Sugar Incentives - A positive move in the short term

Recently I received a research report from Indiainfoline about sugar industry. Excerpts from that insightful report.

Government support for the sector positive in the short term

Government has reportedly announced a series of measures to provide short term support to the sugar industry. These measures include:

ü A subsidy of Rs1.35/kg for coastal states like Maharashtra, Tamil Nadu, Ka rnataka and Gujarat while a subsidy of Rs1.45/kg for north based mills.

ü Creation of a buffer stock of about 2mn tons

ü With an estimated sugar inventory of about 8mn tons by September 2007, the buffer stock would lower the cost of holding for the companies which would be borne by the government.

Beneficiary Companies

Companies with sizable re-export obligations are expected to take advantage subsidy schemes to partially liquidate their inventories accumulated as a result of bumper cane crop in the current seasons.

For instance, Sakthi Sugars, one of the largest exporters, has an obligation under the Advance License Scheme (ALS) of about 200,000MT to be exported by December 2007. The a verage import price of raw sugar was about US$200/ton while the company expects export realizations of about US$310/ton which would translate into domestic price of Rs13.2/kg which, coupled with the export subsidy of about Rs1.35/kg, would lead to net export realization of about Rs14.5/kg

No Impact On Larger Players

Larger sugar companies like Bajaj Hindustan, Balrampur Chini Mills and Triveni Engineering and Industries do no t have any obligation under ALS hence would remain unaffected by any such scheme. These companies may, however, look at fresh exports if domestic prices tumble further since this would help them liquidate mounting stocks albeit at lower international realizations.

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