Sugar companies' stocks up on decontrol buzz

Share prices of sugar companies jumped as much as seven per cent on Wednesday on the back of a government move to decontrol this sector.

Since the government control on sugar sector affects Uttar Pradesh-based crushing units the most, mills in India’s second largest sweetener producing state cheered the most on Wednesday with share price of Balrampur Chini surging seven per cent to close at Rs 49.25. Similarly, Bajaj Hindustan rose 5.47 per cent at Rs 24.10.

India’s largest sugar refiner with its crushing and refinery units in Karnataka — Shree Renuka Sugars — followed suit to close at Rs 29.75, a gain of 4.94 per cent from the previous day. According to existing norms, the government allocates monthly release of quota which prohibits sugar mills from adjusting quantity of release in respect to demand.

Sometimes, the government exceeds demand through its release quota, which results in the price falling much below the cost of production. The government mandates sale of released quota during a specified time, which results in a huge loss for sugar mills, said an analyst.

On Tuesday, the government had almost prepared a Cabinet note to abolish the release order mechanism for sugar industries. A second note is also under preparation to remove a mechanism under which millers have to set aside a specific portion of their annual output for selling through the public distribution system.

Abolishing the periodic release order, through which government determines the quantum of sugar that each mill can sell in the open market in a specified period, is one of the major bottlenecks in faster growth of the Indian sugar sector. The government-constituted panel, headed by the Prime Minister's Economic Advisory Council Chairman C Rangarajan, had also favoured abolishing the release order mechanism.

In the second phase, another Cabinet note will be moved, which will do away with the levy sugar obligation. Under this obligation, mills have to earmark a certain portion of their annual production for sale through ration shops at cheap rates.