Anything but sweet

The commodity that they manufacture is sweet, but the makers themselves are sour and bitter after the latest disappointment. The stock prices of sugar companies had risen after the Economic Survey 2013 had recommended phased sugar decontrol. There was justified cause for optimism. After all, none other than a committee headed by C Rangarajan had made the recommendation in October 2012. 

Politics and economics, however, make for strange bedfellows. While sugar producers may be right in demanding partial or full decontrol, the government has its own compulsions to deal with. Prime among them is the currently high CPI (10.91%), to which rising food prices are the biggest contributor. Given the double-digit inflation, there isn’t much room for higher sugar prices that would have resulted if levy sugar was abolished. Under the levy sugar system, sugar mills sell 10% of their production at ₹19 a kg to the government. In case the levy is abolished, not only will there be a high subsidy to be provided for, there will be knock-on effect on food inflation too. “If removal of sales at levy price is implemented, the government will have to procure sugar at market price (₹ 32) to meet its PDS requirements, thus relieving the industry of an annual loss of ₹3,000 crore,” says Sanjay Manyal, analyst, ICICI Direct.

As the government has not been reimbursing sugar companies on time, they fund their working capital via debt. On their part, they also delay paying farmers for cane. High cane prices have ensured that farmers have benefited but companies have lost out. S Ranganathan, head of research, LKP, says, “None of the sugar companies will make obscene money, even if decontrol is implemented due to increasing arrears on the back of rising cane prices.” 

No surprise that after the political crisis arising from the DMK pullout, the cabinet has stuffed sugar decontrol into a dark jute sack. This postponement has resulted in a meltdown in sugar stocks. Not only have the gains made in March evaporated, the three biggest sugar companies — Shree Renuka, Bajaj Hindusthan and Balrampur Chini are down 29%, 24% and 13% year to date respectively. So, are there any bargains to be found here? IIFL analyst Bhavesh Gandhi says, “Post-deregulation one can buy Balrampur Chini, but other than that it’s better to avoid the sector.” Manyal, too, recommends Balrampur Chini and Dhampur Sugar as they have relatively lighter balance sheets compared with Renuka Sugar or Bajaj Hindusthan. With uncertainty over decontrol, sugar companies will continue to face investor apathy.