Decontrol to boost sugar companies' profits by 50%: CRISIL

If recommendations of the C Rangarajan Committee on full decontrol of the sector are implemented, rating agency CRISIL says, the profitability of sugar companies rated by it will increase by 50 per cent or Rs 600 crore in fiscal 2012-13.

In other words, as against their estimated profits under the current regulated scenario, profits of the rated companies could well grow by 50 per cent, apart from their credit risk profiles being strengthened, says a study conducted CRISIL on 47 of its rated sugar companies.

What's more, sugarcane farmers too stand to benefit from decontrol through reduction in cane arrears and share the upside in sugar prices, said Subodh Rai, senior director, bank loan ratings, CRISIL regarding the study.

Apart from full decontrol, the expert committee headed by C Rangarajan has recommended abolishment of state-advised cane prices (SAP) and removal of regulatory control on the sale of sugar in the domestic market, of quantitative restrictions in international trade and of mandatory jute packaging.

The Government of India (GoI) advises the cane purchase price - known as the fair and remunerative price (FRP) - for companies. However, the key sugarcane-producing states such as Uttar Pradesh, Tamil Nadu and Punjab also announce SAP for sugarcane. The committee has recommended abolishing SAP, and suggested that 70 per cent of companies' realisation from sugar and its by-products be shared with the farmers.

"We believe that linking sugarcane prices to the prices of end products will be positive for the industry and will improve CRISIL-rated companies’ profits by Rs 450 crore," Rai added. As per the existing regulations, sugar companies are required to sell 10 per cent of their sugar produce at a subsidised rate of Rs 19.05 per kg which is significantly lower than the market price. In addition, the Centre imposes export embargos, restricting companies' opportunities to benefits from higher export realisations. Companies are allowed to use only jute bags for packing sugar which increases costs by Rs 400 per tonne.

"We believe that removal of sale of sugar under the levy quota and flexibility to use plastic bags will increase profits by Rs 150 crore, resulting in stronger cash flows for sugar companies," said Manish Gupta, Director, Bank Loan Ratings, CRISIL.