A slew of measures announced by the Government on Monday came as a sweetener for the country’s ailing sugar industry. Sugar stocks gained between 5 and 18 per cent in the last two trading sessions. While the monetary benefit from most of these measures is not yet clearly computable, the hope that the increase in import duty will take domestic sugar prices higher has possibly driven the rally in sugar stocks.
According to sources in the industry, the decision to increase import duty to 40 per cent from the current 15 per cent may lead to increase in domestic sugar prices by ₹0.5-2 a kg. While risks to this assumption remain, here is what it means to sugar producers.
In the best case scenario, should the price of sugar in the home market increase by ₹2 a kg, the revenue and operating profit accretion for these companies may range between ₹100-200 crore this fiscal year. Again, being the largest domestic producer, Bajaj Hindusthan is likely to benefit the most, with an increase of about ₹200 crore, followed by Balrampur Chini (₹150 crore), EID-Parry (₹114 crore) and Shree Renuka (₹101 crore).
This calculation assumes a 3 per cent and 5 per cent decline in sugar volumes in FY14 and FY15, respectively.
Risks That said, there are risks to the expectation of increase in market prices. First, a weak monsoon may result in lower output and also impact cane yields. Second, cane prices will have significant bearing on the profits of sugar mills; sharp increase in cane prices can erode profitability.
Third, the decision to increase import duty and incentivise exports takes into consideration the current situation of surplus production; a change in the demand-supply equation may even warrant a change in policy measures.
Likewise, while the move to increase ethanol blending (to 10 per cent) from the current 5 per cent, if implemented, may benefit sugar companies, the actual benefit may be hard to quantify due to uncertainty in pricing.