Sunday, April 07, 2013

Brokerage Report: Sugar finally decontrolled: A 360 degree view
The Cabinet Committee on Economic Affairs has given a much-needed boost to India’s Rs 80,000 crore sugar industry. Sugar prices will now be market-linked but state controls like distance between sugar mills, sugarcane area reservation and setting of cane prices (over and above the government’s fair & remunerative price will continue to remain.

CCEA accepted the recommendations made by the Rangarajan Committee on sugar reforms at its meet held on Thursday. The meeting was presided by Prime Minister Manmohan Singh.

The timing of the sugar decontrol is bold considering the coalition government lacks the requisite numbers in Parliament and is facing general elections next year. Coalition partner DMK had in March withdrew support to the United Progressive Alliance.

Mulayam Singh Yadav’s Samajwadi Party and Mayawati’s Bahujan Sawajwadi Party – representing India’s largest sugarcane producing state – are helping to prop the government up. A new state government in Uttar Pradesh may have provided Mulayam with the leeway to green nod the government’s decision.

Benefits to industry:
  • In the past, sugar mills had to sell 10% of their total production -- below market prices -- to the government under the levy quota mechanism. This has been done away with.
  • This levy ensured that 10% of the output was available to the government to supply to the poor through the public distribution system.
  • Now, states will be required to buy sugar at market prices for public distribution. The Centre, in turn, would compensate states for the difference between the market and regulated price. However, the Cabinet has fixed a ceiling of two years on such payments. This may lead to huge heart burn between the Centre and states.
  • Surprisingly, the policy was silent on an excise duty levy of Rs 150 per quintal to help the government meet its sugar subsidy burden.
  • The Cabinet has also done away with the release mechanism. Under the regulated release mechanism, the Centre had the power to fix the amount of sugar mill owners could release in the open market.
Short-term impact on government finances:
  • According to analysts, this shift in compensation will result in an additional subsidy burden of Rs 2,700-3,000 crore. This subsidy was earlier borne by the industry.
  • However, government officials peg this much lower. Food Minster KV Thomas does not see the Centre’s subsidy burden exceeding Rs 2,700 crore. "According to our estimate, the current market price of sugar is Rs 32 per kg while the same under PDS is Rs 13.5. For this, the Centre will bear an additional subsidy burden of around Rs 2,700 crore," he explained.
  • The government already walking a tight rope on handling its rising fiscal deficit will have to be extra cautious as rating agencies have threatened to cut its sovereign downgrade.
What does this mean to the common man?

 The government’s move may not go to well with citizens already facing rising prices of day-to-day essentials as any price fluctuations will leave a sour taste.

Should investors buy now?

 Bhavesh Gandhi, Associate Vice-President, India Infoline and a close tracker of the sugar space, feels the long awaited move will bring much needed relief to the industry. He sees better inventory management in sugar companies post the removal of the release mechanism.

Among sugar plays, he is positive on Balrampur Chini. "We are advising investors to buy Balrampur Chini with a 9-12 month target of Rs 60 per share."