The government increased the Fair and Remunerative Price (FRP) of sugarcane for the year 2018-19 by Rs 20 per quintal, with the new price being Rs 275 per quintal for the marketing year starting October.
However, the FRP has been linked to a 10 percent recovery rate and for every additional 0.1 percent rise in recovery a premium of Rs. 2.75 will be added. The FRP has been linked to a 10 percent recovery rate as against a 9.5 percent previously.
The government had recently announced a sharp increase in the minimum support price (MSP) of kharif (summer-sown) crops, including paddy.
Why is this important
An increase in the FRP will not only increase the purchase cost of the sugar mills but will also have a negative impact on the earnings of the mills which are already reeling under pressure.
The increased FRP will also lead to an increase in the sugarcane arrears which stood at Rs. 180 bn at the end of June 2018.
Stocks to be impacted
Increase in the FRP along with a good harvest for the second consecutive year is likely to have a negative impact on the sugar companies.
Dwarikesh Sugar (CMP: Rs. 15.8, MCap: Rs. 300 crs, 2.9x FY18 PE)
Balrampur Chini (CMP: Rs. 63, MCap: Rs. 1441 crs, 6.7x FY18 PE)