Is it time to play Sugar Theme?

In order to address the stress prevailing in the Sugar sector, the Centre’s move to raise the import duty on sugar from 15 to 40 per cent should be viewed with cautious optimism.

India is the world’s second largest sugar producer but the largest consumer. The move will give much needed relief to millers who are reeling under debt and facing serious liquidity crunch for uncleared dues to the tune of 11000 corers to cane growers.

Day after Narendra Modi govt effects import duty hike, sugar price soars as much as Rs 2 per kg. A section of Traders criticized hike in import duty on sugar. Though, Sugar Stocks reacted positively to the development, one should exert caution as most players are heavily debt loaded due to either expansion activities undertaken in the past domestically or
internationally.

It should be commendable to see the concerted efforts by the various ministries involved such as food, agriculture, petroleum and finance and laudable to appreciate respective secretaries of such ministries for showing the determination and speed of execution.

How effective it is?

Does this duty hike (from 15 to 40) solve all the problems sugar sector is facing? Answer to that question is  to an extent, yes. It definitely facilitates up to INR 4,500 crore interest-free bank loans to mills for clearing cane arrears, and also doubling the mandatory ethanol blending in petrol to 10 per cent, but the real problem that will bring the Sugar sector to the path of Growth and sustainability is to address the problem faced by cane growers.

Sugar is still a state subject and it is the sector, which is the darling of politicians. From UP to Maharashtra (not to forget Karnataka) politicization of cane prices by state governments has led to a situation where for the sake of record, sugar is decontrolled but cane growing is still regulated and controlled.

This is how it works

The state government allocates cane areas to individual sugar factories, with no new mill being allowed to come up within a prescribed distance of an existing one, So no real new capacity is being added.

In exchange for area ‘reservation’, mills are obliged to pay a state-determined cane price having no relation to sugar realizations. In addition to these Mills are subjected to restrictions on sales of molasses.

Should one Buy or Ignore?
Given the above scenario, from where is companies engaged in Sugar processing going to generate profit to reward their loyal share holders, remains the effective question? Till the time issue of cane growers and de-politicization of prices are not being carried out, sugar will still remain a sector to ‘Ignore’ rather than ‘Buy’.