Business Today

Sickly sweet

Many sugar companies are in the red, with some seeking financial restructuring. Partial decontrol is a glass half empty.
Ajay Modi | Print Edition: July 21, 2013

It is a bitter pill for the sugar industry in India. A flawed policy regime has taken its toll on the producers of the sweetener.

C.B. Patodia, President, UP Sugar Mills Association
The government must understand that the fate of the (sugar) industry is linked to that of the farmers: C.B. Patodia, President Photo: Shekhar Ghosh
Consider the example of Uttar Pradesh-based Mawana Sugars. In February, the company decided to refer itself to the Board for Industrial and Financial Reconstruction (BIFR). "We took the matter to shareholders and then approached the BIFR, which has admitted the company as a fit case for revival," says Siddharth Shriram, Chairman, Mawana Sugars. The company owes around Rs 400 crore to the sugarcane growers and has been unable to pay because of poor cash flows. It reported a loss of Rs 81 crore in the 18 months to September 2012. Mawana, like most other sugar companies in UP and the rest of the country, is making heavy losses primarily due to a steep rise in the regulated sugarcane prices over the past few years. The company is losing Rs 5,000 on every tonne of sugar.

According to the Indian Sugar Mills Association (ISMA), the cost of producing a tonne of sugar in UP is Rs 35,500 while the mills are selling it at an average realisation of Rs 31,000. UP is the country's biggest sugarcane producing state with 36 per cent of the national output. It accounts for about 30 per cent of the sugar production in India.

Most of the sugar companies are now in the sick bay. Kushagra Bajaj-led Bajaj Hindusthan, which owns 14 mills in UP and is the biggest domestic player, reported a loss of Rs 234 crore in 2011/12. The smaller companies too are in trouble. For instance, Shakumbari Sugar, another UP-based company with one mill, has recently been declared sick while Sakthi Sugars, with three mills in Tamil Nadu and one in Orissa, has reported a combined loss of Rs 147 crore in the two financial years 2010/11 and 2011/12.

The union government has made an effort to restore the industry to health with partial decontrol of the highly regulated sector in April. It did away with the levy system under which all the mills were required to sell one-tenth of the sugar produced to the government at a regulated price that was always lower than the market price. The annual burden on the industry because of this stipulation ranged from Rs 1,800 crore to Rs 2,500 crore. This sugar was sold to the beneficiaries of the public distribution system.

Under the new system, the Centre will provide cash subsidy to all state governments which will now procure sugar from the open market and supply to beneficiaries at the same price of Rs 13.50 a kilogram. It also scrapped the release mechanism that decided the quantity of sugar a mill could sell in a month or a quarter. These two reform measures were part of the suggestions made by a committee headed by C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council.

However, the disconnect between sugarcane and sugar prices continues to weigh heavily on the sector. The Centre works out a price for sugarcane every year. States, though, are free to fix their own price, known as state advised price - it is mandatory for the mills to buy at this price from farmers. States like UP continue to use sugarcane price as a political trump card. Since October 2010, the UP government has raised sugarcane price by 36 per cent to Rs 280 a quintal while sugar prices have gone up by only 11 per cent to Rs 3,100 a quintal. Some other states such as Tamil Nadu, Haryana and Punjab also announce their own sugarcane prices though these tend to be much lower than in UP.

But this forces mills to buy sugarcane at a fixed price in a season irrespective of the highly volatile sugar prices.

Dhruv M. Sawhney, Chairman and Managing Director of Triveni Engineering & Industries (TEIL), says that the recent reforms will "greatly help the industry if a realistic mechanism is also put in place to determine sugarcane pricing". While admitting that the abolition of levy obligation has reduced the financial burden on companies, Sawhney says that sugar operations are still not profitable. "Therefore, long term viability and sustainability of the industry also depends on the reforms to be implemented on the sugarcane side as suggested by the Rangarajan Committee," he adds. The Committee, which submitted its report to Prime Minister's Office last year, had recommended that sugarcane price should be linked to the price that mills realise on sugar. "In order to ensure a stable industry, there is a need to have a linkage between the sugar and sugarcane price," says Ajay S. Shriram, Chairman and Senior MD of DCM Shriram Consolidated Ltd (DSCL), which runs four sugar mills in UP.

Some feel there could be a way out of the present mess if the industry adopts the pricing formula followed by the cooperative sugar mills in Maharashtra, Gujarat and Haryana - it is a revenue sharing-based sugarcane price. In Maharashtra, for instance, cooperative mills pay farmers a part of the sugarcane price at the time of purchase. Later on, farmers are made a second and final payment based on sugar realisation. The total payment works out to 65 per cent of the sugar price realisation compared with almost 100 per cent for private companies in UP and 75 to 80 per cent in states like Tamil Nadu. "If a similar formula can be followed nationally, it will bring stability to the business," says Vinay Kumar, MD, National Federation of Cooperative Sugar Factories. Cooperative mills account for 40 to 45 per cent of sugar production in the country.

Paying the Price

Meanwhile, the impact of the flawed policy is clearly visible in UP where most big sugar producers are based, such as Bajaj Hindusthan, Balrampur Chini and TEIL. Mounting financial losses have made it impossible for the industry to make sugarcane payments to the farmers. The UP sugar industry owes Rs 4,300 crore in payments to farmers.

Siddharth Shriram, Chairman, Mawana Sugars
We took the matter to shareholders and then approached the BIFR, which has admitted the company as a fit case for revival: Siddharth Shriram
C.B. Patodia, Director, K.K. Birla Group of Sugar Companies, and President of the UP Sugar Mills Association, feels short term political gains are dictating the sugar policy in the state. "The government must understand that the fate of industry is linked to that of the farmers."

The sugarcane pricing policy of the state governments has had another adverse fallout. "International players are waiting for a rationalisation of sugarcane pricing before they enter India," says Abinash Verma, Director General, ISMA. "While we have moved halfway in our battle for reforms, another half remains in form of getting a rational sugarcane price."

Some also believe that the Indian sugar industry has to boost efficiencies and become more competitive. "The central government has done what it could. We now have a framework in which the most competitive will do well," says Narendra Murkumbi, MD, Renuka Sugars, which is the only Indian company to own sugar mills in Brazil. It pays 61 per cent of realisation as sugarcane price in its four Brazilian mills.

A bountiful sugarcane crop in the last three years did not deter states from raising prices. However, large unpaid arrears due from sugar companies might deter farmers from planting sugarcane, say analysts. This could lead to a drastic decline in production and a reliance on imported sugar, as seen in 2008/09 and 2009/10. Clearly, the state governments need to streamline policy fast to revive the domestic sugar industry.

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