Indian sugar mills association

Surplus Output, Cap on Exports Leave UP Sugar Cos Bitter

Date:	19 Jan 2012

Source:	The Economic Times

Reporter:	Suraj Sowkar

News ID:	868

Pdf:	trend UP.pdf
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The Supreme Court directive on Tuesday upholding the UP state government`s decision to pay farmers the special advisory price or SAP is a major setback for sugar companies located in the state. For UP-based sugar companies, it is a double whammy — surplus production and limited export quantities are expected to keep sugar prices low while a higher SAP will add to their cost burden.

The SAP of sugarcane in UP will now be . 240 per quintal, which is 20% higher than a year ago. Assuming 10% of the quantity of sugar is recovered from sugarcane and a processing cost of . 3-4 per kg of sugar, the total cost of production works out to be . 28 per kg.

The average sugar price at NCDEX (ex-Muzaffarpur) for the past couple of weeks has been . 29 per kg. So, at this level, UP-based sugar companies will be merely breaking-even at the operating level.

For India`s sugar industry, it is a rough patch with an expected glut. Current estimates peg India`s total sugar production between October 2011 and September 2012 at 26 million tonne (mt) against the domestic consumption of 22 mt. This is likely to keep sugar prices subdued this year.

The government allowing exports in excess of 1 mt it has already approved could prove a breather to the industry. However, what could make a difference is a timely increase in the export quota for domestic companies to benefit from the price differential between local and global markets.

The futures price of white sugar on the London International Financial Futures and Options Exchange, which is a global benchmark, is currently trading at close to . 32 per kg.

The concerns relating to the industry have already been factored in the stock prices of these companies. Over the past six months, the ET Sugar index has fallen 48% compared to the 15% fall in the benchmark Sensex.

The uncertainties and a weak outlook may have put off investors. However, companies, which have significant earnings from co-generation units and from ethanol, are likely to perform better in this year. Bajaj Hindustan and Balrampur Chini Mills are likely to perform better in the industry.

For Bajaj Hindustan and Balrampur Chini, their co-generation and ethanol segments contributed nearly one-third to earnings before interest and taxes during the past three years.

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