Stocks of sugar companies, after receiving a drubbing over the last three years, have revived in recent months. The gains have been uneven with the larger integrated producers gaining strongly, while smaller ones have been left out of the rally. As with other sectors, it was the hope of policy changes rather than a fundamental change in financial performance that drove these gains.

The year 2013-14 proved to be a forgettable one for the Indian sugar industry despite some respite on the policy front. With the levy quota removed, the industry is no longer required to supply 10 per cent of its output to the public distribution system much below cost of production. The dismantling of the release mechanism also allows mills to take greater advantage of any seasonal or cyclical uptrend in prices.

Though this should have theoretically lifted profit margins of the players, the changes had barely any impact on sugar company numbers in 2013-14. This was the fourth consecutive year in which domestic sugar production topped demand, thus depressing sugar prices in the domestic market. With cane prices remaining firm, most sugar companies suffered heavy losses on their sugar operations. Integrated producers who process by-products into ethanol, alcohol or power, such as Balrampur Chini Mills, EID Parry, and Bannari Amman Sugars, fared a little better with the profits from these businesses helping to offset some of the losses from sugar sales.

High debt on the balance sheet proved a deadweight during this downturn; Bajaj Hindusthan, Dhampur Sugars, Shree Renuka Sugars and a few others suffered on this score.

While the market is betting on relief to the sugar sector from budget moves such as an import duty hike, a sustainable turnaround will materialise only on a turn in the sugar cycle – a decline in output which can lift market prices of sugar.

Yes, a change in the cane pricing mechanism to a revenue sharing method can be a significant sweetener too.

Related Topics
comment COMMENT NOW