Expect EBITDA margins to be constant: Shree Renuka Sugars

In an interview to CNBC-TV18, Narendra Murkumbi, managing director of Shree Renuka Sugars says the domestic sugar price is at around Rs 32.50 ex-mill in Maharashtra and about Rs 35 in the north. "Given that the next two years, this year and the next year, are going to be tight for domestic production, we do see prices taking a dip now in the peak of the crushing season. But we should see higher prices after January," he adds.

He expects EBITDA margins to be constant because in Maharashtra and Karnataka cane prices move in tandem with sugar prices. "We should expect a steady EBITDA margin," he asserts. 

Also read: Sakthi Sugars sees Rs 25-26 kg as 'comfortable price' band

Below is the edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee.

Q: There has been a lot of agitation in Maharashtra, has some kind of a pact been struck between the millers and the farmers?

A: I think the heart of the controversy is that the agitation was against the cooperative sugar mill, which formed the bulk of production in Maharashtra, are controlled by farmers. So, I would see there is an agitation in two groups of farmers and their leaders. It has ended. The crushing has started almost in every factory in the state. Cane price is higher than last year, in-line with the increase in the sugar price that we have seen in the last four-five months.

Q: What price has been agreed upon?

A: I think, including harvesting and transport, the total landed cost of sugar cane in the state would be about Rs 2,800-3,100 per tonne, depending on which region of the state. It is against an average recovery of about 11.5 percent sugar from sugarcane in Maharashtra.

Q: It seems production has also started picking up, particularly from states like Karnataka. Does it mean that sugar prices domestically may continue to see some kind of headwind or downward pressure?

A: No. Infact I think production is frontloaded. We have substantial production capacity in Karnataka. We have started the season earlier this year because due to the shortage of water, we believe that it will be very difficult to sustain the cane beyond January. So, the intention is to finish crushing by February at the latest and not stretch it into the summer month. I would think that we have a very short end season with a steep fall in production after January.

Q: What is the current price going at though in the domestic market? The concern seems to be, given what is happening with spot sugar prices and what you have agreed upon for sugarcane, there may not be much that millers make out of this deal.

A: Currently, the domestic sugar price is at around Rs 32.50 ex-mill in Maharashtra. It is about Rs 35 in the north. Clearly, these are very high levels, significantly higher than the world market also. Given the current sugar price, I think the cost of production in Maharashtra would be around Rs 30. Depending on your income from cogeneration and ethanol, it would be between Rs 28 and Rs 30 per kilogram.

However, given that the next two years, this year and the next year, are going to be tight for domestic production, we do see prices taking a dip now in the peak of the crushing season. But we should see higher prices after January.

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Q: What about international prices? Do you see weakness, going forward, even in global prices?

A: I think the world market has found very strong support around 19 cents, about three times in the last two months. We see a good demand both for white sugar and raw sugar in the world market. Second half of next year, there is a surplus, there is a big surplus in the world market. Prices could move down after March.

However, by then, we have to look at what is going to happen with the Indian crop in 2013-2014. So, while I see a surplus in 2013, which is primarily triggered by high cost production, increased due to high sugar price in the last two years, I do see a correction in global production for 2014.

Q: What does that do for your margins though, especially on the international operation side?

A: In local currency terms, the current sugar price, which is around 20 cents, is equal to about 24-25 cents last year. So, we are seeing similar kind of revenue in our Brazilian operations.

In India, obviously, I think our EBITDA margins should be constant because the cane price increases roughly equal to the increase in sugar prices. In Maharashtra and Karnataka, cane prices move in tandem with sugar prices. So, we should expect a steady EBITDA margin.

We expect alcohol prices to be higher here in India. Speaking particularly about Renuka, refining division is working at full capacity. That is the biggest positive point for us compared to last year.

Q: What kind of feedback do you expect from the state governments to the recommendations which have come in from the Rangarajan Committee? Do you see a large part of that being accepted or a stalemate presented at the end of this month?

A: I think there are three important parts. One, on the product side, there are two things. First is the dismantling of controls on local and international sales, freedom for mills to sell as much sugar as they want in the domestic market without these monthly sales controls that have been in place for the last 40 years. I think there is unanimity between state government, central government, the industry and even farmer’s organisations have supported this freeing up.

The second issue is regarding levy. I think in some states, a new procedure is recommended by the committee, which removes the burden from the industry and passes it on to the general budget, which is where it should be. There are some issues of procedure there where there could be some feedback for changes from the state government. But otherwise we do not see that also being opposed.

I think the third part is about sugarcane pricing and sugarcane zone area reservation for farmers with factory. I think this is the part, which will take some time, there is no unanimity on it. There is an opposition from a lot of state governments in terms of giving up their control on fixing the cane price. On the raw material side, I do not expect any progress in the near future.