Shree Renuka Sugars eyes debt reduction; turn profitable as soon as possible

Confirming the news that Wilmar Sugar would be infusing around Rs 813 crore into Shree Renuka Sugars via convertibles at Rs 16.27 per share., Managing Director Narendra Murkumbi told CNBC-TV18 said the main intention behind this to reduce the debt of the company.

The standalone debt currently is around Rs 3,600 crore and consolidated is around Rs 9,700 crore. Post the deal, it is expected that the India debt would reduce to Rs 1,500 crore (standalone) in addition to about Rs 580 crore of 0.01 percent interest coupon NCDs, said Murkumbi.

He further added that that the total debt would shrink to around Rs 2,080 crore of which Rs 1,500 crore will be regular interest paying debt.

Interest costs has been the problem area for the company and post this restructuring it is expected to fall to Rs 200 crore from Rs 400 crore, said Murkumbi.

The target is to turn profitable as soon as possible and the idea is to grow the company.

He also clarified that in-principle everybody including the banks are onboard of this plan and as of now, there is no change in board or the management.

In the interview, he also explained the exact restructuring process and stake holding post that.

He said, the fully divested stake after conversion of the CCPS — Wilmar will own about 38 percent, the banks will have anywhere between 25-27 percent and Murkumbi family stake will be down to 13 percent.

According to him, whenever CCPS are converted there would be an open offer.

Below is the verbatim transcript of the interview.

Anuj: Can you explain the deal structure because the share capital is going up many fold from Rs 185 crore to Rs 2,500 crore?

A: The bulk of the increase is because we are currently issuing convertible but compulsorily convertible preference shares (CCPS). These are being issued at the full face value at Rs 16.27. When these are converted eventually into regular equity, this will be done at a face value of Rs 1 and a premium of Rs 15.27 per share.

Therefore what you are seeing as an increase in authorised capital is mainly to accommodate the preference share. It is not a dilution of the common stock.

All told, if the debt restructuring package goes through as envisaged between Wilmar and the banks, the total equity of the company will roughly double from the current levels.

Latha: Now you have 95 crore shares, it will become around 200 crore shares?

A: Slightly less than 200 crore shares. Roughly double of the current share capital.

Varinder: Simple questions from my side, one, there is no open offer in this deal, it will only happen after the conversion happens?

A: That is right, right now it is invested as convertible instrument and as per Sebi rules these are triggered on conversion and that is expected after the debt restructuring exercise is complete which we think will take about six to seven months.

Latha: They get converted after six months, these convertibles, the Wilmar convertibles?

A: I suppose that is really their option and also the banks priority on that, but basically I would expect it to convert earlier rather than later.

Varinder: What happens to your stake, I am just interested in are you, Murkumbi family moving out of Renuka Sugars because upon conversion of all this, Murkumbi family’s stake will come to between 10 to 13 percent and Wilmar’s stake will go higher from 27 percent to 45 percent plus. Is this an integration?

A: Post dilution, fully diluted stake after conversion of the CCPS would be about Wilmar will own about 38 percent, the banks will have anywhere between 25-27 percent, and my family will be down to about 13 percent. So, we will be the three largest shareholders; at that time we will decide about the future management. Obviously at the moment there is no change in equity stake and business continues as usual.

Latha: Banks will not want to keep the shares with them, are they in agreement with Wilmar to sell it to them or could they look for another buyer altogether?

A: I think banks, the shares that are issued on a preferential basis as part of restructuring are locked in for one year. So, there is no agreement as such on that point. I would expect that to be sold in the market whenever banks want to exit.

Varinder: The shareholding pattern you are suggesting after the conversion is without taking into account an open offer?

A: Whenever the CCPS are converted, there would obviously be an open offer.

Varinder: Does that mean that there will be change in the board, change in the management structure also since now Wilmar will be holding the maximum shares in the company?

A: I think these are things to be decided by the main shareholders at that time. At the moment, it has been decided that the same management structure will continue, the same joint venture agreement continues.

