Expert Speak
Rangarajan Committee recommendations positive
Adoption of key reforms could transform domestic sugar industry
In a positive development for the domestic sugar industry, the Dr C Rangarajan Committee has
submitted its report on sugar decontrol. In this backdrop, we organized a conference call with
Mr Vivek Saraogi, Managing Director and Mr Kishore Shah, Director & Chief Financial Officer of
Balrampur Chini Mills to gain deeper insights on the subject.
Our key takeaways:
The recommendations are positive and in line with industry expectations. If implemented,
they could transform the sugar industry.
The timeline for adoption of measures could be 3-4 months.
Levy obligation could be immediately removed and sugar companies might enjoy the full
benefits in the current sugar year (SY13) itself.
Clarity on issues such as cane pricing could emerge post the general elections in FY14.
The total subsidy on account of levy obligation is estimated to be ~INR30b. The Committee
has suggested that the government could utilize the sugar cess collection of ~INR6b (@INR24/
quintal) along with payment received on account of past concessionary loans from SDF
(Sugar Development Fund) to partially offset levy obligations.
Flexibility with regard to sales of value-added products - a key positive.
25 October 2012
Sector: Sugar
Mr Vivek Saraogi
Mr Vivek Saraogi is an
industrialist, renowned for
his expertise in the sugar
industry. He is the Managing
Director of Balrampur Chini
Mills. He has served as the
President of Indian Sugar
Mills Association and as the
Chairman of Indian Sugar
and General Industry Export
Import Corporation.
Key recommendations positive; in line with
industry expectations
The key recommendations of the Dr C Rangarajan
Committee on sugar decontrol are positive and in line
with industry expectations. Adoption of these
recommendations by the central government could
transform the domestic sugar industry. The key
recommendations are:
Sugarcane pricing should be rationalized and the
sugar trade liberalized in a calibrated phase-wise
manner over a 2-3 year period.
Levy sugar obligation and administrative control on
non-levy sugar should be immediately dispensed
with.
The states should dispense with regulations
regarding cane area reservation and bonding over
the long run, and as the states discontinue
reservation area, the center should dispense with
the minimum distance criterion.
Road map ahead
The timeline for adoption of measures could be 3-4
months. While the probability of implementation of levy
obligations with immediate effect appears very high,
the cane pricing recommendations may take some time
to implement. Mr Saraogi expects the benefit of removal
of levy obligations to be available from the current sugar
season (SY13) itself. Removal of levy obligations has the
potential to enhance the recurring net profit of sugar
companies by 30-40%.
Our view
The performance of the domestic sugar sector, in
particular UP-based companies has been erratic.
Government intervention has been one of the key
reasons for this. Implementation of the Dr C Rangarajan
Committee recommendations is likely to (1) lower policy
uncertainties, (2) boost recurring profit, (3) attract FDI /
facilitate industry consolidation, and (4) allow
companies to successfully implement their long-term
plans.
Siddharth Bothra
(Siddharth.Bothra@MotilalOswal.com); +91 22 3029 5127
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Expert Speak
Key recommendations positive; in line with industry expectations
The key recommendations of the Dr C Rangarajan Committee on sugar decontrol are
positive and in line with industry expectations. Adoption of these recommendations
by the central government could transform the domestic sugar industry. The key
recommendations are:
Sugarcane pricing should be rationalized and the sugar trade liberalized in a
calibrated phase-wise manner over a 2-3 year period.
Levy sugar obligation and administrative control on non-levy sugar should be
immediately dispensed with.
The states should dispense with regulations regarding cane area reservation and
bonding over the long run, and as the states discontinue reservation area, the
center should dispense with the minimum distance criterion.
The table below depicts the key issues with regard to sugar decontrol and the
Committee's recommendations on the same.
Sugar decontrol: Issues and recommendations
1) Cane
reservation
area and
bonding
Issue
Every mill is obligated to purchase from
cane farmers within the cane reservation
area, and conversely, farmers are bound
to sell to the mill.
Consequently, setting up of a new mill
requires approvals, notwithstanding de-
licensing
under
the
Industries
Development & Regulation Act.
The Central Government, under the
Sugarcane Control Order, has prescribed
a minimum distance of 15 km between
any two sugar mills.
