Is sugar in a sweet spot?

Prices will remain in the same range, between ₹3,600 and ₹3,700 per tonne, says Vijay S Banka

Despite tight regulatory control, sugar companies, especially in Uttar Pradesh, have witnessed a revival in the last two years. Vijay S Banka, CFO and Whole Time Director, Dwarikesh Sugar, shares his views on what lies ahead for the industry.

The last one year has been good for the sugar industry, with prices moving higher. What is the government’s stance with respect to sugar prices?

The sugar industry went through a challenging phase over an extended period in the past, mainly due to excessive supply. In Uttar Pradesh, particularly, companies were negatively impacted due to successive increases in cane prices.

This was the case from 2007-08 to 2012-13, as a result of which there was also a big gap between the Central government’s regulated price (FRP or fair and remunerative price) and state advised price (SAP).

This also coincided with capacity creation between 2004 and 2007 because the Mulayam Singh government had announced a policy wherein, if a company invested ₹500 crore in capex, it would get back the ₹500 crore over the next 10 years.

In the past, the immediate response of the Centre if the sugar industry faced problems was to give doles such as interest-free loans to help the industry pay the cane arrears.

But since 2014-15, a different strategy has been adopted. It was felt that the basic problem with the industry was the production surplus, so exports were made mandatory.

That helped companies get rid of 1.6 million tonnes (mt) of surplus stock and cane prices headed higher thereafter. This also coincided with deficit sugar production globally, so sugar prices have been moving higher since then.

Sugar prices bottomed in August 2015 and have been rallying since the end of 2015 and early 2016. But over the last many months, prices have been range-bound at ₹3,600-3,700 per tonne.

This is a healthy price where efficient sugar companies can make a decent amount of money. The testimony to that is the liquidation of sugarcane dues in UP. There wasn’t too much cane arrears in 2016-17.

Yes, the government has taken some steps, such as importing sugar, whenever there was fear that prices could flare up. But if you see the quantum of imports allowed, it is small. It helps discipline the players connected to the industry such as traders, but does not impact prices substantially.

But isn’t this the direction intended by the government?

Sugar production was really low in the 2016-17 season; we had 20.2 million tonnes in that season mainly due to the unfortunate drought in Maharashtra, Karnataka and Tamil Nadu.

We started the season with opening stock of 7.7 million tonnes, there was 20.2 million tonnes of production and with some imports, availability was 28.5 million tonnes. Consumption was 24 to 24.5 million tonnes that translates to closing stock of 4 million tonnes — equal to consumption for two months.

Historically we have been used to higher stock levels. The present stock levels are low. Whenever there have been concerns of price flare-up, the government has been quick to allow imports at reduced import duty. Since prices are moving sideways, there is really no cause for alarm.

The imports are also being done in a calibrated manner and are mainly targeted at the southern States, where there has been lower output.

In Maharashtra too, production has been affected by pest attacks. So will there be further imports?

Let me give you a break-up of the estimated production of 25 million tonnes (mt) for season 2017-18. Maharashtra is expected to produce 8 mt, 10 mt will come from Uttar Pradesh, Karnataka will do 2.5 mt and Tamil Nadu may be 1 mt or even lower. Last year, Maharashtra produced only 4.2 mt, so there is going to be a revival in output in Maharashtra.

With decent production estimated in Maharashtra, the South will not face too much shortage as sugar can move from Maharashtra to down South. So, both sugar availability and sugar prices are going to be reasonable across the nation this year.

How strong is the linkage between domestic and international sugar prices currently?

The global picture does have impact on sentiment but we are largely insulated from international sugar prices.

For instance, when international prices were at 22 cents per pound, domestic prices were around ₹3,600 per tonne. Now international prices are at 14 cents but domestic prices are at the same level. Unless the government decides to import or export, there is no international trade in sugar.

What is the outlook for prices, going ahead? Do you think these kinds of interventions will continue to cap prices?

My view is that prices will remain in the same range, between ₹3,600 and ₹3,700 per tonne, at least over the next one year or so.

We open the season with 4 million tonnes of stock, both production and consumption is expected to be around 25 million tonnes, so we close with similar closing stock numbers for 2017-18. So prices will also remain in similar range, which is all right for efficient sugar companies.

UP increased the state advised price last week. Do you expect any increase in future?

I don’t expect any significant revision in the SAP hereon. One, it is learnt that the Centre wants the state of UP also to gradually move towards fair and remunerative price and then to linkage in line with the Rangarajan committee report.

But in UP, farmers’ yields have become a lot better over the last few years due to adoption of better technology; the sugar industry is also actively involved in this.

There is this variety developed by the Coimbatore research and development institute, C0238, that has revolutionised sugar yields in UP.

Yields have improved nearly 25 to 30 per cent. This is an early maturity variety that gives good recovery also. This variety has also helped in improving the recoveries of sugar mills. It is thus a win-win proposition.

The UP sugar industry has changed for the better over the last few years, at the farmer level as well as the company level. The government is more focused on increasing the income of farmers in a more sustainable manner rather than give sharp hikes in SAP that can again lead to cane arrears.

Are there any new capacities coming up in the sugar industry?

No. This is a case of twice bitten, many times shy. Most industry players have become wise. They are using this good phase to clean up their balance sheet, liquidating debt, improving efficiency at the plant level.

In our company we had long-term debt of ₹301 crore in FY16. As on date, we have debt of ₹76 crore and by 2018, we expect to become long-term debt free.

We have done some capex, but those were only to de-bottleneck the operations and in adopting latest technology with a view to enhance efficiencies.

How did you manage the recovery rate of 11.78 per cent , what’s the average rate of recovery for you?

We have three plants. In the first plant we had recovery of 12.34 per cent; this is the highest in North India and across the country, it is the amongst the highest recovery rate. This was in Dwarikesh Nagar Bundki plant. The second plant had recovery of 12.11 per cent and third plant 10.89 per cent.

We managed the higher recovery through use of high-yield variety of sugarcane, C 0238. Better logistic management was another reason.

Ideally, sugarcane should be crushed 24 hours from harvesting. This is not always possible but we tried to crush in the earliest possible time.

The third factor is plant efficiency. Our process losses have been the lowest in the country.

In the last two years, we have also had conducive climatic conditions that have helped in improving the recovery — cold and wintry nights and some sunshine during the day in wintry spells.

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