At least Rs.12,000 crore in loans given to sugar companies have gone for restructuring over the past year as companies struggle to make profits in an environment where prices are skewed by policies set by the central and state governments.
Over the past twelve months, at least five sugar companies have approached their lenders to restructure their debt. The most recent being Chennai-based Dharani Sugars and Chemicals Ltd, which entered the corporate debt restructuring (CDR) cell this week, the company informed the BSE on Monday. The company is looking to restructure nearly Rs.1,000 crore worth of loans, a banker with the cell said on conditions of anonymity.
According to data available on the CDR cell’s website, 17 cases with loans worth over Rs.5,294 crore are undergoing recast through the CDR mechanism as on 31 December 2014.
Additionally, Bajaj Hindusthan Ltd is restructuring over Rs.6,500 crore worth of debt outside the CDR cell via the joint lenders’ forum, the company informed BSE on 26 December.
The proposed scheme includes restructuring of working capital loans of Rs.3,667.75 crore and term loans of Rs.2,864.79 crore. Under the scheme, Bajaj Hindusthan is likely to get 10 years to repay its loans and a two-year moratorium on interest, the company said.
Emails sent to Bajaj Hindusthan and Dharani Sugars on Monday seeking more details remained unanswered.
Other companies like Sakthi Sugars Ltd, Dwarikesh Sugar Industries Ltd and Rajshree Sugars and Chemicals Ltd have all approached their lenders for easier repayment norms since March 2014, according to notifications to the exchanges.
Bankers say pricing problems in the sugar industry are affecting profitability across the sector.
“Last fiscal year (FY14), Indian sugar companies were making money by exporting raw sugar and receiving some subsidies from the government. However, that subsidy is yet to be announced this year, which is affecting them adversely. Moreover, politicians often force these companies to offer high prices to sugarcane farmers which increase the input cost considerably and affect the margins,” said a senior official at a public sector bank who did not want to be named.
Sugarcane prices in India are controlled by the central as well as state governments. Each year the central government fixes a fair and remunerative price (FRP) to be paid to sugarcane farmers for procurement of sugarcane by sugar mills. Additionally states also fix up a state advised price (SAP).
While these government-fixed prices for cane push up input costs, the price of sugar in the open market has remained subdued both domestically and globally.
According to R.K. Bansal, chairman of the CDR cell and executive director at IDBI Bank Ltd, while sugar mills in most states are facing difficulties, those in Uttar Pradesh are worse off because the state government has prescribed a particularly high SAP.
“There are companies which tried to diversify their portfolio and enter other segments like power, but that has not paid off yet,” Bansal said.
In a report titled Review of the Financial Health of the Indian Sugar Mills released in January 2015, consultancy firm Grant Thornton noted that Uttar Pradesh has the highest SAP of Rs.280 per quintal and very low recovery rates (9.26%), as compared with Maharashtra with cane prices at Rs.255/quintal and recovery rate at 11.4%.
“The combined effect of high SAP and low recovery rates has increased the raw material cost and hence the cost of production for various millers specially in the state of Uttar Pradesh,” said the report, adding that debt across the sugar industry stood at Rs.36,601 crore as on 31 March 2013, compared with Rs.11,443 crores in 2008—an increase by almost 3.20 times. The number does not include debt of sick sugar cooperatives due to lack of data.
In October 2012, a committee headed by C. Rangarajan, then head of the Prime Minister’s Economic Advisory Council, had recommended abolishing the SAP, along with other measures such as allowing sugar mills to sell output freely in the open market.
According to the Grant Thornton report, while states like Maharashtra and Karnataka have already adopted the recommendations of the Rangarajan Committee, others like Tamil Nadu and Uttar Pradesh are yet to do so.
“It is a cyclical sector so pain keeps coming back. There is also an oversupply situation and there are some decisions with respect to subsidies on export of raw sugar which are still pending with the government. Unless these issues are sorted and demand comes back, recovery cannot be expected,” said a consultant with an international consultancy on condition of anonymity.
According to data released by the Indian Sugar Mills Association (ISMA), between 1 October 2014 and 15 January 2015, the 494 sugar mills in India produced 103 lakh tonnes of sugar compared with 86.5 lakh tonnes of sugar in the same period a year ago.
“ISMA feels that only solution in the short run to solve the depressed ex-mill sugar prices and ensure the mills are able to pay cane price to the farmers on time as also repay bank loans, 15-20 lakh tonnes of sugar needs to be exported for which government incentives for production of raw sugar and export thereof should be immediately announced,” the association said in a statement on its website on 15 January.
According to a Reuters report on 30 January, India was considering giving Rs.4,000 a tonne in subsidies for raw sugar exports, up from Rs.3,300 last year.
While the government is yet to vet the final plan, an announcement may come as early as next week, Reuters said in its report, citing people familiar with the matter.