In an interview to CNBC-TV18, M Manickam, Executive VC, Sakthi Sugars said sugar prices are unlikely to go up despite the threat of El Nino. Weather forecasters have said India should brace for a weak monsoon season as El Nino conditions are likely to develop, but before rains dry up, the ongoing wet spell will continue until June.
Meanhwhile, India Ratings has revised its outlook for the sugar sector from negative to 'negative-to-stable' on improvement in the credit profiles of millers based in South India from FY14 levels. It, however, says that UP-based mills may continue to struggle with higher leverage.
"For UP based mills, we could see that the profitability may not see as much of an improvement if we assume that 15-16 cents per pound prices prevail," Janhavi Prabhu, Senior Analyst, India Ratings told the channel.
Below is the transcript of Janhavi Prabhu and M Manickam's interview to CNBC-TV18's Ekta Batra and Sumaira Abidi.
Reema: There are reports that El Nino could favour the sugar sector. If that happens, we could see a production cut, which would result in sugar prices going up. Could you give us your thoughts on the same and the impact El Nino will have on the industry prices as well as production?
Manickam: Assuming that El Nino is on track, and the Indian monsoon gets affected, then we have to look at production cut. We have a lot of stock in hand. We may not have a crisis.
Sumaira: How much of a rise do you think we could see in sugar prices in that case? Is there any sort of a ballpark figure that you guys are working with?
Manickam: Our breakeven is about Rs 34, which I have been maintaining for long time. At current cane prices, our breakeven is Rs 34. We definitely need Rs 34. How much further it is going to go? I don't know because the world is oversupplied and there is enough stock in the country. I don't think it is running away.
Reema: What could be the extent of production cut that you anticipate as things stand now and how would the demand supply then stand at?
Manickam: Right now we have got Maharashtra and Karnataka supporting production quite a bit. What we expect is if there is a failure of monsoon then you could see drop in production maybe 1-1.5 million tonne.
Sumaira: You have recently upgraded your FY15 outlook for the sugar sector from negative to 'negative to stable' that you had earlier. What is this predicated on and how much of an impact are you sensing from the El Nino impact on the sugar sector?
Prabhu: The reason that we have upgraded our view on the sector to negative to stable from negative is because we sensed that southern-based mills are going to see an improvement in the overall operating profitability, especially in the sugar segment, which will see profitability in the range of 60 paisa to Re 1. This is considering the fact that for global sugar year 2014, we are seeing that the supply and the production—the global surplus is going to be in the range of around 5 million metric tonnes.
For the next year, which is sugar season 2015, because when we are looking at 2014 we are looking at typically two seasons to play with. So, in the second season of sugar season 2015 we could see that this global surplus is going to come down significantly and we also have industry sources which indicate that and because of which this is expected to provide support to international sugar prices in the range of 15-16 cents.
If you are looking at 15-16 cents of international sugar prices minimum for sugar season 2014 then in that case you could see that considering the cost of production as indicated for most Maharashtra based mills which could be around Rs 30-31 you could see an improvement in the overall profitability over there. However, as regards UP is concerned, we have assumed that the difference between the Fair and Remunerative Price (FRP) as well as the UP state advisory price (SAP) prices would continue to remain in the 33 percent range.
For UP based mills, we could see that the profitability may not see as much of an improvement if we assume that 15-16 cents per pound prices prevail. However, if there is an El Nino and the surplus contracts significantly then we could see a sugar price rallying of higher than this price. However, if you are looking at a price above 19 cents per pound internationally then that is when it would benefit the Indian sugar companies.
Reema: Janhavi has said, according to their study, South India-based mills will turn profitable in FY15, by say half to Re 1 per kilogram in FY15. Do you think it is likely?
Manickam: We will see the profitability coming back because I see the prices going above Rs 34. So, we will be profitable in FY15 from what it looks like.
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