Govt incentives to aid sales; expect better H2: Triveni

To help the cash-starved sugar mills and to assist reduce their debts, the government on Wednesday announced a production-led subsidy of Rs 45 per tonne for sugarcane farmers. This along with recent initiatives of the government, like excise duty waiver on ethanol and minimum export scheme, will aid the sugar industry's growth, says Tarun Sawhney, Vice-Chairman & MD, Triveni Engineering & Industries. Speaking to CNBC-TV18, Sawhney says the cost of production currently is Rs 34 per kilo whereas the sale price is Rs 27 per kilo. This gap will be filled by the government’s subsidies, he adds. He expects a positive second half for the sugar industry in comparison to the last year. However, he does expect some pressure on sales. Companies that export sooner, will be able to improve prices faster, he adds. Last year, the UP government had provided subsidy of Rs 286 per million tonne. In the current year, the state government will need to bridge the gap between Centre’s subsidy and the state’s decided rate, he says. Below is the verbatim transcript of Tarun Sawhney’s interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.Sonia: It is encouraging to see the UP government follow through on the cane subsidy but can you just tell us how does this help a company like yours? What is the amount on an absolute basis and would you be expecting more?A: The subsidy that was announced yesterday was from the central government. This is the first time in history that the central government is directly going to support the sugarcane famer. This is a production linked subsidy; of course you have a minimum export quantity that each mill will have to undertake and provided that each miller does that you will receive approximately Rs 4.5 per quintal of cane which will be paid directly to the farmer. Just to clear this up, it is a subsidy from the central government and not from the state government. Now, the central government has done several very important things over the last few months. They have announced an excise duty waiver on ethanol, they have announced this minimum indicative export quota (MIEQ) which is this minimum export scheme which every miller has to undertake and a host of other factors. All of these together are very important. The sooner this quantity gets exported, between 3.2-4 million tonne gets exported from the country, the faster we will see some rise in sugar prices in the country. I anticipate that the price rise will be between 4-6 percent at the very maximum from current levels. With that type of rise I think that state governments for example in Uttar Pradesh will also have to play a role in terms of providing an additional subsidy through the sugar millers in order for us to breakeven.Reema: You are expecting additional subsidy coming in from the state government of UP as well?A: The state advised price in Uttar Pradesh is yet to be announced and we are all eagerly anticipating it. The start of the season is pretty much underway, a few millers in Uttar Pradesh have started with a bulk are yet to start and this is typical, this is no different from previous years of course. It is around about this time that the UP government does announce a price. One is anticipating that the subsidy that the UP government announces is greater than what they paid last year and last year as I am sure you would remember, the UP government made an extremely bold move, a very positive move by paying Rs 28.60 per quintal directly to sugarcane farmers. Sonia: How much of subsidy are you expecting this year?A: It is very tough to tell because it is the government’s decision but I think that the Uttar Pradesh government is expected to take care of the gap between the central government determined fair and remunerative price (FRP) and the state government determined state advisory price (SAP). So, whatever that delta is, I think that is the expectation by the industry that the UP government will take that upon its shoulders. Reema: Purely on yesterday’s measures which were announced by the central government providing that Rs 4.50 subsidy per quintal which is linked to exports, how would a company like Triveni benefit? Any number that you could help us with? A: I think for Triveni, our minimum export quantity is 75,000 tonne. So, for us to qualify for that subsidy we will have to export approximately 60,000 tonne. Exporting this quantity will incur a substantial loss because at this point in time global market prices are lower than domestic prices. So, we will incur that kind of a loss and we will receive a subsidy from the government. At this point in time the loss incurred is approximately Rs 3 and so if we were to export the entire quantity right now we would probably breakeven with the subsidy given by the government. However, having said that, as time elapses I think that this loss for export will rise from about Rs 3 to Rs 5-6. It is already about Rs 5 for raw sugar, it is about Rs 3 for white but all of this will rise as time elapses. So, I think companies that export quickly will be able to save money or breakeven on this export. However, companies that actually wait may suffer and may incur a loss. Reema: So all it would help you do is mitigate your losses? A: That is correct.Sonia: In terms of revenues for the company itself in the quarter gone by you made sugar revenues of around Rs 346 crore and an EBIT gain of about Rs 30 crore. For the second half of the year can you give us any ballpark numbers on what the sugar business revenues and EBIT will look like? A: I think there is going to be certain amount of pressure in terms of sales. So, I think revenues will certainly have an uptick. I think across the country there is great pressure on the industry to clear stocks and to save interest. So, from a revenue front, there will certainly be an uptick.As I mentioned, the export that the central government has put very front in center on the agenda is extremely important. If this quantity is exported quickly, we will see some uptick in sugar realisations across the country and which will have an impact on EBITDA margins for sugar companies. So, I am certainly positive for second half (H2) of this year that we will certainly fare and the industry will fare better than last year. However, there are wheels within wheels and we have to make sure that as a responsible member of the industry that this export does take place and we support the central government agenda. Reema: You are saying that even if the country does manage to meet its export target, it will help in reducing the domestic surplus but the price rise would only be 4-5 percent. So, that is not going to help too much. Also if you could tell us what is the current price of manufacturing as well as the kind of realisations so we get a sense of what the loss is? A: Last year, the average price for sugar in Uttar Pradesh and take Uttar Pradesh as an example, without the subsidy was approximately Rs 34 per kilogram – that was the cost of production. The sale price as of today is about Rs 27 per kilo. The gap between that the state government did give some subsidy and so you do have a multi rupee loss per kilo even today at this point in time. Now, a lot of that of course has gone into the results and has been accounted for. Going forward, I think we have started the new year, the new cost of production is yet to be determined because we don’t know what the state advised price is. I think we will know in the next few days and we will be able to give you a very solid and robust answer in terms of what that delta would be. Sonia: Coming back to your own business you have seen an improvement in your distillery business. The revenues were up quite a bit in this quarter gone by. What is the expectation for the latter half of the year?A: I am very happy about the growth in the distillery business. I think going forward with the excess duty waiver we will see enhanced profitability in the distillery business if Triveni Engineering. Clearly the incentive is for us to setup incremental capacity and additional capacity as well to support the ethanol blending program on behalf of the central government. I think the agenda is fairly clearly in the years forward. One needs to setup more distillation capacity and that incremental revenues and profitability from this line will certainly offset any in the sugar market. So, we are gearing up to expanding this capacity over the coming years and for the next half year our quantity of production will be mainly focused on ethanol at least to the tune of 90 percent. Reema: You are in constant conversation with the governments, both center as well as state. Give us a sense, any idea of what the state advised price of sugar could be for this coming season, you said it is going to be fixed anytime now, give us a sense of what it could be?A: The industry’s hope, the association’s hope and we have written to the government and we have been speaking to the government for some time now is that the state government actually takes on the gap between the central government determined FRP which is Rs 230 per quintal for this coming season and the SAP. Now, last year the SAP was Rs 280. It is important to remember that as of November 1 sugar prices in Uttar Pradesh were Rs 27 per kilo whereas a year ago they were Rs 31 a kilo. So given that kind of an environment we have urged the government not to look at any type of increase and to look at setting of sugarcane prices at a very realistic level and an affordable level for the industry. With that having being said, if the state government actually bridges the gap between SAP and FRP, I think that is part of the solution. Of course there are other measures and expectations as well with respect to first payment and installment so that very farmer does get paid and does get paid on time and a certain amount of waiver of taxes and duties that are levied on sugarcane which the government has been giving for the last few years. So, I expect that this year it will be no different and we do expect that waiver.