Sugar decontrol unlikely in near future: Expert

Govt panel has proposed immediate removal of levy sugar obligation of companies and administrative control on non-levy sugar

The recommendation made by a government committee for decontrolling of the sugar sector is a positive step but total decontrol may take several years, an industry expert has said.

"We consider the decontrol proposals to be quite positive. However, the actual decontrol is going to take several years. Also, weaker productivity than Brazil, the key competitor, could hurt India in the long run," Bank of America Merrill Lynch Research Analyst Sanjaya Satapathy said in a note.

The government committee has proposed immediate removal of levy sugar obligation of companies and administrative control on non-levy sugar.

Removal of levy sugar will boost realisation by 5% while doing away with administrative control on sales of non-levy sugar will improve cash flow as mills won't be required to carry inventory, he said.

However, given the uncertainty about sugar production in the current season starting October 2012 due to deficient rainfall, the possibility of immediate implementation is quite remote, Satapathy added.

The committee has proposed that mills should share 70% of their revenue (75% of ex-mill sugar price) with farmers instead of paying a government determined price which is lesser than around 80% paid to farmers in last two years and hence will boost margin of the mills, he said.

However, farmers may not agree to a reduction in share. Current sugar price of Rs 35 a kg in Uttar Pradesh despite being 20% higher for the mills compared to last season will lead to only 4% rise in payment to farmers, he said.

Brazil experience is not too encouraging, Satapathy said, adding that the deregulation did lead to sharp rise in sugar production in Brazil but sugar mills there are still struggling with high debt and low ROCE.

Excess capacity and lesser competitiveness is the problem here. India has milling capacity to produce over 32 million tonne of sugar, which is 40% higher than domestic demand, he said in the report.

The other key problem is weaker productivity of 6.7 tonne per hectare of sugar, which is about 30% lesser than 10 tonne per hectare in Brazil, he added.