The Uttar Pradesh (UP) Government has, through a December 7, 2012 order, announced a Rs. 40/quintal (qtl) increase in the State advised price (SAP) of sugarcane for the sugar year (SY) 2012-13 (October-September season). The order raises the cane price for the normal varieties from Rs. 240/qtl in SY2011-12 to Rs. 280/qtl in SY2012-13, and that for the early maturing varieties from Rs. 250/qtl to Rs. 290/qtl. For the rejected varieties, the SAP has been raised from Rs. 235/qtl to Rs. 275/ qtl. At these prices, ICRA expects the landed cost of cane (inclusive of basic SAP, purchase tax, society commissions and inward freight costs) to be around Rs. 290-295/qtl.
While ICRA expects UP based sugar mills to benefit from higher prices in SY 2012-13 as well as higher crushing volumes (around 15% crushing growth) and also higher recovery rates (ICRA anticipates improvement of around 0.3%), higher cane costs are likely to substantially offset the positive impact of the aforesaid.
According to ICRA’s estimates, with the new cane prices, the cane cost of production for sugar is likely to increase by around Rs. 3500/MT and stand at Rs. 30500-32000/MT, given that the recovery rates for most UP-based sugar mills range between 9 and 9.5%.
ICRA expects price of sugar (ex mill, net of excise) for most UP sugar mills at around Rs. 33000/MT for SY2012-13, and at these levels, most efficient and integrated mills are likely to report modest operating profits. Based on current prevailing prices and costs, ICRA believes that operating margins for UP based sugar mills will moderate from the levels seen in the second half of SY 2011-12 unless supply-demand dynamics permit sugar mills to pass on cost increases.
For UP based sugar mills, upsides in the near-term could arise from acceptance of Rangarajan Committee recommendations regarding abolition of levy sugar (which if accepted, are likely to improve realisations and gross margins by around Rs 1500/MT) or upward revision in fuel ethanol prices and doping targets.
The main downside would arise from pressures on realisations arising out of either an unanticipated increase in domestic sugar from ICRA’s current estimates of 23 million MT (which however appears unlikely at this moment) or from a downward movement in international sugar prices coupled with reduction of import duty from current 10% levels.
ICRA will shortly evaluate the impact of the latest UP order on the financial health of the UP sugar mills rated by it.