About one-third of sugar mills’ share price gains in the first fortnight of September were wiped out the past three days, due to the penalty levied by anti-trust regulator, the Competition Commission of India (CCI).
Following a number of sops announced by the government, the composite index indicating share prices of sugar mills rose 36 per cent between September 4 and 17. During this period, the government raised ethanol prices by as much as 25 per cent for the sugar season 2018-19 beginning October 2018, apart from allowing direct conversion of ethanol from sugarcane. The move was aimed to bail out sugar mills from high cane arrears.
Earlier, the government had fixed a minimum support price (MSP) of Rs 29 a kg for sugar sales from factories. The buzz in the market is that there will be an increase of at least Rs 4 a kg in prices as demanded by sugar mills to achieve the commodity’s cost of production.
On September 18, however, the CCI imposed Rs 380 million of penalty on 18 sugar mills and two sugar associations, including Indian Sugar Mills Association (ISMA) and Ethanol Manufacturers Association of India (EMAI). In its submission to the CCI, the complainant India Glycols had maintained there was rigging of the bids of a joint tender floated by oil marketing companies -– Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL) and Indian Oil Corporation Ltd (IOCL) — in January for procurement of ethanol for blending with petrol.
On Friday alone, shares of sugar mills shed up to 16 per cent, continuing their fall for the third day in a row. While Balrampur Chini was down 10.22 per cent to Rs 78.60 on Friday on the Bombay Stock Exchange (BSE), Bajaj Hindusthan Sugar lost 10 per cent to Rs 10.42. Triveni Engineering & Industries and Simbhaoli Sugars have also reported a fall in their share prices of 9.91 per cent and 6.14 per cent, respectively, to close on Friday at Rs 44.10 and Rs 14.98.
Following a bumper output of 32.25 million tonnes for crushing season 2017-18 (October–September), apex industry body ISMA has forecast India’s sugar output to rise further to 35-35.5 million tonnes in the 2018-19 season.
“Bumper production, at 35 million tonnes in SY2019 as per preliminary estimates, is likely to be higher than consumption by at least 9 million tonnes, adding to the existing sugar surplus in the market. Significant increase in sugar production by around 60 per cent YoY in SY2018 is likely to result in closing stocks of 9–9.5 million tonnes, even after considering that 2 million tonnes of the commodity are exported. However, export of entire 2 million tonnes might pose a challenge, given subdued global sugar prices. Hence, while the prices have recovered after the announcement of the Government bailout package, pressure on sugar prices cannot be ruled out, given the continued oversupply scenario,” said Sabyasachi Majumdar, Senior Vice President & Group Head, Icra Ratings.
With sugar realisations likely to be under supply-induced pressure in SY2019, this is likely to result in margin pressures as well as the increase in cane arrears in that year.