CCEA Approves Two Key Recommendations On Sugar By Rangarajan Committee

In a vastly gloomy economic scenario comes a bright streak of positivity for India Inc., with the Cabinet Committee on Economic Affairs (CCEA) announcing the much-awaited sugar sector decontrol. The committee chaired by the Prime Minister has approved the decontrol of the Rs 80000 crore Indian sugar industry in two critical areas, viz. abolishing levy sugar and dismantling the regulated release mechanism of sugar by millers.

In the Dalal Street Investment Journal issue dated February 25, 2013, we had reported that the government is very serious on the issue of sugar decontrol this time around, a matter which was pending for almost two decades. At that point, we had advised readers to hold on the sugar stocks and should not be in hurry to sell them.

Sure enough, the decision came through, and the impact of this on the sugar stocks is clearly visible. Despite broader market has nosedived, sugar stocks are buzzing and are up anywhere between 5%-20%.

As per the CCEA’s decision, the levy sugar mechanism has been fully done away with as suggested by the Dr Rangarajan Committee. Now on, sugar mill owners will not be obliged to sell a specified quantity of sugar to the government at concessional rates (so far, they were selling 10% of their produce at Rs 20 per kg, whereas the market price is Rs 32). This is a big positive for millers, and the sugar industry will save around Rs 2700 crore per year as a result of this decontrol!

At the same time, it also means that millers will not have to keep a designated quantity of sugar with themselves – in the earlier mechanism, they could sell only a specified quantity within a fixed timeframe. Abolishing the mechanism will help millers in taking timely decisions and managing their cash flow well, as they will be able to manage inventories optimally. Sugar producers are currently borrowing 14%-16% of the working capital requirement as they are forced to keep extra inventory. This increases their debt burden as well as interest cost.

Under the new CCEA-approved mechanism, state governments will now purchase sugar from the open market through transparent bidding and sell at a subsidised rate in the public distribution system (PDS). This difference in price will be borne by the central government, which will make up for the losses of the state government. But there is a catch – the central government will only bear the subsidy upto a market price of Rs 32 per kg (PDS price is Rs 13.50 per kg), and that too for a period of two years. If the market price climbs to above Rs 32, the difference will be borne by the states.

With regard to the other proposal of increasing excise and import duties to compensate for the loss of levy sugar, the CCEA hasn’t taken any decision yet. Experts are of the view that though this will help sugar mill owners in a big way and boost their profits, it will certainly create pressure on retail prices now as the sugar season lasts from September to November. But currently, ample stocks are lying with sugar producers, and if this comes into the market, the prices may fall in the short term.

After this decision by the centre, the decision on two other key parameters  – cane area reservation and minimum distance area between sugar mills – now lies with the state governments. The Dr Rangarajan Committee has recommended abolishment of these two restrictions with long-term contracts in cane area reservation. All these developments will benefit sugar companies and their stocks immensely as and when they come about. Therefore we recommended our readers to book partial profit as of now.