Interesting interview by Mawana Sugar mgmt

Even after the partial decontrol of sugar about two years ago, mills continue to be under pressure. Mills are forced to pay a high price for sugarcane to farmers and a series of measures taken by the government is not helping. Mawana Sugars promoter Siddharth Shriram tells Dilip Kumar Jha that till the Rangarajan committee formula, which proposes linking cane pricing with final product prices, is implemented, the industry's woes will persist. Edited excerpts from the interview.

Sugar mills in Uttar Pradesh are badly affected. How do you view sugarcane pricing in the state?

The Rangarajan committee formula which ensures 75 per cent of sugar revenues to farmers and 25 per cent to millers is a welcome design. However, the UP government, which has traditionally announced cane prices as state advised price (SAP), has not accepted this formula. It prefers to have a situation where it can decide cane prices, for whatever reason, without reference to sugar prices.

The Centre has taken measures to improve the situation. Will these measures help turn around the sugar industry?

The Centre is trying to increase the prices of sugar by organising exports. While the intention is good, it might not be possible within the confines of the World Trade Organization. If it is possible, will the mills be asked to make up the losses on the export price? Why should this be, especially since cane prices have been artificially determined by the state government?

Many mills, such as ours, are unable to access the central government's excise loan which was to be interest-free for a number of years or for participating in the Rs 6,000 crore loan that the government has given only to pay farmers (this loan will have to be serviced in future years, after the first year). This leaves us in a pretty poor state. The government comes out with relief measures too little, too late.

What is the way out for companies?

Having announced a high price, the state government is reluctant to reduce these for obvious electoral purposes; it cannot reduce the price farmers will get. In this case, who will bear the burden of the difference between cane prices and sugar prices, which until a month ago was a negative 30 per cent (about Rs 6,000 a tonne)? If the government wishes to give subsidy, so be it. That is their political business. However, the industry should only be responsible for 75 per cent of sugar prices to farmers. Most of the balance sheets of sugar companies are in poor shape. Some that have more power or ethanol for sale are in a better shape. Others which run old plants, and have a higher cost of production, are in a pretty serious shape.

What is the solution?

The Rangarajan Committee formula with a proviso to make payment for sugarcane in three tranches would work. The miller would pay the first tranche of about 25 per cent within 14 days of purchase of cane to the farmer. Forty per cent would be paid about three months later when some of that sugar is sold, and the balance would be paid by the end of the sugar year.

This has the benefit of reducing interest costs for millers as we will not have to take loans from the banks who in any case are reluctant to give loans under the circumstances.

High sugar price is really a price signal for the farmers to grow more cane. A lower price will balance the economics between sugarcane and other crops and the farmers can decide which way they should go.

What about the mills? Can there be a win-win solution for both farmers and mills?

It will take at least two-three years of high sugar prices to repair the balance sheets of companies, so the government should implement the Rangarajan Committee after two years from this season. The farmer will get two years to decide whether he wishes to grow sugarcane or any other crop. In the next two years, the central and state governments could make up for the losses that are likely to accrue. Thereafter, with the linkage of sugarcane prices and sugar prices, we will not need any further government intervention.

http://www.business-standard.com/article/companies/sugar-cane-prices-should-be-linked-siddharth-shriram-115102300019_1.html

Hi Anil,
Still don't see the xmind format, only see the pdf. Can you recheck please.

Regards
Raja

Highlights and concerns:

1. Lactose started as contract manufacturer for Kerry in 2011 where the capacity was increase 10,000 tonnes which is mostly taken away by Kerry.
   o Charges are on cost plus basis
   o Utilization as of now is c. 6,000+ tonnes
   o Probably next year utilization level will increase to 100%

View: Strong visibility, but concerns around customer concentration. It is understood that Kerry wants Lactose to set up additional capacities for lactose. Management is currently focussing on Lactulose, which will enable them to reduce concentration on Kerry.

1. Second division: Pharma (Formulation) – Does contract manufacturing for players like Sanofi. These products are premium products where 80% products are export and 20% used locally.
   o Oectan (100% manufactured by Lactose) – Sanofi has shut down their operations in Turkey and now they source from Lactose India. Oectan is INR 100crores for Sanofi with INR 40crores or profit.
   o Though there is concentration risk, but it is less likely that Sanofi will cut short its contract with Lactose to the the approval process / formalities for assigning new capacities for manufacturing

2. Lactulose – Claims to be the largest in India post commissioning of new plant
   o Raw material is Lactose, so in-house lactose acts as supply for Lactulose plant
   o Expect to clock INR 60- 70 crores of turnover in next 2 years

View: Company has incurred capex through creditor funding / long term loan. equity requirement was brought in by sponsors.

Queries:
1. Management's ability to market new product - Lactulose; this is different as compared to its tradiitonal client driven product segments including lactose and formulations.

1. Ability to service debt in case of delay in take-off of new project

Disclosure - hold small quanitites

Superb sunil..I subscribed to this long time ago. I thought this was provided by bse :-)..
Many Thanks