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Home / Market / Mark-to-market /  UP-based sugar mills’ shares rise sharply

Sugar mills in Uttar Pradesh have decided to wait till the state government fixes a procurement price to start crushing cane, presumably at a level that is to their benefit. Last year, the price was fixed after crushing began, leaving them with no leeway to negotiate.

Investors seem to approve the tactic, as Uttar Pradesh-based sugar mills’ shares rose sharply on Wednesday. Balrampur Chini Mills Ltd’s price rose by 9.6% while that of Bajaj Hindusthan Ltd rose by 13.9%—both are leading Uttar Pradesh-based sugar mills. Apart from hoping for a positive outcome on the cane price front, investors are also expecting an increase in import duties and a government-funded financial package for sugar mills, according to a Reuters news report.

The grouse of the sugar mills is not new. The cane harvest is ready for crushing, making it the right time to put pressure on the government. Uttar Pradesh-based mills pay a state-advised price (SAP) rather than a fair and remunerative price (FRP) that is determined by the central government. Last year, Uttar Pradesh’s SAP was fixed at 280 a quintal against an FRP of 170 a quintal. In the current season, the FRP has been hiked by 23.5%. Now, Uttar Pradesh farmers are expecting an SAP of 320 a quintal, or a 14% increase, according to a Hindu Business Line report. This may have been fair if sugar prices too had been rising.

At an SAP of 280, sugar mills would like ex-mill prices to be at 36 a kg, but at this time wholesale prices in Delhi are 32.8 a kg. Therefore, a hike in SAP would cripple their sugar segment margins.

But integrated sugar mills’ profits should also include earnings from by-products such as alcohol and co-generation of power. In Balrampur Chini Mills’s case, for example, the sugar segment reported a loss of 64.4 crore in the trailing four quarters ended September 2013, but revenues from distillery and power contributed to an overall profit before interest and tax figure of 203 crore. Looking at the spread between cane cost and sugar price alone is not correct, at least for the integrated mills.

But mills do have a point that cane prices cannot keep rising when product prices are falling. Investors seem to be expecting that the state government will accept the mills’ demands to either lower the SAP or link it to the market price of sugar, both of which could mean a cut in the procurement price. That will be politically difficult to execute since elections are around the corner. Investors are also expecting a government-funded financial package for mills thrown in with higher import duties on raw sugar.

But subsidies will affect the fiscal condition of states and are not in sync with efforts to decontrol the sector. And, if sugar prices go up because of the government’s actions, it can not only add to inflation but can also become a hot potato for the government. The issues seem complicated, to say the least. At present, the jump in shares seems only based on hope. The way ahead is likely to be a long one and riddled with uncertainties; investors should be prepared for that.

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