The proposed capacity addition of about 79,000 tonnes crushing a day (TCD) in the sugar sector could be delayed by a year or two. The expansion involves an investment of about Rs 4,000 crore.
Data compiled by the Centre for Monitoring Indian Economy (CMIE) show mills have planned huge investments to increase production capacity. The expansion plans were drawn up about two years ago, when production was 14.7 million tonnes (mt). Since then, farmers have sown more, and this has led to higher cane output.
Against the proposed investment of Rs 3,000 crore in 2013 according to CMIE data, India Ratings & Research, a Fitch Group company, believes capital expenditure (capex) of large sugar companies this year would be negligible. “The capex spends of large sugar companies would be negligible in 2013. CMIE believes the sugar sector may see total capacity addition of 79,100 TCD between April 2012 and March 2015, with peak addition in the April 2013-March 2014 period. However, given the unfavourable dynamics for sugar in 2013 and the prevailing high interest rates, we believe capex spends could see delays,” said Ashwini Picardo, associate director (corporates), India Ratings & Research.
In Maharashtra, India’s largest sugar-producing state, production costs stand at Rs 33.5 a kg, against the ex-factory realisation of Rs 29 a kg. This means crushing mills are incurring a loss of Rs 4.5 a kg. In Uttar Pradesh, where the state government decides cane prices (state advised price), crushing units incur a loss of Rs 4 a kg. Against the production cost of Rs 36 a kg, realisation stands at Rs 32. Sugar mills in Karnataka produce at Rs 32.5 a kg, compared with the ex-factory realisation of Rs 29 a kg.
“To avoid incurring losses, fresh investment may face a delay of one-two years,” said an analyst.
In 2012-13, production in India is estimated at 24 mt. In the previous year, it stood at 26 mt. Consumption is estimated at about 23 mt.
“Given the positive environment emerging out of the government’s policy decision in the recent past, the investment sentiment might change. Once the release mechanism and levy sugar quota are withdrawn, as is often said by the government, mills would get more freedom. Also, mills wouldn’t be required to work on carryover stocks. This would attract more investment in the coming years, like any other industry in India,” said Abinash Verma, secretary general, Indian Sugar Mills Association.
A weekly report by Kotak Commodity Services said, “Various ‘sector-positive news’ had trickled into the market last week.”
Food minister K V Thomas has said before Budget 2013-14, the government would decide whether to allow sugar mills to sell the product in the open market. The ministry has sought the Cabinet’s approval to lift controls on sugar. This is the first time the Cabinet would take up such a proposal.
In October, an expert panel headed by Prime Minister’s Economic Advisory Council Chairman, C Rangarajan, had recommended immediate removal of two major controls---regulated release mechanism and levy sugar obligation.
In the first three months of the 2012-13 crushing season, sugar production stood at 13.75 mt.