Recommendation
Over a period of time, states should encourage development
of market based long-term contractual arrangements, and
phase out cane reservation area and bonding.
For those states that may want to continue in the interim, the
current system may be allowed to continue.
However, where a state does decide to continue with cane
area reservation, it must be ensured that the period of
reservation is not less than three to five years.
This restriction inhibits entry and further investment, and
adversely impacts competition for purchase of sugarcane as
well as for improving mill efficiency.
As such, it is not in the interest of development of sugarcane
farmers or the sugar sector, and may be dispensed with as
and when a state does away with cane reservation area and
bonding.
An analysis of the costs incurred by sugarcane farmers and
those incurred by sugar mills suggests that this ratio between
farmers and millers, taking a recovery rate of 10.31 per cent,
works out as 69:31 which, rounded off, can be taken as 70:30.
The actual payment for the cane dues would happen in two
steps. The first would be payment of a floor price, based on
FRP as per extant mechanism. Balance payment of cane dues
will be done subsequent to publication of half-yearly ex-mill
prices, on the lines indicated.
States may publish half-yearly ex-mill prices of sugar and the
by-products for this purpose. While scrutinizing the ex-mill
sugar pricing data, the open market price of sugar as
competitively bid in sugar procurement for PDS (which has
been recommended separately, in lieu of the present levy
sugar arrangement), net of taxes, may be kept in view.
With such a system in operation, states should not declare
an SAP.
2) Minimum
distance
criterion
3) Price of
sugarcane
While on the one hand, the Centre fixes
FRP as the minimum price.
On the other, many States have intervened
in sugarcane pricing with State Advised
Price (SAP) to strengthen the farmer
interests. SAP has typically been higher
than FRP.
25 October 2012
2

Expert Speak
Sugar decontrol: Issues and recommendations (continue)
4) Levy sugar
obligation
Issue
Every sugar mill mandatorily surrenders
10% of its production to the Central
Government at a pre-determined price,
which is, at present, INR1,904.8/qtl.
This enables Central Government to get
access to low cost sugar stocks for
distribution through PDS.
At present prices, the Government of India
saves about INR30b on account of this
policy-the burden being borne by the
sugar sector.
Recommendation
Levy amounts to a cross-subsidy between open market and
PDS sugar and is not in the interest of the general consumer
or the development of the sugar sector.
Therefore, levy sugar
may be dispensed with. Dispensing with levy sugar translates into
doing away with a centralised arrangement for PDS sugar.
The states which want to provide sugar under PDS may
henceforth procure it from the market directly through a
competitive bidding process.
An additional subsidy on account of the implicit cross-subsidy
in the levy arrangement may be provided by the Central
Government over and above the current subsidy being given
for the difference between the levy price and the issue price
and PDS transportation costs.
Markets in almost all sectors in India are constantly matching
anticipated demands with supply. There is no particular
reason why sugar market would not be able to do this.
This mechanism of regulated release of non-levy sugar
imposes costs directly on mills (and hence indirectly on
farmers) on account of inventory accumulation, inability to
plan cash flows, etc.
Further, seasonal fluctuations in price are continuing.
Hence,
since this mechanism is not serving any useful purpose, it may be
dispensed with.
The committee is of the opinion that trade policies on sugar
should be stable.
Appropriate tariff in the form of a moderate duty on imports
and exports, not exceeding 5-10% ordinarily, as opposed to
outright ban or quantitative restrictions, should be used to
meet domestic requirements of sugar in an economically
efficient manner.
However the option of imposing a higher level of duty could
be retained for dealing with exceptional circumstances.
Current regulatory arrangements relating to by-products
impede development of a national market and consequently
reduce economic efficiency. There should be no quantitative
or movement restrictions on by-products like molasses and
ethanol.
Prices of by-products should be market-determined with no
earmarked end-use allocations. Likewise, there should be
no regulatory hurdles preventing sugar mills from selling their
surplus power to any consumer.
The release of non-levy sugar into the
5) Regulated
market is regulated by the Central
release of
Government through a controlled release
free-sale (non-
mechanism.
levy) sugar
Earlier, monthly release orders were
issued to each mill. Release orders have
now become quarterly. The idea seems
to be to match supply with anticipated
demand based on the data available with
the Directorate of Sugar.
