The sugar industry's fortunes are set to worsen with another anticipated bumper crop adding to the glut in the market.
Analysts say sugar prices could fall 5-10 per cent, which, in turn, could see sugar mill valuations crash further.
Agriculture ministry officials say the sugarcane crop output for the next crushing season starting October 2007 could be at least 10 per cent higher than the current season, resulting in record sugar production. Prices in the past year have softened from Rs 1,900 to Rs 1,430 a quintal.
The National Federation of Cooperative Sugar Factories expects the 2007-08 sugar output to be around 26 million tonne, up from 25 million tonne this year.
With domestic consumption expected to stay at this year's 19 million tonne, sugar mills are expected to carry stocks of over 4.5-5 million tonne.
Initial reports from Uttar Pradesh and Maharashtra, the country's two largest sugar-producing states, show that farmers have sown a large sugarcane crop despite high payment arrears from sugar mills. Mills owed farmers Rs 176 crore (Rs 1.76 billion) in Uttar Pradesh and Rs 265 crore (Rs 2.65 billion) in Maharashtra on January 31.
"Mills are now selling under stress to make payments, which will stop after crushing ends," said C S Nopany, chairman and managing director of Oudh Sugar Mills.
Meanwhile, PTI said the government is understood to have decided on major incentives for exports and create a buffer stock of 2 million tonnes, in a bid to help farmers and sugar producers.
This followed a meeting of the Cabinet Committee on Economic Affairs last night. Export subsidy at a flat rate of Rs 1,350 per tonne would be given to sugar mills in coastal areas and of Rs 1,450 per tonne to factories situated in northern states.
The buffer stock would be created for a maximum of two years, sources said, though no official communication could be obtained on the decisions.
Sugar mills had earlier demanded incentives for exports and creation of a buffer stock of two million tonnes.
"This move will improve the market sentiment towards sugar and arrest the price decline," said Nikhil Sawhney, vice-president of Triveni Engineering and Industries.
Prices of sugar companies in the stock markets have fallen by up to 50 per cent in the last six months. Yet, DCM Shriram Consolidated Ltd Chairman & Managing Director Ajay Shriram feels the time is not right for an acquisition.
He'd rather wait for another year when valuations will have tumbled further. "The bloodbath is yet to begin," he says.
