Jul 08, 2013 07:03 PM IST | Source: CNBC-TV18

Weak Brazil currency to aid revenues: Shree Renuka

In an interview to CNBC-TV18, Narendra Murkumbi, MD, Shree Renuka Sugars spoke about rupee depreciation and the recent talks about government increasing the import duty on sugar.

Narendra Murkumbi, MD, Shree Renuka Sugars doesn't see much impact from import duty hike on sugar. He told CNBC-TV18 that the company is currently not too much into imports infact it is focusing on more exports. He informed that the company has recently started exporting from its Haldia refinery.

Food, finance and agriculture ministries on July 4 decided to raise the import duty on sugar to 15 percent from 10 percent, to discourage overseas buying.

Meanwhile, the Indian rupee touched an all time low of 61 against US dollar on Monday, which can be beneficial for company's exports. Murkumbi adds that weak Brazilian currency (real) will boost revenues of its Brazilian subsidiaries.

"In local currency terms our margins are expanding despite the low sugar price. In Brazil, we have the best season in the last three years going on right now. So, on the revenue side it is positive. We have some dollar loans there, but the overall impact on our P&L is positive because of the large exports," he elaborates.

Below is the verbatim transcript of his interview to CNBC-TV18

Q: We understand that the government plans to increase the import duty on sugar to 15 percent versus the earlier 10 percent. What kind of an impact and benefit do you think the industry as well as the company is likely to see?

A: I think right now the domestic prices are being driven more by supply-demand equation. With a good monsoon we are seeing relatively flat prices in fact some commitments for exports. So, I do not think this is a very big factor.

There is very little import happening at the moment. We are currently exporting from both our refineries. We have just started commencing exports from our Haldia refinery as well. The Kandla refinery is already exporting sugar for the last 12 months.

Net-net, I do not think this itself is going to have a very big impact on domestic prices. There has been some improvement, but not much.

Q: In that case the rupee depreciation has come at a very good time. Are you probably able to export more than you thought? Are realisations better for you? Can you just sum up what it might mean to the P&L?

A: I think right now the domestic market has reached export parity on the west coast that is in Maharashtra, Karnataka and also in south in Tamil Nadu. So depending on how the world market behaves on the level of rupee, I think we could see some more exports.

About 100,000 tonnes of sugar has been contracted for exports in the last couple of weeks. We could see some more exports in the coming few months and definitely in the new production season, which starts in November.

Q: How does the change in currency positions as well as the fall in commodity prices impact your P&L? Are you going to benefit from your Brazilian unit? Can you just take us through the impact of the recent volatility on your P&L?

A: The Brazilian currency has been almost as weak as the rupee. This means that our export earnings for sugar in our Brazilian subsidiaries is actually better. In local currency terms our margins are expanding despite the low sugar price. As I have said earlier in Brazil we have the best season in the last three years going on right now.

So, on the revenue side it is positive. Of course we have some dollar loans there, but the overall impact on our P&L is positive because of the large exports.


Q: Since the last time we spoke to you the rupee has fallen even further. Have you done any kind of rough analysis assuming that if the rupee closes at the 60 mark what would be perhaps the mark-to-market loss on your P&L?

A: This is reported every quarter. According to us we are operating our imports in a hedged manner and obviously we do not see any further impact from hereon on our balance sheet. As I said now with exports accelerating we become more competitive on our sugar exports as the rupee depreciates.

Q: Have you done the same exercise that we were doing with Bharti thanks to that research report from Credit Suisse. What would be your unhedged exposure? Will that be more than 15 percent of your Earnings Before Interest and Taxes (EBIT) because in that case domestic borrowings could get a little expensive?

A: In our case as on 31st March overseas borrowings on our Indian balance sheet were about USD 110 million and part of that is also going to be repaid in the current year. So as a part of our overall debt it is not much.

Q: So you do not expect domestic borrowings to get expensive on account of that?

A: We do not think so at the moment.

Q: Have you done a ballpark calculation of how your revenues will look, after all you were in the red because of exceptional items? How will your top-line look in FY14 itself?

A: Top-line wise we have higher volumes. Refining side we have higher volumes. We have more ethanol sales including ethanol sales carried over from the previous year which could not be dispatched due to delay in receipt of orders. All in all we should see in the current year a revenue increase in India of about Rs 1,500 crore.

Q: There were certain reports which indicated that your company is likely to cut the sugar output from Brazilian units in FY14 to increase the ethanol output. Is that true? If that is the case what will be the financial impact?

A: Currently it does pay to prioritise making more ethanol rather than sugar. Last year we made 63 percent sugar and 37 percent ethanol. This year currently we are operating at about 55 percent ethanol and only 45 percent sugar. This is product mix decision which is changed dynamically almost every week. Right now margins at the EBITDA level are higher by about 3-5 percent for making anhydrous ethanol compared to sugar exports and this keeps changing from week to week.

Q: Sometime back we had another sugar company's CEO speaking with us. He was saying that at the moment the price of sugar ranges at about Rs 31 while its production cost is actually Rs 35. How does the arithmetic work at your end? Are you able to breakeven? Is your production cost lower?

A: Our cost last year was about Rs 29 and this too was primarily because we all paid a higher cane price voluntarily because at that time it was looking like the production was much lower, there was a drought effect. Eventually production has tended to be higher. We expect with good rains this year we will have better recoveries, better yields and therefore production costs should be stable in the coming year.

Hence, I think in different parts of the country we have different cost depending on the cane price, the recovery and we have a sharp polarisation in our industry now between high cost regions as well as low cost regions. So we do think we are one of the low cost producers in the country and to that extent insulated from the current flat trend in sugar prices.

Q: You expect your cost of production should be around Rs 29 mark. Will that be maintained?

A: That's right and even in the coming year that should be the price.

Q: What would be the realisation that you will enjoy at least in the medium-term?

A: Right now the price is almost the same. Mainly the profitability is coming from the co-products which is cogeneration and ethanol where the oil companies have recently released a large bunch of orders and export demand is also strong for ethanol. I think in the coming season a lot depends on what the export viability and export price is, because at the current levels of the rupee that is likely to support the domestic market.


Q: Your Indian debt is Rs 2,600 crore now after that steep reduction you managed last year and overseas debt is Rs 5,800 crore. Is there any likelihood that you will do some asset sales abroad or will this be the debt we have to work with?

A: We are pursuing some ideas. I would not like to mention anything more at the moment. Clearly there is a need to bring down leverage fast and we are pursuing certain options.

Q: Your repayment obligation in FY14 is Rs 600 crore in India and nearly Rs 700 crore overseas. How is the company looking to repay in the coming fiscal year?

A: We have asset cover and I do think we will be able to refinance this with fresh long-term loans in both places.

Q: Is the Brazilian unit likely to turnaround completely into black this year or will that still be a few quarters away?

A: We are definitely seeing a much stronger EBITDA performance. Our target is to have a Profit After Tax (PAT) level breakeven this year.

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