Govt's sugar bailout package to clear 40% of Rs 220 bn cane arrears: Crisil

The Rs 70-bilion bailout package announced by the government for sugar industry is likely to bring limited respite for mills with around 40 per cent of reduction in the total estimated cane arrears of Rs 220-bn by May 2018 end.

A study conducted by the credit rating agency Crisil showed that the bailout package, though well intended, does nothing to address the structural issues that have plagued the industry, the most acute of them being non-linkage of sugarcane prices to end-product realisations. Creating a buffer stock and fixing a minimum ex-factory price for sugar will help improve the cash flows of corporate mills to the extent of Rs 91 billion for the industry over the next one year.

Worryingly, with the supply surplus situation anticipated to continue in SS 2019 as well, a further build up in arrears cannot be ruled out. The offer of financial support to mills for setting up distillery capacity is unlikely to find many takers, given the financial situation of the industry, the study said.

The government on Wednesday announced a bailout package of Rs 70-bn to improve liquidity amongst sugar mills. Apart from fixing a minimum selling price of Rs 29 a kg for the immediate term which can be reviewed later incommensurate with revision in the fair and remunerative price (FRP) of sugarcane, the government has budgeted for the creation of 3 million tonnes of its buffer stock at an expenditure of Rs 11.75 billion. 

The remaining amount, comprising Rs 44.40 billion of loans and Rs 13.32 billion of interest subvention to upgrade or set up distillery capacity, would help in diversion of sugar during the surplus phase (diversion will be allowed from B molasses instead of C molasses, allowing more molasses to be produced, as per industry interactions).

The study believes that the price support would account for 70 per cent of the incremental cash flow. Without the price support, the benefit would be limited to the raw material and inventory carrying the cost of Rs 26.75 billion, which would be only 12 per cent of the total cane arrears. These cash flow benefits would accrue over the next 12 months, spanning a quarter of SS 2018 and three quarters of SS 2019.