Varinder: What happens to the debt, the India debt and the global debt?

A: That is in fact the crux of the deal. As of our March balance sheet, we have a total standalone debt of Rs 3,630 crore on our balance sheet as per our annual results, annual accounts. The consolidated debt is about Rs 9,700 crore. Post this deal, we expect, and this is of course a forward looking statement, but based on a successful completion of the debt restructuring scheme proposed along with this investment, our India debt would actually fall to about Rs 1,500 crore from Rs 3,600 crore in addition to about Rs 580 crore of zero or 0.01 percent interest coupon NCD.

So the total debt would shrink to about Rs 2,080 crore of which Rs 1,500 crore will be regular interest paying debt. So you would expect the interest cost of the company to be less than half of what it is today.

On the consolidated basis, we are also expecting a divestment of one unit in Renuka do Brasil S/A (RdB). Post that the total consolidated debt should drop to somewhere around Rs 3,000 crore level.

Varinder: Is that happening?

A: We have an auction. September 4 is the auction date. We believe we have three serious bidders for the asset. The deal with the banks in Brazil is that on the September 4 if we have a successful auction, then the debt will be taken care of from the proceeds of the sale of that mill and the other mill will be debt free.

Reema: How much are you expecting to rake in from the sale of this unit?

A: The banks have a target of raising about USD 250-260 million but that is basically the call of Brazilian banks based on what they receive in the auction. That money will go to them as a kind of settlement of their dues.

Varinder: Isn't that a very small amount compared to the entire global debt?

A: The debt in RdB is much more than that. It is close to USD 800 million. So, you will see a sudden shrinkage in our global debt because the rest is write off there. If you remember, we announced this some months ago, in Brazil the banks have agreed to take a 70 percent haircut on their debt.

Latha: What will be the price at which the banks will convert? Wilmar is converting at about Rs 16.27, does that hold for the banks?

A: Absolutely. I think in the interest of transparency, all new stakeholders will be at the same price.

Anuj: What is the game plan going forward, is this going to then become finally a Wilmar company, will Wilmar take over Shree Renuka at some point?

A: It is a question you should ask them. I think right now the intention is to run it as it has been running for the last so many years.

Varinder: What is your game plan?

A: Obviously with the leverage down, we are hoping to return to profitability as soon as possible. Obviously the idea is to grow the company. Beyond that I think it is too early.

Anuj: That is Wilmar’s call, but what is your call -- that is the important question, you have to sell for them to buy.

A: I already said what is there.

Varinder: Are you staying in the company or not for the long term in Shree Renuka Sugars?

A: Right now the focus is on this turnaround. As I explained the numbers to you, this is the key thing. Beyond that it depends on how successfully we transition in the next few months.

Varinder: There is no money invested or being put by you as a promoter in the company, in this entire restructuring?

A: No, I am not putting any money in this exercise.

Latha: Will you be in the black at the end of FY18?

A: FY18 is already underway and the outlook depends a bit on the weather, government import policy, etc. Our main problem is our interest cost. I think even last year we had an EBITDA of more than Rs 300 crore. The problem is our interest cost, so, if that is tackled, that is a huge step forward towards return to profitability.

Latha: How much will the loan fall to, the interest outgo fall to post restructuring?

A: We have interest cost close to Rs 400 crore now, it should fall by more than half of that post the restructuring.

Latha: Then with an EBITDA of Rs 300 crore you logically should be in the black?

A: Now you are asking me too many forward looking questions. I think the intentions are very clear, the amount of investment is pretty large. I think the debt restructuring plan is also I may venture to say is rather bold and comprehensive in its scope. So, let us hope for the best.

Latha: All parties have signed on, I mean the banks will convert?

A: The banks as you know have a very elaborate statutory process now under the oversight committee. However, I think in principle everybody is on board.

Varinder: Is there any change in the board with this fund infusion, restructuring?

A: There is absolutely no change in the board or the management.