Govt controls, slump in global prices cutting margins, say sugar producers.

New Delhi: Balrampur Chini Mills Ltd, India’s best-performing sugar producer, says the industry will continue to lose money as state controls increase costs and a slump in global prices cuts margins on exports.

Prospects of falling profits have turned analysts the most bearish in at least nine months on Balrampur and Bajaj Hindusthan Ltd, the country’s biggest maker of the sweetener, according to data compiled by Bloomberg.

The federal government sets quarterly limits on sales by each mill to cap prices, while state administrations fix cane rates to help about 50 million farmers, a powerful voting bloc, earn more.

“Companies are making losses because of government regulation,” Vivek Saraogi, Balrampur’s managing director, said in an interview. “Until policy is reformed, companies will continue making losses.”

Balrampur, which reported losses in three quarters through December, may say profit in the three months ended 31 March plunged 75% from a year earlier to Rs. 28.3 crore ($5.1 million), according to the median estimate of three analysts compiled by Bloomberg. The Kolkata-based company is due to announce its earnings on 28 May.

A slump in New York futures to a 21-month low this week has reduced incentives for Indian sugar exporters, Saraogi said.

Producers must also sell 10% of their output typically below market rates to the government for resale to the poor at a subsidized cost.

Policymakers use such controls on essential commodities to cap inflation, a politically sensitive issue in India where the World Bank says about 75% of the population lives on less than $2 a day.

Rising cane prices and surplus sugar for a second year will also crimp earnings, said Manish Mahawar, an analyst at Prabhudas Lilladher Pvt. Ltd in Mumbai.

Cane prices set by state governments rose as much as 19% in the past year, leaving the country’s mills struggling to pay farmers. Producers owed growers Rs. 10,200 crore in arrears as of 15 March, food minister K.V. Thomas told Parliament on 30 April. Mills are losing as much as Rs. 4 on every kg (2.2 pounds) of sugar produced in the northern state of Uttar Pradesh, the country’s biggest cane grower, according to the Indian Sugar Mills Association.

Production of the sweetener in the season starting 1 October will probably match this year’s output of 25 million tonnes (mt) to 25.5 mt, exceeding demand in the world’s biggest consuming nation, Thomas said last month.

“We are reiterating our negative stance on the sugar sector considering a surplus sugar year and higher cane cost leading to incremental burden on companies’ financials, primarily domestic-focus players like Balrampur Chini,” Prabhudas’s Mahawar, wrote in an email.

The consensus analyst rating for Balrampur is 3.2, the lowest since September 2010, according to data compiled by Bloomberg. The rating for Bajaj is 1.89, the lowest since September. The consensus rating is the average within a range of one to five, with five being the highest.

“Balrampur, which has rallied 47% this year in Mumbai, may decline to Rs. 44 in a year, Mahawar, who has a reduce rating on the stock,” said in a report dated 16 April.

The shares fell to Rs. 48.50 before ending 3.02% up at Rs. 51.15 in Mumbai trading on Friday. Bajaj climbed 0.95% to Rs. 26.55, extending this year’s gains to 12%.

“Domestic prices will be under pressure until and unless exports take place in a big way,” Sanjeev Singh, a Mumbai-based analyst at Centrum Broking Pvt. Ltd, said in a phone interview.

Producers are being allowed to export an unlimited amount without prior approvals from the food ministry under a government decision announced on 2 May. Shipments reached about 1.7 mt so far this year, the Indian Sugar Mills Association estimates.

The government in January formed a panel headed by Chakravarthy Rangarajan, the top economic adviser to Prime Minister Manmohan Singh, to study demands for ending state controls. The group will give its report in six months, Rangarajan said on February 27. The government is running a huge subsidy budget and the sugar industry is put into forced losses Saraogi said.

Source : livemint.com