Sugar: Expects a sweet deal

Current industry status:

Sugar industry is plagued by falling realisations, rising costs, huge carry over stocks leading to liquidity problems and huge losses. However, there is a ray of hope for the industry in terms of better realisations for by-products, particularly after the introduction of blending of ethanol with petrol from Jan 2003.

Sugar production came down by 8.8% to 51.59 lakh tonne in the quarter ended Dec'02. The domestic consumption during this period grew by modest 3.9% to 42.49 lakh tonne while dispatches for export surged by 67% to 3.5 lakh tonne. The central government has been giving various incentives for exports, including inland transport subsidy, ocean freight subsidy while certain state governments like Maharashtra are also giving incentives for sugar exports. As a result of sharp rise in exports, coupled with modest rise in domestic consumption, the carrying stocks of sugar as of Dec'02 was 8.7% lower at 114.6 lakh tonne as against 125.56 lakh tonne in Dec'01.

The government has gradually been decontrolling the industry to pave way for full decontrol and emergence of sugar futures. However, these initiatives received setback in the fag end of 2002, when the prices crashed, upon which the government has brought back the monthly release quota.

Overall, sugarcane accounts for about 65% of the cost of production. While the cost of sugarcane purchases zoomed by 15.3% between 2000 and 2002, the non-levy sugar prices came down by 7.3% during this period, as evidenced by the movement in Whole sale price index. Hence, the bane of the industry has been fall in realisations of sugar on the one hand, and the rising cost of sugarcane purchases. The fall in prices continues unabated, as the WPI of non-levy sugar came down by 1.3% over the five weeks, and was 109.7 in the week ended 1st Feb'03.

However, the industry expects that the approval for blending of ethanol with petrol (gasohol) will bring in much needed revenues and margins. Currently, gasohol supply is restricted to parts of four States - Maharashtra, Andhra Pradesh, Punjab and Uttar Pradesh. But by June'03, the coverage will be extended to five other States and four Union Territories. By Sept'03, the gasohol project is likely to be extended throughout the country.

The ethanol requirement for nine states and four Union territories is expected to be around 320 to 350 million litre, while for national coverage the same is expected to be around 500 million litre annually. The industry is likely to report incremental inflow of around Rs 500 crore and incremental gross profits of around Rs 250 crore on the full implementation of the first phase. When extended to national levels, the incremental revenues are likely to be around Rs 750 crore, while the gross margins thereof are likely to be around 400 crore.

Prevailing tax rates and provisions

Industry expectations

• Relief in excise duty and central surcharge on sugar

Currently, the sugar industry pays basic excise duty of Rs 340 per tonne, additional excise duty in lieu of sales tax of Rs 370 per tonne and cess of Rs 140 per tonne towards Sugar Development fund. Indian Sugar Mills association (Isma) has requested for exemption from basic excise duty and cess on sugar for one year.

• Priority sector classification to the sugar industry

The cane price arrears in 2001-02 season stood at Rs.1500 crore due to inadequate credit apart from the fall in sugar prices. While the food processing sector was treated as priority sector from Feb'99, sugar has not been treated as a food processing unit though it is defined as a food item under the PFA Act. If priority sector status is accorded, the industry will have access to greater funds from the banking system at relatively finer rates. This will also facilitate the speedy implementation of the ethanol plants within the sugar complex, which will enhance the viability of the industry.

• State governments not to be allowed to charge sales tax

There are proposals before the government to abolish additional excise duty in lieu of sales tax, and to allow state governments to levy sales tax on sugar, in the proposed VAT regime. Isma suggests that even after introduction of VAT, the additional excise duty on sugar must continue and State Governments should not be empowered to levy sales tax thereon.

• Notification on concessional excise duty surcharge on ethanol doped petrol

The Budget 2002 proposed a concession of 75 paise per litre in the excise duty surcharge for ethanol doped petrol. Though the Parliament has also approved the above proposal, the Notification by the Finance Ministry has not been issued so far despite several representations. The notification as above will facilitate greater incentives for the pro-active members of the industry, and will improve the operational performance of the industry and also enable the country to save on foreign exchange on the one hand and environmental protection on the other.

• Excise duty on molasses to be reduced

Currently, the excise duty on molasses is Rs 500 per tonne. Isma reported that the average realisations from molasses ranges between Rs.400 per tonne to Rs.600 per tonne in different States in the country. In effect, the incidence of central excise duty in some states is more than 100%. Moreover, the High powered committee on sugar industry under the Chairmanship of B B Mahajan said that as sugar content in molasses is less than 50%, the basic excise duty on molasses should not exceed Rs 170 per tonne. In view of the above, Isma said that the excise duty on molasses is excessively high at over 100% and needs to be brought down to a reasonable level as suggested above.

Separate law to prevent courts from allowing mills exemption from quota system:

Industry has demanded strict enforcement of Monthly quota system. However, many courts have been allowing sugar factories to sell sugar beyond their quotas to pay overdues etc. Government is expected to pass a new law or make amendments which prevent courts from interfering with the quota system. If this is done, sugar prices can stabilise at higher levels, making the industry viable.

Buffer stock:

Government is also likely to make provision for creating buffer stock of sugar to lessen the burden on the industry, which is by default carrying this stock.

Analyst expectations:

The sugar industry is likely to see array of benefits and will stage a strong turnaround in FY 2003-04.

Best Pre-budget Buys/Sells:

Given the improved prospects of the industry on account of Gasohol project, which is likely to be sweetened by further fiscal incentives, the ensuing budget will be a positive budget for the industry. However, players with integrated operations including ethanol, co-generation of power etc like Balrampur Chini are likely to be most benefited than stand alone producers.

Summary:

With politics overplaying economics, the sugar cane prices are tinkered regularly on higher side, despite the fact that the domestic and international sugar prices are on the decline. No amount of fiscal incentives can compensate for the losses incurred by the industry, if this anomaly is not rectified. Nevertheless, the industry has received a welcome breath in terms of opportunity to produce and sell ethanol and make profits from the gasohol project. Further incentives in this regard are expected to be rolled out by the government.

Already, various fiscal incentives of the central and state governments have enabled the industry to aggressively export sugar. Surge in exports, fall in production, modest rise in consumption and the reverting back to the release control mechanism will pave way for arresting the downfall and lead to improvement in realisations. Coupled with flows and profits from blending and co-generation of power, the leading players in the industry are set to witness significant improvement in margins, and the industry as a whole is likely to leave its bitter past behind.