Sugar EBIT margins to rise; cogen volumes up: Shree Renuka

Narendra Murkumbi, MD, Shree Renuka Sugars reveals that volumes from cogeneration have increased considerably. The company has begun de-emphasising trading segment and the proportion of trading is to become smaller in overall revenue mix.

Murkumbi expects sugar EBIT margins to improve to double-digits and the company is exploring all options to deleverage assets in Brazil. In an interview to CNBC-TV18, he said, "Interest costs are expected to decline going forward and currently, no talks have been initiated on sales of cogeneration assets."

The company's debt has reduced to Rs 2,980 crore in Q3 from Rs 4,300 crore with refineries running at full capacity and current refinery margins ruling at Rs 2 per kg.

Below is an edited transcript of the interview on CNBC-TV18

Q: The volumes in the domestic market this quarter were pretty good, but investors were probably expecting margins to be a little higher. Do you think the margins were affected by the fact that you sold more in the refinery segment due to the mix?

A: With both refineries operating and output being about more than twice of total production from cane, the margins will be lower we will have a lower but a much higher volume. We were also affected by the current year's cost of cane which is much higher than last year during the quarter. So the profit is very small in the cane-sugar segment.

There has been a considerable improvement in the co-generation area where the output of power has more than doubled over the previous year. Going forward, I do expect sugar margins to improve as the production season moves into the off-season period.

Q: EBIT margins in sugar were just 3.5 percent, where do you expect it to move up to over the next couple of quarters?

A: I think there will be an expansion in margin both in the refinery as well as the milling segments and it should come close to double-digits.

Q: There was a slippage on the trading front. For the calendar year, what do you foresee in terms of revenues from trading side? How much of that would translate into margins?

A: As a strategy now, we are deemphasising the trading segment. A lot of this trading is also incidental. We trade raw sugar which is shipping to our refineries and for logistical reasons, we sometime trade some of those cargoes. So, we do not have any target for trading and it would continue to constitute a reduced part of the overall revenue-mix.

Q: Where does your debt-level stand at the end of this quarter and are you either monetising or selling assets in order to help alleviate debt?

A: There has been a continuous reduction in debt right from the March quarter where our domestic debt stood at Rs 4,300 crore. This quarter we closed at below Rs 3,000 crore i.e. at Rs 2,988 crore, despite having inventory of more than half a million tonne. There will be a corresponding decrease in interest costs in the coming quarters.

In Brazil, we are exploring all options to deleverage spin-off assets. We were not successful in 2012. It was not for want of trying. We do hope that given better industry fundamentals in 2013, increase in power prices in Brazil which have more than doubled in the last three months as also better fundamental for ethanol in Brazil and very positive policy moves by the country in the last week, to have a better chance of being successful in the next few months.

Q: No talks have begun again afresh on the sale of cogeneration assets?

A: As of now we have nothing firm. If there is anything, obviously we will make an announcement. However, I just want to emphasise that we will be trying again this time with a fresh set of bidders and hope to deleverage in the next few months.

Q: Can you reveal the details of the business mix? How much do you expect to sell on markets versus refinery and realizations in the market versus the refinery segment?

A: Our refineries are currently running at close to full capacity and rolling out 1.6 million tonne a year. We are currently exporting from our Kandla refinery and sell sugar Haldia refinery to the domestic market. Current margins are in the range of about Rs 2 per kg which is about 7 percent in margins.

Q: What is it that you foresee from the global market? How would that impact your Brazil operations?

A: I think global prices have a strong support because the ethanol blend in Brazil has been increased from May 1, the gasoline price has been increased. So, we expect the ethanol demand to rise. Sugar prices are now in parity or in fact at a small discount to ethanol. So, a larger product mix this time will go to ethanol rather than sugar, thus reducing the surplus.

On the upside, we do not see any major surge because the overall global supply is in surplus. In 2014, we expect production in high cost countries to reduce rapidly but for 2013, sugar prices will remain stable ranging from between 18 cents to about 22 cents throughout the year.