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Event Update: Sugar Decontrol

Government announces partial sugar decontrol

January 01, 1970 5:30 IST | India Infoline News Service
Government announces partial sugar decontrol 

Partial decontrol a positive for industry

After a long wait, sugar industry hopes for loosening of government control have been partly fulfilled as govt announced 1) removal of levy quota mechanism under which sugar mills had to sell 10% of production at below market prices for PDS distribution 2) release mechanism has been abolished which restricted mills to sell specified quota of sugar. States would now have to buy sugar at market prices and the difference between the ex mill and levy prices (set at ~Rs19.7/kg in FY13) would be borne by central government, but with a cap of two years. As per our calculation, annual levy quota subsidy is ~Rs27-30bn which is currently borne by the industry but post decontrol would now be transferred to the government. Earlier, it was expected that there would be increase in sugar excise duty by ~Rs150/qtl to pay for the subsidy but no such decision has been taken. Removal of release mechanism would also help sugar companies in better inventory management.


Above decisions follow the recommendations made by Rangarajan Committee on sugar reform, though other aspects like distance between sugar mills, sugarcane area reservation and setting of cane prices (over and above govt announced fair & remunerative price) are still in states’ domain and we do not expect these to be tinkered with in the near future. 


Levy quota removal adds ~Rs1.3/kg to sugar realization for BRCM

Removal of levy quota implies that Balrampur Chini (BRCM) can sell 10% of its production at market prices which has the potential to raise its sugar realization by ~Rs1.3/kg in FY14; our working suggests incremental annual PAT benefit of ~Rs950mn or EPS impact of ~Rs3.9 (assuming 90k levy sugar sales and Rs12/kg differential between levy and market prices). We build in levy quota benefit in our estimates and upgrade Balrampur Chini to BUY with revised 9-12 mth target of Rs60 (earlier Rs53). 

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