Sugar prices are likely to stay firm over the next couple of years according to M Manickam, MD of Sakthi Sugars, who says production in Maharashtra and Karnataka might be down by around 4 million tonnes each this year.
In an interview to CNBC-TV18 Manickam says although currently the real problem is sugar supply shortage, elections in Uttar Pradesh will prove beneficial as the government there has been supportive of the industry and are likely to be more prudent on the matter.
For every Re 1 increase in sugar prices, the company’s earnings improve by nearly Rs 20 crore, he says. Currently, sugar prices are around Rs 34-35 per kilogram, which is the breakeven level for sugar companies and anything above this price proves to be profitable, he adds.
Sugar prices have risen nearly Rs 10 per kg from end of FY16 to now, so earnings for the current year should be fairly good, he says.
Below is the verbatim transcript of M Manickam's interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.
Anuj: Tide has turned for you quite remarkably over the last one year. How much inventory do you have right now and do you think this financial year could be record year in terms of profit?
A: We do not have much of inventory but we are seeing the reaction to the news that Maharashtra production is going down by almost four million this year - that's an estimate given by the government of Maharashtra. I also expect northern Karnataka will also lose, so we are definitely getting into a negative territory as far as sugar supply is concerned. Therefore, one will see tightness in the market for the next one-two years.
The world market today, we are looking at Rs 40 import parity and domestic market around Rs 33-34.
Sonia: When we spoke last it was on account of 20 percent export duty on raw sugar that the government had imposed. At that point there was a lot of talk that that could keep the upside on the sugar prices capped. What is the sense you are getting from here on over the next two-three months. What could the domestic sugar price be - the range?
A: It should go up to import parity. As I said last time, the government is trying to use 20 year old instrument. The basic problem is shortage of sugar and a mistake was made by not creating a buffer when we had surplus. However, that is the basic issue that the government has to face and when there is a shortage of sugar you will have to let the prices go up to the market level and even if you want import duty free sugar today, it should be at Rs 40. We are at Rs 34-35. I think they should allow the prices to move up so that at least imports can come in.
Anuj: You have always been a voice of sanity at times of exuberance. In 2017 we will have Uttar Pradesh elections. Do you think that will again come back as a bit of a risk factor?
A: The elections are not going to change the supply of sugar, rite.
Anuj: Yes, but in terms of political noise especially for the companies that operate out of Uttar Pradesh?
A: It will be a good time for UP mills. We will have to see whether there is some sanity prevailing in terms of cane pricing, but UP government has been supportive of all the state governments that you see in the country today, UP government has been a supporter of sugar industry because they have allowed the mills to pay something like fair and remunerative price (FRP) and the distance has been bridged by the government of UP. So I would think that they would be little more circumspect in keeping the industry on rather than putting a lot of pressure on the industry. We have seen UP react quite favourably.
Sonia: Your stock is up more than 200 percent in the last 12 months, as is the case with most of the sugar companies. So give us a sense of what the earnings could look like. You are sitting on a base of around Rs 800 crore of revenues and Rs 60 crore of profit for the year gone by. What could the growth be in FY17?
A: It's a speculative situation in the sense for every rupee of sugar price going up, our bottomline can improve by about Rs 20 crore but having said we do not know what the cane price could be, so we could probably lose a bit of that in the cane price. Therefore, ultimately we will look at much better earnings this year than what we have done earlier. So next two years, as I was saying, will be an opportunity for the sugar industry to clean the balance sheets, get ourselves back on track and make sure that we do not get into these kinds of cycle.
Sonia: You said for every rupee of sugar going up you will get about Rs 20 crore on your bottomline. How much have the sugar prices gone up between the end of FY16 and now?
A: The prices have gone up by about Rs 10 but our breakeven is Rs 34. So last year we were selling at Rs 24-26; we were actually making losses last year. At Rs 34, current prices we are at breaking level and anything above Rs 34 is when we will start seeing profit.
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