Maha Coop Bank may lower valuations for sugar mills

By: |
Pune | February 27, 2015 12:08 AM

If implemented, the move will leave millers with reduced funds in hand

Maharashtra sugar mills, which are already under  pressure for making FRP payments to farmers,  now face the possibility of lower valuations by banks, leaving them with reduced funds in hand. Amid falling sugar prices, the Maharashtra State Cooperative Bank (MSCB) is considering lowering valuations on sugar pledged by mills,  a move that could lead to short margins and higher provisioning for the banks, top officials said.
According to Pramod Karnad, MD, MSCB, prices as on date have fallen to R2,370 per quintal against R2,430 on Monday. If prices fall by another R40, the bank may have to consider lowering valuations leaving lower amounts for cane payments. This has been done in the past when prices have risen or fallen by R100 per quintal , he pointed out.

At a valuation of R2,430 per quintal, an amount of R1,315 is allocated for cane payments. If the prices fall by R100 then the cane payment amount also falls to around R1,240 per quintal and therefore the factories could be left with lower amounts in hand even as they have to pay up the FRP, officials said.

Sugar mills are under pressure to make FRP (fair and remunerative price) payments or face action from the Sugar Commissionerate. Now, 40 mills in the state are on the radar of the Commissionerate for having a shortfall of more than R400 per tonne and notices are in the process of being issued to the mills sometime this week. Mills have been complaining that they do not have enough funds to make FRP payments in light of falling sugar prices. The incentives announced by the Centre that comes with riders, have not brought much enthusiasm in the industry.

MSCB has sanctioned working capital of R3,135 crore to 30 odd sugar factories in Maharashtra with positive net worth for the sugar season of 2014-15.  Last year, the bank had sanctioned R3,200 crore working capital to sugar factories in the state. The remaining 12 DCCBs have also sanctioned pledge cash credit and working capital to mills this season. According to industry observers, what is happening now is that with falling sugar prices and the threat of ‘revenue recovery’ (RR) proceedings, the sugar mills are ready to sell their stocks at lower rates and the gap of the valuation could increase as the season progresses and this could cause problems at the end of the season.

According to Sanjeev Babar, MD, Maharashtra State Cooperative Sugar Factories Federation (MSCSFF), lower valuations could lead to short margins causing problems for mills during the season. Sugar prices are falling and are currently at R2,730 per tonne and mills do not have money to make FRP payments, he said, adding that this is really a sad time for the industry.

MSCB has reduced valuations at least four times during the last year starting from January 1, 2014 when prices were around R2,640 per quintal. Prices went down by R2,540 per quintal by January 16, 2014 leading to lower valuations. On September 5, 2014, sugar prices ruled at R2,810 and after 12 days, prices went down to R2,700 per quintal. The third occasion during the year was at the start of the season on October 31 when prices  stood at R2,700 and this went down to R2,630 per quintal in a few days.

Last instance of lowering valuations has happened on January 1, 2015 when prices were R2,630 per quintal and went down to R2,430 per quintal in a  few days, Karnad pointed out. At present, the sugar rates are at R2,730 per quintal and the bank officials say if this goes down to R2,330 , the valuations by the bank  will be lowered again, he said.

Higher provisioning does not look good on the bank’s books either, he said. The bank usually takes a review of sugar prices on the first of every month and a call is likely to be taken at this time, he said.

According to sugar analysts, the international rates for raw sugar, too, is at a lower price at 14.2 cents which works out to R1,925 per quintal.

There is absolutely no demand and hardly any buyers for raw sugar, analysts said.

Mukesh Kuvedia, secretary general, Bombay Sugar Merchants Association, the sentiment in the market remains bearish with traders not entering into forward contracts and consumer demand being poor. “Only one and half months are left for the season and the rates in the international market have fallen as well. Brazilian sugar will start to enter markets next month onwards and this will pose a huge competition for Indian sugar,” he said. The export subsidy announced by the government has come in late, he said.

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