Jun 14, 2013 06:19 PM IST | Source: CNBC-TV18

Allow price hike for struggling sugar cos: Sakthi Sugars

M Manickam, managing director, Sakthi Sugars also expresses concern over rising disparity in raw material and finished products price. He complained about the government not taking major steps to increase sugar price.

Research firm Crisil expects sugar industry to post around Rs 1000 crore loss in sugar year 2012-13 (Sept-Oct) due to disparity between cost of procuring sugar cane and rate at which sugar is sold.

In last three seasons, the average price paid by mills toward purchase of cane has increased 14 percent, whereas sugar cost has gone up 3 percent, making operations unfeasible for sugar makers.

Read This: Sakthi Sugars hails decontrol; sees low production next yr

In an interview to CNBC-TV18, Ajay Srinivasan, director, Crisil Research said, Sugar mills in Uttar Pradesh and Tamil Nadu will be worst hit due to state government's having announced a state advised price (SAP) which is higher than the central government's Fair and Remunerative price (F&RP).

He further said that steep rise in sugarcane procurement cost vis-a-vis sugar price will have an adverse impact on financials.

M Manickam, managing director, Sakthi Sugars also expresses concern over rising disparity in raw material and finished products price. He complained about the government not taking major steps to increase sugar price.

He further said that sugar production was lower by 20 percent year-on-year. "Expect production to be lower by 10 percent next year," he said.

Below is the edited scirpts of Srinivasan and Manickam's interviews

Q1: What are your chief worries about the sugar industry and what kind of losses do you see in FY13 and FY14 as well?

Srinivasan: What we can see is that with the sugarcane price increasing continuously and sugar prices being under pressure because of low prices globally, as well as dumping by sugar mills after the deregulation on the marketing front, we see the quantum of losses only increasing going forward. The chief concern is that while the by-products such as ethanol and cogen are contributing significantly to profitability, the core sugar business itself is under lot of pressure because of this irrationality in cane pricing.

 Q2: What is your expectation of what the industry might post by way of losses in this season and how does it compare with what it did in the previous year to know how the quantum of losses have jumped up and in general the trajectory? When you say Rs 1,000 crore for FY13 do you mean Sugar Year 13 (SY)?

 A. Srinivasan: SY13.


 Q3: So as of September 30 you expect their losses to be Rs 1,000 crore.

A. Srinivasan: Yes. We think that Q1 and Q2 of this financial year will be very, very bad, because prices have been really low and cane costs have sored this year.

 Q4: A certain irrationality in sugarcane pricing was evident more in Uttar Pradesh. Which are the mills you see most affected and in which regions?

A. Srinivasan: The regions which will be most impacted are mills in Uttar Pradesh and Tamil Nadu. If you look at the quantum of losses our sense is that in SY12 the losses would have been about Rs 4 billion or so which is going to sore to over Rs 10 billion in SY13 and next year we expect the losses to sore further to about Rs 16 billion.

 Q5: Have you done any analysis of which companies will be bearing which loss, like how much loss?

Srinivasan: We have not done a company level analysis, but at an industry level we think that this is going to be the quantum of losses. It would be fair to say that smaller mills would be worst impacted.

Q6: Would you agree that this is looking like the quantum of losses - Rs 400 crore in SY12, Rs 1,000 crore in SY13 and Rs 1,600 crore in coming sugar year as well? Will things get really as bad?

A.Manickam: It is probably an understatement. Probably the losses will be at least double that.

Q7: If losses are as severe as that then at least then the political authorities will awaken because forget current prices, you will not be able to pay even the arrears to sugarcane farmers. So at some point when their back is to the wall doesn't some realism dawn? Don't you think therefore that probably the next year could turn before things get worse?

A.Manickam: Talking about realism and politics they do not mix. Today if you look at it UP is already talking about arrears of about Rs 7,000 crore. The government has done nothing about increasing sugar prices there and when we are starting the next season I do not expect the farmers to supply cane unless they are paid the arrears. So you would have a major situation coming unless the sugar prices go up. I have been maintaining it at break-even at Rs 34 for the last one year and now Commission for Agricultural Costs and Prices (CACP) has recommended another Rs 400 increase in cane prices, so next year unless we have about Rs 38-40 we are not going to break-even. It is going to be very interesting to watch in the next year.

Q8: Where do the realisations currently stand at?

A Manickam: Now it is about Rs 30.

Q9: For Sakthi Sugars could you tell us what you estimate the losses to be in SY13?

