UP-based sugar mills will see decline in operating profit this year

High cost of production and low realisation are the reasons. says a Care Ratings study

High cost of production and low realisation is likely to pull down operating profit of sugar companies during the ongoing season 2012-13 (October–September), a Care Ratings study forecasts. The rise in cost of production is mainly attributable to the substantial rise in the sugarcane procurement cost which accounts for almost 80 to 85% of the total operating cost of the industry.

For every sugar season, the central government determines the minimum price payable to the sugarcane farmers known as Fair and Remunerative Price (FRP). However, in some states, like Uttar Pradesh, Tamil Nadu, Haryana and Punjab, the state government fixes minimum price at which the sugar mills have to procure sugarcane from the farmers, known as State Advised Price (SAP). Even in the other states like Maharashtra and Karnataka, which do not declare the SAP prices, sugar mills have to pay sugarcane farmers higher prices than the FRP fixed by the central government.

This is done to support farmers and boost the area under sugarcane cultivation. Thus, the per tonne sugarcane cost differs from company to company based on the location of the plants.

In past few years, the SAP declared by the UP government has been the highest among other sugar producing states resulting into widening gap between the sugarcane prices of UP and other states. The difference between the SAP of sugarcane by UP was as high as Rs. 40 per quintal in past couple of years. For the sugar season 2012-13, this difference has increased to a level of Rs. 55 per quintal. So, the sugar mills in the UP region have to bear comparatively higher sugarcane cost due to high SAP prices as against the sugar mills based in other states, the study said.

On account of the incremental SAP charged by the UP state, the cost of sugar production of UP based sugar mills had remained higher compared to the west and south based sugar mills. During the period SS2009-10 to 2011-12, the cost of production of sugar for the sugar mills in UP region has increased by Rs. 7.8 per kg while the same for sugar mills in the south region has increased by about Rs.4.1 per kg. However, it decreased by Re.1 per kg for sugar mills in Maharashtra mainly on account of some softening in sugarcane prices during the same period.

Experts believe, the rise in cost of sugar production has adversely affected the profitability of the sugar mills across the country but the magnitude of impact was higher for the north based sugar mills. During the period of SS2009-10 to SS2011-12, the operating profit on each kg of sugar sold for the UP based sugar mills and south based sugar mills has decreased by Rs 5.5 per kg and Rs 1.8 per kg, respectively while for Maharashtra based sugar mills it has increased by Rs 3.5 per kg.

UP mills to incur loss Rs 2/kg

For the SS 2012-13, UP government has increased the SAP of sugarcane by 17% on a YoY basis to Rs.280 per quintal. Tamil Nadu and Karnataka have increased sugarcane prices for SS 2012-13 by about 15% on a YoY basis. Maharashtra state government has increased sugarcane prices by 22% to Rs. 250 per quintal for SS 2012- 13. CARE Research has estimated that in SS 2012-13, the sugar production cost of UP based sugar mills will increase by about Rs 4.4 per kg to about Rs.34 per kg on account of the higher sugarcane procurement cost. The sugar production cost of south and Maharashtra based sugar mills is expected to be at about Rs 28 per kg and Rs 27 per kg, respectively. CARE Research expects average sugar prices to remain range bound in Rs 33-34 per kg in SS2012-13.

So, in SS 2012-13, the sugar mills based in west and south regions will be relatively better placed compared to the sugar mills based in UP region. CARE Research estimates that, due to rise in the sugarcane procurement cost, the UP based sugar mills will incur an operating loss of about Rs. 2 on each kg of sugar sold in SS2012-13. On the contrary, the south and Maharashtra based sugar mills are expected to earn an operating profit of about Rs.4 on each kg of sugar sold albeit lower than the previous sugar season.