Home / Market / Mark-to-market /  Why the environment is anything but sweet for sugar companies

The environment is anything but sweet for sugar companies. The news gets worse. Surplus sugar at home and abroad has depressed product prices, while sugar companies, especially in Uttar Pradesh, find they have to pay sugarcane farmers a state-fixed price they cannot afford. Lobbying by the industry has resulted in a patchwork of incentives, from the central and state governments, that has kept the industry alive, but not in good health.

There is no relief on the output front in future too. The forecast for the next sugar season that starts in October shows output at the same level as the current season, at 28 million tonnes (mt) of sugar and with opening stock estimated at 10.2 mt, according to lobby group Indian Sugar Mills Association. A better picture will become available in September, once a post-monsoon estimate is available.

Globally, a silver lining is taking form. The expectation is that poor weather may affect the sugarcane crop in some countries. That could result in a deficit, after a very long time. So far, prices are not showing any signs of that. Raw sugar prices are down by 29% in 2015 so far; white sugar prices are better off, having fallen by 12.3%. Excess stock may continue to weigh on prices in the near term.

It is in this backdrop that three big sugar companies announced their results recently—Bajaj Hindusthan Sugar Ltd, Shree Renuka Sugars Ltd and Balrampur Chini Mills Ltd. All three would have reported losses, but Bajaj Hindusthan Sugars reported a profit as it accounted for a government incentive given for the previous year in this quarter. That amounted to 323.4 crore, compared with its reported profit before tax of 107.2 crore.

It is better to look at their trailing four quarter numbers to smooth out the seasonal effect. The sugar business continues to underperform, while the distillery and co-generation businesses are playing a supportive role. But that is not enough to offset losses and report overall profits.

In a conference call, Balrampur Chini’s management said a lasting solution will be linking the cane price to the sugar price, a long-standing demand. It is a politically difficult decision. If not that, then the industry is expecting government help to export excess sugar.

The hope is for a mechanism, which partly compensates sugar mills for losses on exports, and a resulting tighter supply situation that will support domestic prices. Any such scheme is good news, no doubt, for the beaten down shares of sugar companies. But investors are likely to take it with a pinch of salt, as they have been disappointed on several occasions. If the global sugar market slips into a deficit, however, that should bring some cheer.

The writer does not own shares in the above-mentioned companies.

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