Not much impact for South-based sugar mills.
BL Research Bureau
The Uttar Pradesh Government's decision to hike the cane procurement price
"advised" by the State for the current season from Rs 125 to Rs 140 per quintal
may pose a significant threat to the earnings of sugar mills located in the
State. Mills in the State are already involved in a court battle relating to
the previous year's State Advised Price or SAP of Rs 125 a quintal, having
shelled out Rs 110 per quintal the previous season.
An upward revision in the State Advised Price (SAP) for the current season may
entail a significant spike in procurement costs for the mills. A higher SAP
gives rise to doubts on whether mills in the State will benefit from the firmer
sugar prices expected this season. Domestic sugar prices, which had firmed up
by about 22 per cent between January and September, have cooled about 10 per
cent on higher supplies released for the festive season and lower global sugar
prices.
The SAP hike of 12 per cent may absorb a good portion of the higher
realisations that may be possible from rising sugar prices. It is now expected
that the mills in the State may challenge the issue of this year's SAPs in the
courts.
Unwarranted hit
While the higher SAP does pose an earnings risk to sugar producers in UP,
stocks of sugar companies across the board have taken a sharp hit on Monday's
trading. This may be unwarranted.
Given that cane procurement prices are not determined by SAPs in Maharashtra,
Tamil Nadu and Karnataka, companies such as Shree Renuka Sugars, EID Parry and
Bannari Amman Sugars, which have mills located in these States, are not
directly impacted by the developmentin Maharashtra. Though their procurement
prices this year may be higher due to lower cane availability, they may still
be able to secure cane at lower prices than this SAP. A more diversified
revenue stream, consisting of significant contributions from by-products such
as ethanol, power and alcohol, may also lead to a better margin profile for
south-based companies
http://www.thehindubusinessline.com/2008/10/21/stories/2008102151591500.htm
Patience is beautiful.
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