Sugar
Rangarajan Panel report for sugar sector extremely positive for companies
The Government of India had constituted a committee under the chairmanship of Dr C Rangarajan, Chairman, Economic Advisory Council to the Prime minister of India to comprehensively look into all the issues related to regulation of the sugar sector, and suggest ways and means to change those regulations in a manner that better promotes efficiency and investments, and sets this sector on a higher growth trajectory, increasing employment in rural areas and enhancing incomes of all those involved in this sector. The committee submitted its report to the government on October 12, 2012. We believe that there are high chances of levy quota removal at this point of time and if that happens there will be a significant improvement in the earnings of sugar companies (refer Exhibit 1). We believe that risk-reward ratio is favorable for sugar stocks, where we see upside for stocks in the range of 40-50% if levy quota is removed driven by significant earnings improvement.
Various regulations related to the sector are as follows:
m Cane Reservation Area and the Minimum Distance Criterion: There are restrictions on supply and purchase of cane within a mill’s allocated catchment area and setting up of new mills within 15/25 km of existing mills. State governments have the power to reserve any area where sugarcane is grown for a specific mills having regard to the crushing capacity of sugar mill, availability of sugarcane in the reserved area and the need for production of sugar. The obligation under reserved area is mutual, that is, the farmers are required to supply all their cane produce to the mill and the mill has to procure all the cane produced in the reserved area, even if it incurs losses. Currently, 25 km is prescribed in Punjab, Haryana and Maharashtra whereas other states have a distance criterion of 15 km.
m Methodology for determination of Cane Price: FRP and SAP are the respective minimum price set by Central and some State Governments for sugarcane, which must be mandatorily paid by sugar mills to farmers. SAP (State advised price) fixed by the state government is much higher than FRP (Fair & remunerative price) fixed by the Central government. For e.g. FRP fixed by the Central government for SY12 was Rs139/quintal whereas, SAP fixed by the UP government was Rs240/quintal in the same year.
m Levy Sugar and the Release Mechanism for Non-Levy Sugar: Mills have to deliver a certain percentage of production (at present 10%) to the government for distribution through the Public Distribution system (PDS), at a price which is lower than the market price. Currently, mills are being paid Rs1,905/quintal for levy sugar. Free sale of the remaining quantity of sugar (net of levy sugar) release orders are issued by the Central Government. Both free sale sugar and levy sugar are subject to such periodical release quotas. This release mechanism has been in place since 1942. The rationale for periodic release of sugar is to help ensure sugar availability throughout the year at a reasonable stable price to consumers. Till recently, release orders were being issued on a monthly basis and are now being issued on a quarterly basis.
m Trade Policy for Sugar: India uses export and import controls to smoothen the domestic cycles of availability of sugar, and thereby attempts to achieve greater stability in domestic prices for consumers. Policy instruments ranges from export bans, financial help to firms for export of sugar, import duties etc. These measures vary with the demand and supply situation in the domestic market. Thus, international trade is regulated through import tariffs and non-tariff restrictions on exports including temporary bans.
m Other issues: i) Regulations Relating to By-Products: Molasses, bagasse and press-mud are the primary by-products of sugarcane. Molasses are utilized in the production of alcohol in the country. There is no control by the Union Government on production, pricing and distribution of molasses. There is no price control on the molasses in any State too. However, surplus production (after use in boilers in the sugar mill) and movement of molasses is controlled by the State Excise authorities. Bagasse was traditionally used in the paper industry, but is now largely being used as fuel feedstock for cogeneration of electricity. The regulatory regime for cogeneration is part and parcel of the regulatory regime for renewable energy. The issues relating to cogeneration pertain to implementation of Electricity Act provisions and regulations framed for all forms of renewable energy. These fall within the domain of States and State Electricity Regulatory Commissions.
ii) Packaging of Sugar: Under the Jute Packaging Materials Act, 1987, it is compulsory that sugar be packaged in jute bags.
m The committee has recommended various measures and suggests that rationalization of sugarcane pricing and liberalization of sugar trade need to be introduced over a two to three year period, in a calibrated and phased manner. However, it suggests that levy sugar obligation and administrative control on non-levy sugar (release mechanism issued by the Central government on a quarterly basis) need to be dispensed with immediately. The regulations regarding cane area reservation and bonding may be dispensed with by states over the long run, and as states discontinue reservation area, the Centre should dispense with the minimum distance criterion. The committee believes that implementation of the recommendations would enable India to continue to meet its domestic demand and also ensure growth of a competitive and efficient market.
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