Sugar company stocks turned sour as investors felt the financial prospects of the companies will be impacted by unreasonable sugarcane prices being fixed by the State governments.
Mills suspend operations
Some of the sugar company shares that dipped include (in per cent): Triveni Engineering (5), Balrampur Chini (3), Shree Renuka Sugars (2), Bajaj Hindusthan (2) and Dhampur Sugar Mills (2).
Most sugar mills in Uttar Pradesh have decided to suspend operations in the new crushing season 2014-15 starting October. Although, cane price is fixed by the Union Government, the UP Government is forcing companies to pay a premium to farmers over the cane price. Sugar mills in the State have demanded that the Government link sugar and cane prices.
While cane prices in the State have gone up by 70 per cent, sugar prices have moved up barely 7 per cent. Mill owners claim that they lose ₹5.5 on sale of every one kg of sugar due to higher cane prices.
High cost of production
With cane prices rising and sugar recovery from cane being lower, the average cost of sugar production at ₹37 a kg in Uttar Pradesh is among the highest in the country. Sugar mills in UP account for 30 per cent of the annual sugar production of about 70 lakh tonnes.
Interestingly, Uttar Pradesh is the only State which does not have a formula linking sugar prices with that of cane. With the dues to farmers hovering about ₹4,000-5000 crore, sugar mills in UP are already staring at bankruptcy. Till July 31, sugar industry has paid ₹47,852 crore to cane farmers while ₹9,252 crore is still unpaid for the marketing year ending September.
As of mid-June, the acreage under sugarcane was down 2 per cent at 5.23 million hectares, according to the Indian Sugar Mills Association. While crop acreage in Maharashtra and Karnataka is higher, it is lower in Uttar Pradesh and Tamil Nadu. With the south-west monsoon playing truant, the yield and sugar recovery is also expected to be lower.
Paras Bothra, Vice-President (Equity), Ashika Stock Broking, said huge arrears to farmers coupled with concern over progress of monsoon is going will be a challenge for sugar companies which are already reeling under financial stress.
“Expectation of firm sugar prices on the back of strong demand is the only consolation,” he said.