SOP! SAP! SUGAR!!!

Finally some good news for Sugar stocks in India!
You know what is a 'Bad' industry to be in? Not just 'Unattractive', BAD!
An industry where you can be forced to make losses, year after year. Sugar millers of our country are those few lot where government can make them run their mills even if they are making losses.



 As from the chart of top 10 Indian sugar companies in terms of Sales, except for EID parry and Bannari amman, none of the companies showed appreciable profits last fiscal. Bajaj Hindustan and Mawana Sugars registered a loss of Rs 720.15 Cr (-15.89%) and Rs 288.05 (-22.38%) respectively. These companies cumulatively made a loss of Rs 408.26 Cr. on total sales of Rs 24,474.61 Cr.
It's amazing how a commodity, Sugar, which is considered an essential commodity is struggling so hard to keep its head above water. Actually, its already under water.



Apart from EID Parry, none of the top 5 Sugar makers have a market capitalization greater than their total asset value. This is a sign of increased economic distress of the companies. Bajaj Hindustan has the most depressed market capitalization in that context. Ironically, it’s the largest miller among peers!


The reasons for such plight of a long known business is known almost to everyone. And like several other businesses, it's the government control that is slowly and steadily stifling the sector. Or they have already put it on ventilator?
A brief description of how this industry works: Farmers grow Sugarcane which is the raw material for this industry. It makes close to 80% of total Cost of Goods Sold (COGS) expenses for the companies. Government decides the prices at which those Sugarcane would have to be bought. The central government has fixed a Statutory Minimum Price (SMP), also known as Fair & Remunerative Price(FRP), which guarantees minimum price to the farmers for the cane they have grown. But some of the states, like UP, Haryana and Punjab, add some more premium to this SMP and call it SAP or State Advisory Price. This is the price at which the state sugar millers have to purchase it from the farmers.
And to lure the farmers, governments at both levels increase these prices frequently.



	2010	2013
SAP	Rs 165/Q	Rs 280/Q
Production Cost	Rs 24/Kg	Rs 35/Kg
Domestic Sugar Prices	Rs 28/Kg	Rs 31/Kg

(Q=Quintal).
Thus, from a profit of Rs 4/Kg on Operating basis to a loss of Rs 4/Kg in just 3 years!


There are other regulations, restrictions and nuances as well which drive this industry. However, the recent issue arose when the SAP was again increased to Rs 280 per Quintal which the Millers refused to pay. Few of them went on to strike and closed down their mills as such a high SAP on the backdrop of falling international sugar prices seems unviable. They asked government for an increase in import duty, interest-free loans for mills, subsidies for exports and creation of buffer stocks to help mills. Apart from that, it was also agreed a few days back that out of the Rs 280, millers will pay Rs 260/Q immediately while the rest Rs 20/Q will be paid at the end of the crushing season.
After being threatened that court cases will be lodged against those who are not crushing, they were forced to agree to begin the crushing season which normally starts from November.


In order to remove some pain, a Group of Ministers (GoM) chaired by the agriculture minister, Mr. Sharad Pawar, finalised these sops to the ailing industry:
1. Rs 7200 Crore interest free loan to the millers for clearing their cane arrears of close to Rs 3400 Crores. These loans are given for a period of 5 years with the first two years being moratorium periods. Thus  at 12% p.a. interest rate, it can save upto Rs 2592 Cr. of interest payments in the next 5 years.
   I think this is a positive but only a marginal one. Total debt for the sugar companies is Rs 21685 Cr. which is about 42% of their total liabilities. Year on Year the balancesheets have weakened because of increasing debt and thus, the interest free loan is a breather. Nothing more.
2. Increased compulsory ethanol blending in fuel to 10% from present 5%
   Another positive with a lot of riders. Ethanol is a by-product for this industry and can be safely added to fuel to make it more 'Green' as well reduces the price. Brazil has implemented a 25% compulsory blending norm for their Auto sector. We can do it till 10% without making any changes in the present automotive's structure and that’s what government should be pushing for. But this change will take time. Mills have been supplying Ethanol at Rs 38/litre as per the latest tenders wherein they would sell 1.33 billion litres of Ethanol to oil marketing companies. Doubling this revenue will be a sure boost to the sugar companies.

1. Incentives to produce upto 4 million tonnes of Raw Sugar which fetches premium in the international markets.
   This is another good move on two counts. One, Raw sugar realizations are better than normal sugar and thus will boost their cash flows. Two, if 4 mn sugar production goes out for exports, the domestic sugar prices will also get a boost as we have been expecting an over-production here. It is expected that in this Sugar year, India will produce about 25 Million tonnes of Sugar while the consumption will hover around 23 Mn Tonnes. Export on this scale will push the domestic sugar prices up by Rs 2/Kg as per expectations.


Now, none of the measures are addressing the core problem of higher SAP which is choking the industry because no government can dare to disappoint the farmers as they are major voting chunk.
On Monday, the rally in the sugar stocks should continue at the back of these developments, but, going forward, the sector is still poised to feel the shock and helplessness of being in an industry which is practically dictated by the government. A look at their share prices narrate the same story. They have fallen in the past 1 year from 22% to 55% or so.









Will such incremental measures reverse the course of fate of Sugar millers in the country? Time will tell but looking at the figures, it looks unlikely.