Sugar mills in Uttar Pradesh are set to face a huge working capital squeeze in starting operations, because of sustained losses on higher cost of output and lower realisation the season ending this month.
According to the Indian Sugar Mills Association (Isma), 122 operational mills, with a combined output of 7.49 million tonnes of output, had an accumulated loss of Rs 3,500 crore during the 2012-13 crushing season (October-September).
Abinash Verma, director-general of Isma, said the major reason for the loss was the sustained rise in cane prices without proportionate increase in their realisation.
The Uttar Pradesh government raised the cane prices (state advised price or SAP) during the crushing season to Rs 280 a quintal from Rs 240 a quintal.
The increase has resulted in a proportionate uptick in manufacturing cost. This worked out to Rs 3,600 a quintal against realisation of Rs 3,400 a quintal.
“Last year, sugar mills in UP raised working capital at Rs 3,300-3,300 a quintal. Based on the average realisation of this year, 90-95 per cent of the total income was spent on servicing debt.
Hence, sugar mills will not be able to show good financial numbers this year, a base for raising working capital,” said Verma.
Taking a cautious approach on bad loans, banks have already kept the entire sector under the least preferred category, which indicates that raising working capital would be challenging in the coming season.
With cane output of 81.50 million tonnes, mills in Uttar Pradesh reported a total sugar output at 7.49 million tonnes.
The Centre has already raised its fair and remunerative price (FRP) for cane by five per cent.
Isma has urged the state government to bear at least Rs 40 a quintal of cane price at last year’s level of Rs 280 a quintal and distribute this in the form of interest subsidy to mills.
“If the industry raises Rs 2,500 crore from banks as working capital in the ensuing season, the sector would have to pay Rs 300 crore as interest at 12 per cent. The state government has already been supporting co-operative sugar mills with budgetary allocation equivalent to this amount. Hence, we have urged the government to distribute this amount equally among private and co-operative sugar mills, depending upon their crushing capacity,” said Verma.
He added this minor change would help the sector and protect it from closure.
Sugar mills, however, are set to commence crushing in the second week of November this year.