Similar to its peers, Noida based Triveni Engineering & Industries is seeing several merits in government's sugar decontrol measure announced Thursday evening. The company hopes to gain Rs70-80 crore on account of removal of 10 percent levy quota. Abolishment of release mechanism will allow the company to plan production better and enter in to long term contracts with clients, Tarun Sawhney, joint MD, Triveni Engineering & Industries told CNBC-TV18
"It will allow us much greater flexibility to ride out the highs and lows that existed in a month and look at a much longer time horizon in terms of our sugar sales policy. It will allow us to enter into pricing contracts with greater visibility for both parties going forward," Sawhney said. Giving an example he said that the company will be able to establish long term contracts with large buyers like Coco-Cola, bringing in more flexibility and transparency to selling strategy.
He, however, hopes that government does not stop with these reforms and imposes import duty on sugar to avoid large scale dumping of the sweetener. In the last financial year 2 million tonne of Sugar has been imported.
Below is the verbatim transcript of the interview
Q: Could you quantify the benefit on the company on the back of removal of this 10 percent levy quota?
A: The benefit for Triveni Engineering will be somewhere between Rs 70-80 crore at the current price of sugar.
Q: The calculation is at the rate of Rs 10/kg is it?
A: We have factories across the state of Uttar Pradesh and Uttar Pradesh is divided in three zones where we were previously giving sugar through as levy at just below Rs 19-19.5 and Rs 19.7. So the delta is really between free sale market price which is about Rs 32 today and the prices that I had just mentioned.
Q: So you make something like Rs 12-13 per kg of levy that you supply?
A: On 10 percent of the total production, correct.
Q: Is there any clarity or confirmation whether these two years which has been stated apply for the entire removal of levy quota policy or it is for that Rs 32/kg at which the government subsidy would be capped?
A: There is not any clarity from the Food Ministry as of now but my understanding is that we will have the abolition of levy going forward. The mention of two years in my view is only for the price of Rs 32 and the government and the Food Minister has started that at price above Rs 32 the states will have to bear that burden.
Q: Larger problem is all the possible decontrol that the central government could do, has been done. There is not any further good news that we can expect on the policy front except for this two year dithering. If that is made permanent then there is really nothing more that policy can do for you?
A: Firstly, I would like to step back and really applaud the central government for looking at the plight of the industry and taking up these bold measures. As a part of the industry for 70 years we are delighted with the measures that have been taken place. However, it does not end there. Of course the two year caveat is something that will have to be dealt with in a couple of years; however the center does have the right to impose import duty. As you know 2 million tonnes of sugar has entered India in this sugar year, in the form of whites. There is continuous white import that is happening from Pakistan because international prices are substantially lower than the domestic prices. So the central government can choose to look at imposing some kind of import duty.
Q: Now that the monthly release mechanism is also abolished could you tell us how it will help Triveni Engineering?
A: It depends on the financial strengths of companies. You are going to find that people that are cash trapped and that require funds immediately will resort to actually selling into the market. For a company like ours it will certainly give us flexibility to look at the exchanges the National Commodity & Derivatives Exchange (NCDEX), the Multi Commodity Exchange of India (MCX) in terms of hedging, our sugar sales policy and it will allow us much greater flexibility to ride out the highs and lows that existed in a month and look at a much longer time horizon in terms of our sugar sales policy.
Q: Wasn't that monthly already made into six monthly? Is that a very big deal now?
A: You are right. It was made into approximately six months. But it is a very big deal, because there were still caveats attached with the old policy. Now with the abolition of the release mechanism that gives remarkable flexibility as to when you want to sell your sugar, how you want to sell your sugar and you can actually start targeting and developing markets in a much more coherent manner.
Q: So the impact of this in terms of changing your strategy to time your sales etc. will not happen immediately?
A: It will take time. A large portion of sugar goes to industrial consumers and this policy move will allow us to enter into much longer term contracts with industrial suppliers, for example, the Coca Cola or the Pepsi who have a constant requirement, of course it increases over the summer months. But a constant requirement will allow us to enter into pricing contracts with greater visibility for both parties going forward.
Q: Give us some numbers as to your own P&L. Now that you are Rs 80 crore richer does it mean you will be able to bring down interest costs? How does this work into the bottom-line?
A: It is a direct benefit to the bottom-line. How you choose to utilize those funds is of course a matter that will be different from company to company. I would like to point out that in the state of Uttar Pradesh we still have a very high cane price and therefore we are still not totally out of the woods. So this is of course a welcome measure, but it is by no means complete and we as part of the UP industry have made representations to the state government to give us some more relaxation, some benefits to alleviate the cane price burden that we are facing in the state.
Q: Can you give us some number in terms of your own Earnings Per Share (EPS)? How much better does it look at the end of the current year?
A: It is very difficult to say. Our quarter has just ended and we have our board meeting in a couple of weeks, so it is difficult for me to give you any kind of insight at this point.
Q: Will it have any impact on the sugar pricing?
A: There has been a lot of debate over the last 12-14 hours about the impact on pricing. I personally believe that it will have very, very little impact on pricing, since the excess duty is not going to be going up or we will find out if it goes up in the next few days. I believe that the prices that exist today will maintain for the next three to four months.