Sakthi Sugars hopes for better margins as Re falls

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Sugar stocks are in the limelight today after the government gave its nod for one million tonne sugar exports in 2011-2012. The managing director of Sakthi Sugars M Manickam said that the timeframe and the mechanism on sugar exports has not been clearly defined by the Centre.

"I'm hoping the government makes further sugar export allowances in the second tranche," he added.

In an interview with CNBC-TV18, two million tonne exports will help keep domestic sugar realisations steady. He also added that the fall being witnessed by the rupee will aid in boosting export realisations.

Below is the edited transctiptof the interview. Also watch the accompanying video.

Q: The quantum that has been opened in terms of exports because more sugar companies wanted a far larger quantum opened. How material is this and what kind of profits you hope to get from exports now?

A: We are not sure because they have said one million tonne but they have not given a timeframe or mechanism under which this million will be available. They have set a new term marketing year and one million tonne for this marketing year so it could be stretched through the year or it could be front ended. We need to see.

But our total target for export is 2-2.5 million tonne this year out of India and that's when the price will stabilise around Rs 34-35 which is required for the industry at this point.

Q: How profitable are these exports now because global raw sugar prices have also started coming off significantly now at 23 cents a pound. And a lot of houses believe they could be at a 20 cents a pound quite soon. At those price levels will it still make sense for you to export 2.5 million tonne?

A: We are hoping the rupee to depreciate. The way the rupee is today it is viable even at USD 600. We are about USD 640-650 we have another USD 50 that we can afford to take down and with the rupee at Rs 51-52 we are quite comfortable.

Q: Do you mean that because the surplus this year could be 2.5-3 million tonne between demand-supply, do you think this one million tonne eventually will go up to another million - million and half over the next few months from the government?

A: It should go up to about two million tonne by the end of the season. That will keep prices steady in the local market so the mills will be able to pay the farmers in time. Ultimately the two major factors that the government looks at are - the payment to the farmer and the price to the consumer.

We have come to a limit where the farmers will not be paid until the prices move up today.

Q: It was also decided to remove stock holding limits come next month. How material is that and would you go so far to say that it looks like a step in the direction of reform for sugar?

A: It is a step back, reforms have been promised for a long time. We are expecting a decontrol, which could be the best thing to happen.This was withdrawn about two years back but it is brought back. Stock control didn't exist earlier. When the forward trading was banned in the NCDEX that's when the stock control also was brought in. In the first step, they allowed forward trading and now they have removed the stock holding limits.

We have to see the fact that they banned the futures market and they have put this kind of restriction. This has destroyed credibility that the government had in the futures market.

Q: As an industry, how credible the case is for UP based mills in terms of protesting against the price that has been set for sugarcane? Do you think it may have a ripple effect for other markets like Maharashtra considering the hike has been in UP?

A: Maharashtra is independent, it has got its own formula.There is a negotiation between the farmers and mills.

UP is the leader in making instability in this industry. They would announce high prices and the UP millers would then protest.Even if the court gives us the support, whether the state government will be in a position to withdraw its recommendations, is yet to be seen.

Q: You said the prices will stabilize if two million tonne of exports are allowed. What is your outlook for the domestic prices for the next few months?

A: We are at about Rs 30-31 and I have been saying that our breakeven should be around Rs 34. This is the price where the industry is confident that we will able to pay the arrears to the farmers and ensure high production levels. This will not lead to a shortage for the consumer in future.

The single parameter that we should look at is the price of sugar. At Rs 34 the industry will be healthy and we will be able to produce about 24-25 million tonne of sugar every year. We look forward to that.