Indian sugar mills association

Payment of R900-cr cane arrears in three months to hit UP mills

Date:	19 Jan 2012

Source:	The Financial Express

Reporter:	Banikinkar Pattanayak

News ID:	865

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New Delhi: Cash-strapped sugar mills in Uttar Pradesh are bracing for tough times with the Supreme Court ordering them to pay farmers arrears of about R900 crore — accumulated during 2006-08 — within three months.

While farmers are elated at the verdict, reaffirming their faith in the judiciary, a struggling sugar industry sees it as the toughest period since the last sugar season started on October 1, 2010. The cane crushing season is at its peak and mills need cash to pay farmers for the current purchases. Worse still, the minimum sugarcane prices fixed by the UP government have been at an elevated level, while sugar sales realisation has remained low for more than six months now due to adequate supplies.

A Bench, headed by Justice Dalveer Bhandari, on Tuesday observed that mills will have to pay an 18% interest for failure to pay within the time-frame, while referring to a seven-judge constitution Bench an important issue of whether the state has the power to fix the sugarcane prices that mills are obliged to pay farmers.

UP is the second largest producer of sugar, accounting for around 25% of the total production. While only a handful of companies, including two top producers Bajaj Hindusthan and Balrampur Chini Mills, are yet to clear cane dues incurred during 2006-07, almost all major companies have to pay some arrears for 2007-08, a senior industry executive said. Bajaj Hindusthan alone has around R250 crore in arrears during the period.

Indian Sugar Mills Association director general Abinash Verma said: “The biggest problem is that the mills will have to pay the arrears in the next three months. Since sugar sales are tightly regulated by the Centre, mills can`t sell sugar according to their convenience and repay some arrears. So, if mills have to clear old arrears now, they may be constrained to defer payment on fresh cane purchases when the crushing season is at its peak."

UP Sugar Mills Association secretary Shyam Lal Gupta said the next course of action will be decided after the mills get a copy of the Supreme Court judgment.

Share prices of key sugar companies have slumped by up to 70% since the beginning of 2010-11, significantly underperforming the Sensex, as various government controls and dwindling returns on sugar sales bled their balance sheets.

Top producer Bajaj Hindusthan`s net profit rose by just R1.15 crore from a year before in the quarter through June 2011.

The company`s net profit increased just R12 crore in 2010-11, compared with R51.76 crore a year before. In September, the company announced that it would raise R1,644.17 crore through a rights issue aimed at "the repayment/pre-payment, in full or in part, of the outstanding loans”.

As of March 31, 2011, its total indebtedness was R5,876.71 crore, including working capital loans. Balrampur Chini Mills has suffered losses of R59.30 crore in the two quarters through September 2011, while Simbhaoli Sugars incurred losses of R44.13 crore during the period, highlighting persistent pressure on the industry. Bajaj has 14 mills in UP, while Balrampur Chini and Simbhaoli have 10 and three mills, respectively.

While Balrampur Chini managing director Vivek Saraogi has said the decision would cripple the industry in UP, Simbhaoli Sugar chief executive said the industry will be further burdened in times of high cane cost.

“We are exploring all options, but are yet to decide what we can do about it. We urgently need some kind of subsidy or interest-free loans, from either the Centre or the state, to tide over the crisis,” Isma`s Verma said.

“The move will definitely affect the balance sheet, but we are yet to calculate how much it will impact us,” said a senior executive with a company that has a large presence in UP, on condition of anonymity.

Major producer Triveni Engineering and Industries executive director Nikhil Sawhney said: “We didn`t have any arrears in 2006-07, but some payment will have to be made for 2007-08. We have been factoring that in our balance sheet as well. We will go by the court decision.”

However, Verma said sugar production in 2011-12 won`t suffer as mills are mandated to crush all cane from areas reserved for them. “So, whatever may be the situation, they can`t avoid cane purchases,” he added.

DCM Shriram Consolidated, which has four mills in UP, said it doesn`t have any cane arrears to pay. “That is because the group has presence in various sectors, and their cash flow doesn`t just depend on sugar or other cane byproduct sales,” said a sugar analyst.

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