Sugar companies' profits to soar 50% if sector is decontrolled

KOIMBATORE: The profits of leading sugar companies would increase Rs. 600 crore, a 50% jump, in the current financial year if the recommendations of the C Rangarajan Committee pertaining to full decontrol of the sector are implemented.

Sugarcane farmers would also benefit from decontrol as it would lead to a reduction in cane arrears and a share in the increase in sugar prices, ratings agency Crisil has said. The recommendations by the expert committee headed by Dr. Rangarajan include abolishing state-advised cane prices (SAP) and removal of regulatory control on the sale of sugar in the domestic market.

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

As per the existing regulations, sugar companies are required to sell 10% of their production known as levy sugar at a subsidised rate of Rs.19.05 per kilogram significantly lower than the market price that is nearly double the discounted rate now. In addition, the centre imposes export embargos restricting companies' from making higher export realisations. Companies are allowed to use only jute bags for packing sugar this increases costs by Rs.400 per tonne.

"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.4.5 billion (450 crore)," said Subodh Rai, Senior Director, Bank Loan Ratings, Crisil.

The removal of sale of sugar under the levy quota and flexibility to use plastic bags will increase profits by Rs.1.5 billion resulting in stronger cash flows for sugar companies, according to Manish Gupta, Director, Bank Loan Ratings, Crisil.

Improved cash flows to sugar companies will enhance their liquidity and help them settle their dues to farmers on time. Crisil believes that cane arrears will reduce substantially from the usual peak of 6-7 months following decontrol.

Moreover, unlike in the past, farmers will get a share in the upside on sugar prices payout to farmers has been recommended at 70% of realisation from sugar and by-products. The payout was between 55% and 80% in the past five years. "This (recommended payout) will bring stability to farmers' income," Crisil said.

source: TOI