Acceptance of the recommendations of the C. Rangarajan Committee on decontrol of the sugar sector will lead to a 50 per cent increase in the profitability of sugar mills and the cane growers would get stable income due to higher share of realisation from sugar and by-products, according to a study by CRISIL.
While the 47 sugar mills rated by CRISIL would gain Rs 450 crore because of linking sugarcane prices to end products, the abolition of levy quota and modification of the packing rule would lead to Rs 150-crore increase in profit, the report said.
The report said it expected that the profitability of sugar companies would go up by Rs 600 crore in 2012-13 if the recommendations of the Rangarajan Committee on full decontrol of the sugar industry were implemented.
This amounted to a 50 per cent increase in profit for the rated companies compared with their estimated profits under the existing ‘regulated scenario’.
The report also said that while it would strengthen the credit risk profile of the sugar mills, farmers would gain from it because of fall in cane arrears and as they would share any increase in sugar prices.
Subodh Rai, Senior Director, Bank Loan Ratings, CRISIL, observed that the sugar decontrol would ‘improve players’ cash flows, reduce their working capital requirements, and, thereby, strengthen their credit risk profiles’.
Rai felt that the move to link sugarcane prices with that of its end products would be ‘positive for the industry and will improve CRISIL-rated companies’ profits by Rs 450 crore’. According to current rules, the mills should sell 10 per cent of the sugar produced at a subsidised rate of Rs 19.05 a kg which was much below the market price.
Moreover, the government also placed export embargos that restricted companies benefiting from higher export realisation.
The insistence on usage of jute bags for packing sugar also pushed up cost by Rs 400 a tonne.
The Rangarajan Committee’s recommendations, apart from full decontrol of the sector, included abolishing 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.