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BL Research Bureau

The Uttar Pradesh Government’s decision to hike the cane procurement price “advised” by the State for the current season from Rs 125 to Rs 140 per quintal may pose a significant threat to the earnings of sugar mills located in the State. Mills in the State are already involved in a court battle relating to the previous year’s State Advised Price or SAP of Rs 125 a quintal, having shelled out Rs 110 per quintal the previous season.

An upward revision in the State Advised Price (SAP) for the current season may entail a significant spike in procurement costs for the mills. A higher SAP gives rise to doubts on whether mills in the State will benefit from the firmer sugar prices expected this season. Domestic sugar prices, which had firmed up by about 22 per cent between January and September, have cooled about 10 per cent on higher supplies released for the festive season and lower global sugar prices.

The SAP hike of 12 per cent may absorb a good portion of the higher realisations that may be possible from rising sugar prices. It is now expected that the mills in the State may challenge the issue of this year’s SAPs in the courts.

While the higher SAP does pose an earnings risk to sugar producers in UP, stocks of sugar companies across the board have taken a sharp hit on Monday’s trading. This may be unwarranted.

Given that cane procurement prices are not determined by SAPs in Maharashtra, Tamil Nadu and Karnataka, companies such as Shree Renuka Sugars, EID Parry and Bannari Amman Sugars, which have mills located in these States, are not directly impacted by the developmentin Maharashtra. Though their procurement prices this year may be higher due to lower cane availability, they may still be able to secure cane at lower prices than this SAP. A more diversified revenue stream, consisting of significant contributions from by-products such as ethanol, power and alcohol, may also lead to a better margin profile for south-based companies.

More Stories on : Stocks | Agricultural Policy | Sugar

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