Shree Renuka lists four demands of the sugar sector

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Sugar sector is back in news with the ministry yet again talking of a deregulation in sugar. Narendra Murkumbi, managing director of Shree Renuka Sugars spoke to CNBC-TV18 about his outlook for the sector and the company's strategies going ahead.

He says that there is an impending situation of record high arrears in cane to the tune of Rs 10000-12000 crore, coming almost at the same time as the UP elections. Cane arrears had peaked last season at Rs 5000 crore.

He lists down the demands of the sugar industry- "Firstly, we want the levied burden of subsidizing heavy sugar to move from us to the government. Secondly, we should have relief from the release mechanisms so that people can sell sugar to raise cash flow during the season. Then, we want more exports and we also want the ethanol price formula which has been pending with the government for the last seven months to be decided as soon as possible."

Below is the edited transcript of the interview. Also watch the accompanying video

Q: This the umpteenth promise of deregulation in the sector. What are you hopeful of?

A: There are four main things that the industry is stressing on. Let's see the background first- In states where state advised price (SAP) has been declared is very bad because companies are losing a lot of money. We expect cane arrears to peak at a record Rs 10,000-12,000 crore in the middle of this season. Last year, the peak was about Rs 5,000 crore. So we are expecting very big cane arrears position. It's going to come in almost at the same time as the Uttar Pradesh elections, so it's a very big problem that needs to be solved urgently.

What our main demands are from the government are as follows - firstly, we want the levied burden of subsidizing heavy sugar to move from us to the government. Secondly, we should have relief from the release mechanisms so that people can sell sugar to raise cash flow during the season. We want more exports and we want the ethanol price formula which has been pending with the government for the last seven months to be decided as soon as possible.

So we are not looking for a whole scale, complete comprehensive settlement, we want these four urgent and critical issues to be settled.

There is now a growing realization that something will have to be done, otherwise, in the next quarter, I think on a nationwide basis, we are going to see a very large cane arrear position and lot of unrest, especially in the key states- Maharashtra and Uttar Pradesh. This is the background of the announcement that you heard from the minister yesterday.

Q: Under the circumstances of heavy financial stress themselves, do you think the government is going to take up the burden of levy sugar which they have easily palmed off to the sugar companies for the past 20 years? Off the four steps that you are mentioning, where are you more hopeful?

A: I think levy sugar burden for the government is a drop in the ocean. As per our calculation, next year, the impact will be less than Rs 2,000 crore. Anyhow, the way the sugar industry situation is unfolding, they will have to pump in more than that just to keep the industry alive next season, especially in some specific states where cane price is completely out of control. So either directly or indirectly, they need to do it; I don't think there is much of a choice. We are not talking of doing it right away, we are talking of doing it in a next fiscal which is from April onwards.

As far as the ethanol price is concerned, the nation is going to save Rs 2,000 crore if the price formula is implemented. There is a positive gain there. If you look at levy plus ethanol, it's actually a zero-sum game for the central government. You reduce the petrol subsidy on fuel by Rs 2,000 crore by using 5% ethanol, on the other hand the levy burden will be between Rs 1,500 and 2,000 crore; very strong logic for both.

With regard to exports, you have seen 10 lakh release. We have been assured of more releases next month.

So overall, I think this is very workable, even in the current circumstance.

Q: So for Shree Renuka per se, what is the benefit that can be expected from two of the mechanisms on ethanol pricing and levied cost cut if it happens?

A: As per the formula we are seeing an increase in the ethanol price by about Rs 7 per litre for current supplies. Since it is going to be retrospective from October 2010, we will have a cumulative benefit which I need to exactly quantify because petrol prices have been raised six times in the last one year. But there will also be that one-time gain from the calculation from October 2010.

On levy, clearly, margins will increase by about 3-4% on an EBITDA level for the sugar division because this 10% levy is being sold at about 30% discount to the free-sale price.

Q: You also spoke about being assured by the government and next month you will be allowed exports under Open General License (OGL). Any kind of communication, how much will be allowed after the 10 lakh tonne?

A: If you see the 10 lakh tonne allowed in November, given the sluggishness in the world market, much of that sugar is yet to be contracted. The quotas have been distributed to all mills in the country but many of the mills have not yet contracted for that. So that needs to be sold over the next few days. Definitely, for cash flow purposes, I think government has appreciated yesterday, the minister also acknowledged that this is an important part of enabling cash flow in the business.

Q: What have you picked up from the ground in terms of higher output and what do you think this season will end up with in terms of sugar output?

A: I think the season is growing fast, partly because Uttar Pradesh started earlier than normal this year. Therefore, as of 15th December, we are up by about 8 lakh. But all indications are that this season will end faster, and crushing will be over in most of the country by the middle of April. Therefore, the inventory buildup arrears will be very fast. At the same time we have a longer off season and hopefully, prices should be better.

Q: You want to take a guess on prices itself in the first quarter calendar 2012 and then the second quarter?

A: I think first quarter will be weaker because of peak crushing season, crush is fast, people need cash to pay farmers, there is availability of gur and khandsari also. If I were to take a pick I think next quarter could see prices at the same levels as they are currently or maybe a rupee lower also. But beyond that, I definitely see an improvement. A lot depends on what happens to the arrears because of you are going to have this kind of arrears, I can't see how we can have the same size of crop next year. It will have to be lower. I think it's a very big number that we are staring at in terms of potential cane arrears.