Rate hikes, rising inventories spoil sugar cos’ part
Sugar companies that have borrowed heavily from banks in the last one year are on a sticky wicket as higher interest costs may impact their profits.
By Nidhi Nath Srinivas, TNN |
NEW DELHI: Sugar companies that have borrowed heavily from banks in the last one year are on a sticky wicket as higher interest costs may impact their profits.
Coupled with stockpiles of unsold sugar, falling prices and limited opportunity to export sugar, most players have begun feeling trapped into a downslide after 24 months of euphoria.
Domestic sugar companies have undertaken a massive capital expenditure of about Rs 10,900 crore in the last 18 months. Most mills, especially in the north, have expanded their capacities or set up new plants in the last one year to take advantage of Uttar Pradesh’s sugar subsidy scheme that coincided with a global boom in sugar prices.
Most terms loans have been signed with a fixed rate of interest. Companies which have raised loans abroad or used the equity route may not face too much of a crisis. But now that Indian banks have raised their interest rates, working capital and short-term loans have become far more expensive for mills.
“Till now sugar mills were making money because they did not have any debt to service. This is the first year when they have to start making heavy interest payouts, which is sure to tell on their profitability,” said Dwarikesh Sugars chairman and MD Chandra Shekhar Nopany.
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“Our working capital requirements are already very high because of the high inventories we are holding. The government has been very discriminatory in allowing only four-five companies with advance licences to export sugar. There is no reason why the rest of the industry should be penalised and made to subsidise institutional buyers, who take maximum advantage of any artificial downslide in prices. The poorest are anyway eating gur,” said Rajshree Sugars MD Rajshree Pathy.According to Coimbatore-based Shakthi Sugars chairman and MD M Manickam, the industry will feel the impact of interest costs only after March. The worst hit may well be the smaller companies and cooperatives, who could face very heavy inventory costs in the coming months.
Interestingly, till 2005, sugar companies were hardly bothered by debt. The sugar sector has accounted for a declining share of gross bank credit of scheduled commercial banks, largely because of decline in credit during FY05. According to Icra, with gross bank credit of Rs 603 crore in March 2005, the sugar industry accounted for 1.7% of industry gross bank credit of scheduled commercial banks in March 2005, as compared with 1.9% in March 2000.
The implementation of more than 110 new factories across India would increase crushing capacity by 3,79,000 tcd. The completion of these projects is expected to result in an additional sugar production capacity of about 3.8 million tonne, which is about 19% of the total global consumption of 20 million tonne in 2006-07.
Domestic consumption is expected to grow 5% annually, despite intermittent hiccups in production due to the seasonal nature of sugarcane.
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