With no levy quota or monthly releases to help mills sell their entire output, factors like location, sugar productivity and quality will begin to matter, says Narendra Murkumbi, Vice-Chairman and Managing Director of Shree Renuka Sugars. Business Line caught up with him in Mumbai to discuss decontrol.
With the industry decontrolled in April, how do you view the next one to two years for the sugar industry? How will players cope? Will fragmented capacities be consolidated?
April 4, 2013 was a watershed day for this business. There will be an immediate effect on some aspects of the industry, but there will be many factors that could play out slowly. We have seen in other industries that it is impossible to say immediately after deregulation who will be the winners and who the losers over the long term; but there surely will be winners and losers.
Sugar is a very big industry with a turnover of nearly Rs 1 lakh crore at the wholesale level. Decontrol will change the way companies compete. The immediate benefit obviously is in terms of market prices for levy sugar. The last of the levy sugar was despatched last week. From now on, State governments need to procure sugar from the open market. In fact, some of them have already started floating tenders. The freeing up of levy quota will translate into Rs 2,500-3,000 crore in additional revenues for the industry annually at current prices. Five years ago, the number would have been much smaller, maybe Rs 500 crore. The number has expanded as the gap between levy price and market price of sugar has widened.
The other change is to do with free market forces. Earlier, the release mechanism ensured that every mill that produced sugar got to sell it in the market. Everyone got the same opportunity to earn revenues; all competition was based on efficiencies and costs. Now, generating revenues will not be automatic, you have to work towards it.
The third trend is the preference for quality. Earlier, even the worst quality sugar would get sold by the end of the month because every producer had a quota. Now, consumer preference will make sure that only the best quality sugar will sell.
Will decontrol aggravate the volatility in sugar prices between the peak and the lean seasons for production?
Yes. That is why risk management will be important. The futures market will play a big role in this. We are in dialogue with the regulators about this. You cannot have a Rs 80,000-crore turnover in the sugar industry with sugar futures trading stuck at Rs 60 crore.
Will producers with the refinery model benefit from this change as they can export anysurpluses?
I feel that the sugar market is always in surplus, during every production season, from December to April. If a country consumes two million tonnes of sugar a month and produces 26 million tonnes a year, you should be able to export during production season and import during lean months. The decontrol has made the import-export policy much simpler. As a country, if you needed 26 million tonnes throughout the year, why should you carry it on your back, literally, for so many months? Why not export it and save carrying costs? I don’t look at India as an occasional exporter. It must transform into a regular sugar exporter. We can always import when there is a scarcity.
This is especially true because August, September and October are the lean months for production, but peak months for sugar purchases.
How important will the location of a mill be in this new order of things?
Very important, for two reasons. One, location determines whether cane prices are impacted by the SAP (State Advised Price) announced by the State government and what formula is used to fix them. In Uttar Pradesh and Tamil Nadu, the State Government announces prices. In Gujarat and Maharashtra, pricing is completely based on the Centre’s ‘fair and remunerative price’ concept. In Karnataka, we have a new progressive Bill which will provide for a revenue-sharing formula between farmers and mills. If farmers begin to get a share of sugar and by-product realisations, you will find greater alignment of interests. Cane pricing will be more transparent.
The second factor is that productivity varies sharply based on location. Sugarcane productivity is a function of yield per hectare as well as recovery rates. The number of tonnes of sugar produced per hectare, which is a good metric to assess this, is very high in North Karnataka and Maharashtra, at 12 tonnes per hectare. Tamil Nadu produces about 10 tonnes. The number is lower in UP and very low in Bihar. The question is can mills compete from locations with low levels of productivity?
Many of the listed sugar companies in India are in North India. They will have to re-align to this, isn’t it?
Yes. The industry now needs to think about issues like sugarcane research, new seed varieties, productivity and so on. This is where new capital needs to be invested, not in creating manufacturing capacities. I think we have sufficient sugar processing capacity now. We have the capacity to produce 31 million tonnes, which is slightly in excess, in my opinion, given the cane area available, irrigated area and how much cane can be planted. Sugar production has been stagnating at about 25-26 million tonnes in recent years.
What is your expectation of cane plantings in 2013-14?
We expect plantings of about 4.8 million hectares this season. Last year the number was 5.2 million. Water shortages are reducing plantings in Maharashtra and Karnataka.
What is the progress on ethanol blending?
Oil companies had called for bids from domestic sugar companies in January. They received valid bids for about the half the quantity they required. But only half of that quantity has actually been ordered.
I think we should make maximum use of all the available ethanol for fuel blending. After all, ethanol is a renewable energy product that can instantly replace petrol without any modifications to vehicles, etc. You save Rs 10-15 per litre. Sugar producers have also moved away from a system of fixed pricing to a tendering system where we put in independent bids. Usually, generating energy from renewable sources is much more expensive than generating it from fossil fuel. But in ethanol, there is a happy situation where renewable energy is available at less than the landed price of fossil fuel.
Shree Renuka had this unique model of farmers owning shares in the listed company. What else have you done in terms of corporate social responsibility?
Yes, we do have a base of farmer shareholders. But the other activity we don’t talk about much is that we have also transferred some shares to a trust – Shree Renuka Sugars Development Foundation – which is actively engaged in two activities. We have started up three CBSE schools in Belgaum and Gulbarga, where children of our employees and farmers attend school. I can confidently say that these schools are just as good as any CBSE school you will find in the cities. We also run industrial training colleges for enhancing the employability of young people.
In healthcare, we offer out-patient diagnostics to the rural poor in the form of ambulances, health camps and diagnostic centres that help people in these areas access better medical care. Of course, we have focussed these activities mainly in areas where our mills are located.