Depending
on
mill-wise
monthly
6) Trade policy
production and stocks, local production
for sugar
levels and world market conditions,
quantitative controls on both exports and
imports are common in the sector.
This is an avoidable source of uncertainty
for the industry.
7) Regulations
relating to by-
products
There are several regulatory hurdles in
8) Other issues
respect of the by-products of sugar
industry. In respect of molasses, these
are at the state level, in terms of state
government decisions relating to fixation
of quotas for different end uses of
molasses, restrictions on movement etc.
In respect of cogeneration from bagasse,
there are regulatory and implementation
issues relating to freedom to sell power
to consumers other than the local power
utility, or routine invocation of statutory
provisions
meant
to
deal
with
emergencies.
Jute Packaging Materials (Compulsory Use
Sugar industry (like cement and fertilizer industries earlier)
should be removed from the purview of JPMA.
in Packing Commodities) Act, 1987
mandates that sugar be packed only in
jute bags.
25 October 2012
3

Expert Speak
Road map ahead and key impact
Removal of
levy obligations has the
potential to enhance the
recurring net profit of
sugar companies
by 30-40%
The timeline for adoption of measures could be 3-4 months. While the probability of
implementation of levy obligations with immediate effect appears very high, the
cane pricing recommendations may take some time to implement. Mr Saraogi expects
the benefit of removal of levy obligations to be available from the current sugar
season (FY13) itself. Removal of levy obligations has the potential to enhance the
recurring net profit of sugar companies by 30-40%.
The domestic sugar sector has been characterized by high volatility and cyclicality,
resulting in poor and volatile RoCE for most sugar companies. Part of the volatility can
be explained by the fact that sugar is a global agricultural commodity, subject to the
vagaries of various climatic and natural factors. Government regulations and
interventions (both at the central and state levels) further accentuate the volatility
and cyclicality for the domestic sugar sector. Adoption of committee recommendations
could transform the domestic sugar industry.
We have carried out a sensitivity analysis of the likely impact of the removal of 10%
levy on key UP-based sugar companies. Even if we assume 50% probability of this
event happening, the long-term benefits would be significant.
Impact of Levy obligations on key sugar companies FY12
Total Crushed Sugar Sales (mt)
Levy Obligation (%)
Levy Quantity (mt)
Levy Sugar Price (INR/ Kg)
Losses on Levy Sales (Levy price-Sale price)
Per Unit Loss (INR/ Kg)
Value Loss (INR m)
Losses on Levy Sales (Levy price-Cost)
Per Unit Loss (INR/ Kg)
Value Loss (INR m)
BHL
1.2
10
0.12
19.8
-9.0
-1,079
-9.0
-1,074
BCML
0.81
10
0.08
20.1
-8.6
-700
-8.6
-697
Dhampur Sugar
0.36
10
0.04
20.1
-8.6
-311
-8.6
-310
Possible gains on account of removal of levy obligations under various probabilities FY13
Key Assumptions
BHL
BCML
Dhampur Sugar
Total Crushed Sugar Production (m Kg)
1.15
0.86
0.40
Levy Sugar Sales
0.12
0.09
0.04
Levy Sugar Price (INR/ Kg)
21.0
21.8
21.8
Sugar Production Cost (INR/ Kg)
30.0
29.5
29.2
Average Sale Price Market (INR/ Kg)
31.6
31.6
31.6
Sensitivity Analysis: Levy price and sugar production cost (INR m)
20%
207
139
59
40%
414
277
118
50%
518
347
148
70%
725
485
207
100%
1,035
693
296
Sensitivity Analysis: Levy Prce and average sale price (INR m)
20%
244
176
78
40%
488
353
157
50%
610
441
196
70%
853
617
274
100%
1,277
864
384
BHL - Bajaj Hindustan; BCML - Balrampur Chini
25 October 2012
4

Expert Speak
New cane pricing formula proposed
Over FY09-12, UP witnessed irrational cane pricing, which was at significant variance
to the market price of sugar or even the FRP (fair and remunerative price) set by the
central government. This led to increase in cane arrears to farmers in UP alone from
INR5.7b in FY09 to INR47.4b by FY12.
