Higher input cost, two-fold increase in levy quota of sugar from 10 per cent to 20 per cent and falling prices have hit the sugar sector hard in the January-March quarter. As a result, operating margins of 19 sugar firms fell to 3.82 per cent, the lowest in five quarters.

During the previous three consecutive quarters, sugar firms enjoyed high margins in the range of 14-18 per cent (see table) on lower global production, which led to higher sugar prices. The margins are profit on sales of sugar before making provision for interest and taxation.

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Leading players such as Bajaj Hindusthan, Balrampur Chini, EID Parry and Thiru Arooran Sugar recorded a sharp decline in operating margins on higher cane prices and marginal improvement in recovery and inventory write-off on levy sugar.

The small and medium sugar firms, Kesar Sugar, Upper Ganges Sugar, Dwarikesh Sugar and Oudh Sugar have reported loss at operating levels.

The 19 firms recorded a 88.3 per cent rise in revenue on the back of 80 per cent increase in realisation — Rs 33-34 a kg during the quarter ended March 2010, compared with Rs 18-19 a kg during the corresponding quarter a year ago.

However, higher cane prices (up from Rs 150-160 a quintal to Rs 245-250 a quintal) have resulted in a 22 per cent decline in net profit during the January-March quarter, 2010.

Renuka Sugar did well with a seven-fold rise in net profit, while 10 small and medium sugar firms recorded a net loss of Rs 156 crore against a net profit of Rs 113 crore.

Sugar mills in Uttar Pradesh were badly hurt in the quarter ended March 2010 with Bajaj Hindusthan, Balrampur Chini and Triveni Engineering reported 58-62 per cent decline in net profit due to lesser volume and inventory loss.

The decline in profit was also on account of inventory loss accrued on levy sugar. Balrampur Chini and Triveni suffered inventory losses of Rs 76 crore and Rs 51.2 crore, respectively.

Sugar prices are expected to rule at Rs 28-29 a kg as the government is considering to impose import duty on raw and white sugar varieties to protect the producers from already sliding prices.
 

However, any further drop in prices may hit the sugar companies badly. The sugar firms are carrying higher inventory on account of import of raw sugar and stock build-up in the March quarter so that the commodity can be used in the lean cane supply period.

The inventory of Rs 5,100 crore as on March 2010 is equivalent to four months’ sugar sales.

Despite an increase in the import duty, the strain of margins is likely to go up as rising production of domestic sugar may put pressure on the price of the commodity.

Sugar production is likely to increase by 30 per cent to around 25 million tonnes in the October 2010-September 2011 season.

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