New Delhi: Battered by falling prices of the commodity, sugar manufacturers face more losses after the country’s biggest producing state forced them to buy cane at more than market prices.
Balrampur Chini Mills Ltd, India’s second largest sugar producer, expects to lose Rs3.50 on every kg of the commodity in northern Uttar Pradesh, according to chief financial officer Kishor Shah.
“It’s not viable to run mills at these prices,” Shah said. “We hardly have any money to operate the plants. Banks are unwilling to advance money.”
India slowed down exports of rice and wheat, capped retail fuel prices and banned some commodities trading to protect its 600 million people, who live off the land. The latest interference may exacerbate a fall in Balrampur and larger rival Bajaj Hindusthan Ltd’s stock.
“I would urge investors to stay away from sugar company shares for another one-two years,” said Utpal Choudhury, an analyst at IDBI Capital Market Services Ltd in Mumbai. “Avoid the sector until the issue on pricing of sugar cane is sorted out.” He has a “sell” rating on Balrampur shares.
Balrampur stock has more than halved from its peak on 30 April 2006, and is up only 6% this year, compared with the sensitive Index’s 35% gain. Bajaj Hindusthan has slumped 15% so far this year. Sugar mills pay a so-called state-advised price set by the state governments to the country’s 50 million cane growers.
Last month, Uttar Pradesh ordered mills in the state to pay cane growers as much as Rs130 for 100kg. The price was reduced to Rs110 last week by a court in the state after mills challenged the directive.
The reduction is not enough to cover the increased costs, Shah said. It will cost Balrampur up to Rs17 to produce a kg of sugar at the rate set by the court—or 26% more than its selling price. On 11 November, the company reported a loss for a second quarter ended 30 September.
Bajaj Hindusthan, which posted a loss in the June quarter, is yet to announce earnings. The company couldn’t be reached for comment. Global prices of sugar cane have fallen 17% in the past year amid concern India will increase exports as a record harvest leads to oversupply. Bloomberg