A. Manickam: Last year we crushed about 30 lakh tonnes and at about Rs 4 we lost about Rs 120 crore - that is the difference between parity and break even. Next year our cane is going to be lower, thank god for that. Possibly we will lose about Rs 6-7/kilo, so close to Rs 100 crore again.

Q10: What would you mean by cane will be lower, do you mean price will be lower or production?

A.Manickam: The availability of cane will be lower. There is drought this year in Tamil Nadu, Karnataka and Maharashtra, so the cane availability will be lower.

Q11: Therefore you crush lower and therefore your losses are lower.

A.Manickam: Yes.

Q12: If Rs 7,000 crore is what you say is the accumulated losses of the industry, do you see them being able to pay and lift the cane even in this sugar season like come October-November? Will you be able to avail of the cane at all or will farmers at least at that point in time press the political authorities to pay up or remedy the situation? Can the remedy come as early as this November or will it have to wait for another season?

A. Manickam: The prices will have to increase. Politically whether they have the guts to increase the price to Rs 34, I do not know. The funny thing is in October 2012 when they announced this cane price the sugar price was at Rs 34-35. So we were reasonably confident that we might do well. After they have announced the cane price the sugar price was dropped down to Rs 30. Basically it was a tongue-in-cheek kind of situation. They announced a price and then they had dropped the sugar prices. Coming this year I do not know. If the farmers do not get paid they will divert the cane to alternate sweeteners, so you probably will have less sugar production.

Q13: Your report has stated that the debt servicing ability of the industry will also weaken. Any kind of numbers that you have crunched to know how the debt profile of these companies will worsen?

A. Srinivasan: We have looked at the companies constituting about 50 percent of the industry and within that about 30 percent had an interest coverage of less than one time which mean they do not earn enough operating profit to pay their interest. Our sense is that this number will go up significantly over the next two years or so and if something is not done urgently I think lot of the bank loans outstanding to the sugar industry will come under pressure.

Q14: Can it come under pressure in this season itself or perhaps in the next year?

A. Srinivasan: More next year, but things are only getting worse and it is time the reality dawns and we see some bit of rationality in the cane pricing.

Q15: Do you see defaults or Non-Performing Loans (NPL) from the sugar sector coming in November?

A.Srinivasan: Yes absolutely. As Mr. Manickam has stated next year will be very interesting, because cane prices have soared, global sugar prices are low and even domestically sugar prices right now are low. So how mills would be able to pay the cane as well as service the interest will be very interesting to watch.

Q16: So defaults could start as early as this October?

A.Srinivasan: You may possibly see the defaults starting towards the end of this fiscal year.

Q17: Ajay was talking about the non-sugar products giving you some money. Per kilo how much might the net earnings be? At Rs 30 you are clearly saying that you are perhaps at least Rs 4 in the red per kilo. What might be coming in terms of net income to ameliorate this from the non-sugar products?

A.Manickam: It is hardly anything. You get roughly about 12 liters of alcohol per tonne of cane and you get about 70-80 liter units of power. So you get something like Rs 300-350 on one and about Rs 600 in total. But when I am saying Rs 30 as loss and Rs 34 as break even that is after taking these revenues into account and including financial costs.

Q18: What would be the quantum of exposure that the banks have to the entire sugar industry? Any idea of the number?

A. Srinivasan: As of April 2013 total bank loans outstanding was about Rs 34,000 crore. We would guess that if the bigger mills are in this financial condition the smaller mills would be in much more worse conditions and it would spell trouble for the industry as well as banking sector in terms of NPAs, it is something which is not done urgently.

Q19: What does your interest coverage currently stand at and how do you expect that ratio to move?

A.Manickam: Our interest coverage today is negative. We are just below 1 percent. We had gone for huge expansions in last 3-4 years on power sector and most promises made and that also were not kept up by the government, so we are in a negative territory now.

Q20: What about the expected sugar harvest in the current year? The rains have arrived on time. We can hardly forecast how they might progress. But if things turned out well would you expect some kind of a reduction or an easing of sugarcane availability and prices?

A. Manickam: There will be a reduction in all of the Peninsular India. It is only UP which is talking about a higher production, but normally UP forecasts are not reliable. You do not know about the numbers that they have. If UP also goes down then we will have a shortage coming in.

Q21: you do not see the current rains ameliorating the availability of cane in Peninsular India?

A.Manickam: It will help year after, not coming year.


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