Decontrol may boost sugar companies' profits by 50%: Crisil
Mumbai: The profitability of sugar firms rated by Crisil may increase by 50 percent if recommendations of Dr C Rangarajan Committee pertaining to full decontrol of the sector are implemented, according to the rating agency's report.
Profitability of sugar companies rated by Crisil will increase by Rs 600 crore in 2012-13, if suggestions made by the panel on total decontrol of the sector are implemented, the report said.
This represents a 50 percent increase in profits for the 47 rated companies over their estimated profits under the current regulated scenario, besides strengthening their credit risk profiles. Sugarcane farmers, too, stand to benefit from decontrol through reduction in cane arrears and share the upside in sugar prices, it said.
An expert committee headed by Dr C Rangarajan recommended abolishing state-advised cane prices (SAP) and removal of regulatory control on the sale of sugar in the domestic market, quantitative restrictions in international trade and mandatory jute packaging.
"Decontrol will improve players' cash flows, reduce their working capital requirements, and thereby strengthen their credit risk profiles," Crisil Senior Director, Bank Loan Ratings, Subodh Rai said.
The Government advises on the cane purchase price--known as the fair and remunerative price (FRP)---for companies. However, the key sugarcane-producing states (Uttar Pradesh, Tamil Nadu and Punjab) also announce SAP for sugarcane. The committee has recommended abolishing SAP, and suggested that 70 percent of companies' realisation from sugar and its by-products be shared with the farmers.
"We believe that linking sugarcane prices to prices of end products will be positive for the industry and will improve CRISIL-rated companies' profits by Rs 4.5 billion," Rai said.
As per the existing regulations, sugar companies are required to sell 10 percent of their produce at a subsidised rate of Rs 19.05 per kg which is significantly lower than the market price.
In addition, government imposed export embargoes restrict companies' opportunities to benefits from higher export realisations. Companies are allowed to use only jute bags for packing sugar and this increases costs by Rs 400 per tonne.
Improved cash flows to sugar companies are likely to enhance their liquidity and help them settle their dues to farmers on time, the Crisil report says.
Crisil believes cane arrears will reduce substantially from their usual peaks of six to seven months, following decontrol.
Unlike in the past, farmers will get a share in the upside on sugar prices payout to farmers which has been recommended at 70 percent of realisation from sugar and by-products. This will bring stability to farmers' income, in contrast to the past five years, when payout was between 55 and 80 percent, Crisil report added.