The Committee has suggested the adoption of CACP formula for sugar cane pricing.
The cane pricing formula suggests sharing of sugar revenue in the ratio 70:30 between
farmers and sugar producers, apart from sharing ~5% of revenue for value added by
products. The actual payment for the cane dues would happen in two steps. The first
would be payment of a floor price, based on FRP as per extant mechanism. Balance
payment of cane dues would be done subsequent to publication of half-yearly ex-
mill prices, on the lines indicated.
In the long term, if this recommendation is adopted, the domestic sugar industry
could enter a phase of low volatility and stable growth.
In four out of last eight
years in UP, cane
payments to farmers as a
percentage of sugar sales
was higher than the
proposed payment of
~70%. The average
payments over FY05-12,
was 75% in case of
Maharashtra and 72% in
case of UP
CACP formula for cane pricing
Particulars
Recovery rate (%)
Ex-mill price of sugar (INR/qtl.)
Gross conversion cost (INR/qtl. of cane)
Harvesting cost (INR/qtl. of cane)
Transportation cost (INR/qtl. of cane)
Cost incurred by millers (INR/qtl. of cane)
Cost incurred by farmers (INR/qtl. of cane)
Total cost of sugar produced of 1qtl of cane (INR)
Cost incurred by farmers as % of total cost
10.3
2,825
43.5
3.05
0.66
47.2
104
151
69%
Source: Companies, MOSL
Cane price as % of Ex Mill sugar sale price in UP and Maharashtra, over FY05-12
Source: Companies, MOSL
25 October 2012
5

Expert Speak
Our view on the industry
It is likely to (1) lower
policy uncertainties, (2)
boost recurring profit, (3)
attract FDI / facilitate
industry consolidation,
and (4) allow companies
to successfully
implement their long-
term plans
The performance of the domestic sugar sector, in particular UP-based companies has
been erratic. Government intervention has been one of the key reasons for this.
Implementation of the Dr C Rangarajan Committee recommendations would be a key
positive for the sugar industry in general and UP-based sugar companies in particular.
It is likely to (1) lower policy uncertainties, (2) boost recurring profit, (3) attract FDI /
facilitate industry consolidation, and (4) allow companies to successfully implement
their long-term plans.
Our view on Balrampur Chini
We believe Balrampur Chini provides investors the best play on the turnaround of
the sugar industry. UP-based sugar companies are likely to witness a change in
fortunes, given (1) reasonable demand/supply outlook, (2) possibility of few key
catalysts playing out in the near term, and (3) rational cane pricing by the state
government.
The management has no major capex plans for its core business over the next few
years. As such, it plans to utilize free cash flows to lower its INR6.5b long-term debt
and maintain a healthy dividend payout ratio of 30-40%. This should positively impact
valuations. The stock trades at 8.1x FY13E EPS of INR8.6 and provides a dividend yield
of ~3%.
Not Rated.
Background on Sugar deregulation
Sugar is a controlled commodity in India under the Essential Commodities Act,
1955. The Government of India initiated the de-licensing policy in sugar industry on
September 11, 1998 due to the globalization process, and since then the industry
experienced significant changes. De-licensing of the industry led to growth of sugar
mills.
During FY89 and FY92, the government introduced partial control and in accordance
the levy-free sugar ratio was 45:55. It was 40:60 during FY93 and FY97. Decontrol of
sugar trade gained momentum in due course. The ratio of levy-free was increased
from 10:90 to 20:80 during season FY10, which was again restored back to its normal
10:90 in the ensuing season.
The committee appointed by the government under chairmanship of SK Tuteja
recommended decontrol of free sale sugar by October 2005. The Central government
announced statutory minimum prices (SMP) of sugarcane and based on this state
governments fix state advised prices (SAP). However, SAP is being used as a political
tool and has been the main concern of sugar mills as it results in higher production
costs. SAP was replaced by FRP during season FY10, which is followed across India
barring certain Northern states, including Uttar Pradesh, where SAP is being
followed.
25 October 2012
6

Expert Speak
N O T E S
25 October 2012
7

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