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Feb 13, 2013, 08.18 PM IST | Source: CNBC-TV18

Will be tough to cope with current sugar prices: Triveni

After fairing well in the first quarter of their financial year, Tarun Sawhney, joint managing director, Triveni Engineering is optimistic on the company's performance in the next quarter.

Triveni Engineering is in an optimistic mood after having fared well in the first quarter of the financial year. The company  reported a sales turnover of Rs 533.44 crore and a net profit of Rs 5.16 crore for the quarter ended December 2012. Tarun Sawhney, joint managing director, Triveni Engineering in an interview to CNBC-TV18 says he is positive on the company's performance in next quarter as well.

"The sugar business in particular has shown signs of improvement in terms of operating results. Our recoveries have been higher," he says.

On the path ahead, Sawhney believes sugar production will grow 16-17% this year. However, he says sugar pricing needs to be focused on. Pricing, according to him, will be the greatest challenge in the upcoming months.

With increase in sugarcane prices, Sawhney opines it will be a little difficult to breakeven in terms of realisations. "The sugar that is produced this year will be at a substantially higher cost of production and the current prevailing price of about Rs 3,300-3,325 per quintal is not sufficient to meet that particular cost," he adds.

Below is the edited transcript of Sawhney's interview to CNBC-TV18.

Q: Tell us how the sugar business has fared in the quarter? What is the outlook like and tell us what the cane cost was for the company in the quarter and the realisations?

A: The company has fared well in the first quarter of this financial year. We have a September ending year. The sugar business in particular has shown signs of improvement in terms of operating results. Our recoveries have been higher. The performance on the sugarcane yields has also been very encouraging. I hope to see atleast a 16-17 percent growth in the total quantum of sugar that we produce this year. Our cost of cane has gone up by Rs 40 from Rs 240 to Rs 280 for general variety, which is a substantial increase ofcourse in this year. Looking forward, I see that the focus really needs to be on sugar pricing and there lies the greatest challenge in terms of predicting what the price will be over the coming months.

Q: A lot of sugar companies who have reported numbers have not been able to generate the kind of profit you have. Given the kind of cane cost that you have paid and they are paying, something similar - Rs 280, in that case, what have been your realisations in the quarter gone by and therefore what is the point at which you are at breakeven in terms of realisations?

A: In the last quarter, we sold sugar that was produced in the previous year. Our average realisation was in excess of Rs 3,500 per quintal. Therefore, we were able to generate a profit on that sugar that was sold. Now, the sugar that is produced this year will be at a substantially higher cost of production and the current prevailing price of about Rs 3,300-3,325 per quintal is not sufficient to meet out that particular cost.

Q: How much do you have by way of inventory that you could sell off in Q1?

A: In the previous year we sold about 11 lakh bags.

Q:  Is that all the inventory or you will have more?

A: We have a couple of lakh of old season stocks still leftover. In addition to that, ofcourse we have the new season stock which we started selling January onwards. This year, we expect a 16-17 percent increase in the total sugar that we will produce.

Q: Assuming that you don't sell the inventory which is produced last year which results in the sugar business reporting very profits, if you do sell it at the current crop then what would be the kind of profits that we could expect in the sugar business?

A: At these current market prices, we would not be able to expect profits. We have declared this ofcourse to our shareholders. We have taken a write down in terms of valuation of inventories. For sugar companies in North India to be able to make a profit, we need sugar pricing at the level of about Rs 35 per quintal for the current seasons sugar. Now, we are a good rupee and a half away from that and therefore there are several measures ofcourse that the central government can take to allow us to achieve that realisation over the coming few months.

Q: Can you take us through how the non-sugar business did?

A: The engineering businesses have performed well. We have Rs 500 crore order book. On the gears business front, we have seen a small increase in the total order book which is very encouraging. Despite the lower capital expenditure for our clients, we have seen businesses in South-East Asia and other parts of the Asia that have been fairly aggressive in terms of their capital expenditure.

On the water front, we have actually had a pretty reasonable quarter as well. We have got a large pipeline of orders. We do think that certain orders which have been pushed back by municipalities as well as industrials will ofcourse come about perhaps in this quarter or the next quarter. So, I am hopeful, cautiously optimistic that this business will also continue to grow as we have told our investors in the past.

Q: What might be the inventory write down in next quarter?

A: It is difficult to say, because we still have another six weeks for this quarter to end. We will have to look at the prevailing prices at that point. That’s the first or second week of April. If I had to hazard a guess, I think that we have reached the bottom of pricing. Perhaps another rupee per kilogram could eek out, but I don’t think there is significant downside beyond that.

Q: How is your debt situation and your finance cost panning out on a quarterly basis?

A: We had projected a slight reduction in our total finance cost in percentage terms. That happened in Q2 as the Reserve Bank reduced rates. We have actually paid off about Rs 65 crore and our long term debt position is very comfortable around Rs 500 crore. We have a large payback program ofcourse over the coming three quarters as well. On that front we are placed very well in these challenging market conditions.

Q: In this quarter, your engineering business has reported a decline in sales. In the coming quarter, can we expect a pick up in the engineering business by way of sales and EBIT performance? If yes, how much could be the growth?

A: In the first quarter, what traditionally happens is that a lot of clients actually push out orders from Q1 to Q2. We have to cover our fixed cost which is what explains the slight dip in EBITDA. I do believe that in Q2, we will have robust growth and we will come up to atleast what we have expected in our own internal Budget which is a return to growth.

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