana Sugars stood at Rs 831.3 crore and Rs 697.7 crore against their inventories worth Rs 530.2 crore and Rs 638.6 crore respectively.

The government recently announced a number of incentives to sugar mills. In addition to increasing import duty to 40% from the existing 15%, loan equivalent to excise duty was extended to five years from three years now. These incentives helped raise sugar prices by Rs 2 a kg resulting into rising realisation for mills.

“Mills held sugar stocks in anticipation of higher prices. Sugar sales to open markets slowed since February amid expectations of supportive measures as suggested to the government resulting into piling up farmers’ cane arrears to the tune of Rs 11,000 crore,” said a senior industry official.

In fact, Rangarajan Committee recommended sugar mills to pay at least 70% of realisation to farmers which sugar mills in the north based failed to pay.

“Delay in arrears’ payment is bound to discourage farmers for sowing sugarcane for the next season. But, sugar has been a beaten down sector in all cyclical stocks which with government measures may be looked at seriously,” said Vasudevan.

By contrast, companies like Balrampur Chini and Dwarikesh Sugars enjoy higher value of inventories than total short term debt and arrears together. Short term debt is considered to be repaid during the current crushing season. Against total payable amount of Rs 1,444.6 crore, Balrampur Chini possess sugar inventories worth Rs 2,092.3 crore. Similarly, Dwarikesh Sugars’ sugar inventories stand at Rs 436 crore against total payable of Rs 377.3 crore. This indicates that these companies are in comfortable position. Still, raising working capital for them might be an issue due to overall negative sentiment towards this sector.