Acceptance of the recommendations of the C. Rangarajan Committee on sugar decontrol will lead to a 50 per cent increase in the profitability of mills and the cane growers would get stable income due to higher share of realisation from sugar and by-products, according to a study by Crisil.

While the 47 sugar mills rated by Crisil would gain Rs 450 crore because of linking sugarcane prices to that of the end-products, the abolition of levy quota and modification of the packing rule would lead to Rs 150 crore increase in profit, the report said.

In a report based on its study of 47 of its rated sugar companies, Crisil said it expected that the profitability of these companies to go up by Rs 600 crore in 2012- 13 FY if the recommendations of the Rangarajan Committee on full decontrol of the sugar industry were implemented. This amounted to a 50 per cent hike in profit for the rated companies compared to their estimated profits under the existing “regulated scenario”.

Listing the benefits, the report said that while it would strengthen the credit risk profile of the sugar mills, the cane farmers would gain from it because of fall in cane arrears and as they would share any increase in sugar prices.

The Rangarajan Committee’s recommendations, apart from full decontrol of the sector, included abolishing state-advised cane prices (SAP) and removal of regulatory control on the sale of sugar in the domestic market, of quantitative restrictions in international trade and of mandatory jute packaging.

Subodh Rai, Senior Director, Bank Loan Ratings, Crisil, observed that the sugar decontrol would “improve players” cash flows, reduce their working capital requirements, and thereby strengthen their credit risk profiles.

While the Government of India recommended cane purchase price called as the Fair and Remunerative Price (FRP) to the sugar mills, some of the states like Uttar Pradesh, Tamil Nadu and Punjab also announced SAP for sugar cane. The Rangarajan committee wanted that the SAP be done away with and recommended that that 70 per cent of the sugar mills’ realisation from sugar and sugar by-products should be shared with growers.

Rai felt that the move to link cane prices with that of its end-products would be “positive for the industry and will improve Crisil-rated companies” profits by Rs 450 crore”.

According to current rules, the mills should sell 10 per cent of the sugar produced at a subsidised rate of Rs 19.05 per kg which was much below the market price. Moreover, government also placed export embargoes that restricted companies benefiting from higher export realisation. The insistence on usage of jute bags for packing sugar also pushed up cost by Rs 400 per tonne.

Manish Gupta, Director, Bank Loan Ratings, Crisil, calculated that due to removal of sale of sugar under the levy quota and flexibility to use of plastic bags, the mills’ profits would go up by Rs 150 crore, that would improve their cash flow. This would help increase liquidity and enable the mills pay their dues to farmers on time. The cane arrears would come down drastically from their usual peaks of six to seven months.

The cane growers would gain from any increase in sugar prices as the payout to them has been recommended at 70 per cent of the realisation from sugar and its by-products compared to 55 to 80 per cent payout in the past five years as it would bring stability to their income.

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