The Cabinet Committee of Economic Affairs has decided to partially de-control the Indian sugar industry. 1) The cabinet has decided to remove the levy quota obligation for the next two years. Contrary to earlier expectations, the government is not going to increase the excise duty on sugar, but will now bear the increased subsidy itself, totaling roughly Rs53bn (an increase of Rs30bn). Levy price has been capped at Rs32/kg ex mill.
The cabinet has also abolished the non-levy sugar release mechanism. This provides the industry with the flexibility to manage inventory liquidation. The game-changing reform of cane pricing formula being linked to sugar price has not been cleared and the states will continue to hold the rights to decide cane prices. This decision is not a surprise given the politically sensitive nature of the issue and the backdrop of state elections in C2013 and general elections in C2014.
Whilst we await the fine print and timeframe of its applicability, we estimate removal of the 10% levy quota if effective from April 1, 2013, would imply average sugar realizations improving 4%. Removal of the levy quota also implies that the cane arrears
situation is likely to be more manageable now and there could be upside risks to supply for 2014, especially from the largest sugarcane-producing states like Uttar Pradesh.
Domestic sugar prices have corrected 5% and 15% in last three and six months, respectively, driven by seasonality and, more important, by rising production estimates. Simultaneously, the ~15% increase in cane price by UP state government implies a loss of ~Rs4.30/kg of sugar produced which post removal of the levy quota would imply a loss of ~Rs3/kg in the sugar business and improve financials for the industry.