Sugar Mills to Lose $1.1 Billion on Record Cane: Corporate India
Sugar mills in India, the biggest producer after Brazil, are set to lose about 60 billion rupees ($1.1 billion) this year as record cane prices and surging imports prompt them to sell below production cost.
Factories in Uttar Pradesh and Maharashtra states, accounting for 65 percent of the nation’s output, are selling sugar at least 11 percent below cost, Abinash Verma, director general of the Indian Sugar Mills Association, said in a phone interview. Producers may report financial losses if a slump in sugar prices isn’t stemmed by halting cheap imports, said Vivek Saraogi, managing director of Balrampur Chini Mills Ltd. (BRCM)
Producers are riled by a government policy that sets limits on sales by each mill to cap sugar prices, while states fix cane rates to help about 50 million farmers, a powerful voting bloc, earn more. Local sugar futures have tumbled for four straight months from August’s 20-month high. Falling prices of the sweetener may erode profit margins at companies including Bajaj Hindusthan Ltd. (BJH), Balrampur and Dhampur Sugar Mills Ltd. (DSM) and delay payment to cane growers.
“The fact is that the government induces a high cost,” Saraogi said in a telephone interview. “At least it must ensure that imports don’t come in.”
Sugar production in the country may decline as farmers switch to more profitable crops such as cotton, soybeans and wheat, potentially turning the world’s biggest consumer of the sweetener into an importer in 2013-2014, according to Vinay Kumar, managing director of the National Federation of Cooperative Sugar Factories Ltd.
The northern state of Uttar Pradesh raised cane prices by as much as 17 percent to a record for the 2012-2013 crop, while rates in Maharashtra were raised 22 percent. That’s led to a pile-up of dues to growers of as much as 29.87 billion rupees in Uttar Pradesh alone, Verma said. Arrears will increase if sugar prices don’t improve, he said.
Apart from limits on sales, mills must also sell 10 percent of their output typically below market rates to the government for resale to the poor at a subsidized cost to shield them from food inflation.
“Cane prices have gone up while sugar prices have fallen,” Parineeta Poddar, an analyst with ICICIdirect said in a phone interview. “Higher cane costs will erode margins of companies, reducing their earnings.”
The operating margin of Bajaj Hindusthan, the nation’s biggest sugar producer, narrowed to 13 percent in the 12 months ended March 31, from an average 17 percent in the previous four years, according to data compiled by Bloomberg. The gauge of profitability shrank to 11 percent at Balrampur Chini, the second-biggest, from as high as 27 percent in 2009.
Shares of Uttar Pradesh-based mills have fallen in the past three months. Balrampur Chini fell 36 percent, Dhampur Sugar has dropped 30 percent during the same period, while Bajaj Hindusthan has plunged 26 percent. Bajaj Hindusthan fell 1.7 percent to 22.55 rupees, Balrampur dropped 0.8 percent to 43.30 rupees, while Dhampur declined 2.1 percent to 47.30 rupees in Mumbai today.
Sugar slumped 16 percent in 2012 in New York because of a second year of glut and Goldman Sachs Group Inc. (GS) on Jan. 14 cut its forecast to 18.5 cents a pound in three and six months from an earlier estimate of 22 cents, citing rising inventories. The contract for delivery in February on the National Commodity & Derivatives Exchange Ltd. fell for a fifth day, losing 0.5 percent to 3,197 rupees ($59.4) per 100 kilograms (220 pounds).
Indian refiners, seeking to profit from a slump in global prices, have contracted to import about 919,000 tons of raw sugar since Oct. 1, including about 190,000 tons for sale in the local market, Verma said. That’s more than the combined imports in the previous two years, according to U.S. Department of Agriculture data. Inbound shipments will increase in the coming months if the government doesn’t raise taxes, he said.
Sugar-cane growers in Brazil’s Center South, the world’s largest producing region, may harvest more than previously forecast as rainfall benefits crops, said Antonio de Padua Rodrigues, technical director at industry association Unica.
Mills want the Indian government to immediately raise the import tax on white and raw sugar to 60 percent from 10 percent to prevent inflows, said M. Srinivaasan president of the mills association.
“Mills will start making losses if imports are not banned,” Saraogi said. Producers also shouldn’t be asked to sell 10 percent of their output below cost to the government if the factories have to stay profitable, he said.
Balrampur Chini posted profit of 488.8 million rupees in the quarter ended Sept. 30 compared with losses in the preceding three-month period and a year earlier. Dhampur Sugar’s net income climbed to 107.93 million rupees in the quarter ended Sept. 30 from 30.77 million rupees a year earlier and 64.23 million rupees in the preceding quarter. Bajaj Hindusthan posted losses in four of the last five quarters that ended Sept. 30.
“Profitability margins of sugar firms could continue to trend downwards because of higher cane costs and lower extent of pass-through to prices, lower world sugar prices and consequently lower export realizations,” according to IMaCS, a unit of credit rating company ICRA Ltd. (ICRA)
Earnings from sale of ethanol, molasses and electricity won’t be enough to bridge the drop in profitability from sugar sales, Ashwini Picardo and Carrol D’Silva, analysts at India Ratings & Research, a unit of Fitch Group, said in a report. In 2012, “high cash flows from by-products had cushioned stressed margins from sugar operations. However, such support from by- products will not be sufficient in 2013,” they said.
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