Sugar turning sour for mills: CRISIL

Rationalisation of sugarcane pricing critical for long-term sustenance

The Indian sugar industry’s net losses are set to increase to Rs 1,000 crore in the 2012-13 sugar season (October to September), due to the widening gap between cane and sugar prices.

While the latter are determined by market forces, cane prices continue to be regulated by the central and state governments. This disparity in cane and end-product pricing will continue to cause wide variations in sugar production and mill profitability. CRISIL Research in its latest report says this issue can be resolved only by linking cane prices to those of end-products.

Over the past three seasons (2010-11 to 2012-13), the average price paid by mills for cane has increased at a compounded annual rate of 14 per cent; sugar prices have gone up by only three per cent annually.

The impact of this can be seen in the balance sheets of 74 companies, together accounting for about half of domestic sugar production. Nearly 40 per cent of them posted net losses in 2011-12, and about 30 per cent had an interest cover of less than one time. The proportion of companies facing difficulty in servicing their interest is increasing.

While sugar distribution has been decontrolled from this April, following the abolition of the regulated release mechanism and levy sugar obligation, cane prices continue to be regulated by the central and state governments.

For season 2013-14, the central government has announced a 24 per cent rise in the minimum price payable for sugarcane, the Fair and Remunerative Price (F&RP). By CRISIL estimates, the rise in sugar prices is likely to be only eight or nine per cent. “The financial performance of sugar mills will, therefore, deteriorate. The worst hit will be mills in Uttar Pradesh and Tamil Nadu, where the state governments announce a State Advised Price (SAP) for cane that is higher than the F&RP,” it has said.

In October 2012, the Rangarajan committee had recommended the SAP be abolished and 70 per cent of revenue from the sale of sugar and its byproducts be shared with farmers. The government is yet to act on this recommendation.

“Although recent reform measures on the marketing front and increased impetus on blending of ethanol with petrol will provide some relief to mills, cane pricing remains the key issue,” says Ajay Srinivasan, director, industry research, CRISIL Research.

Rationalising of cane pricing will also help in reducing the volatility in sugar production and farmer income. “Sugarcane arrears and diversion of cane for other purposes have influenced sugar production. Linking sugarcane prices to end-product prices will result in more efficient transmission of price signals to farmers and, thereby, help curb volatility in sugar production to some extent,” he adds.