Bajaj Hindusthan Ltd

I. Global Scenario

Sugar is a widely traded commodity. On an average, about 70% of world sugar productionis consumed in the country of origin, and the balance 30% is traded in the internationalmarket. A part of the international sugar trade occurs under specific agreements(Preferential trade, long term agreements, etc.) that, in some cases include clauses onimport prices. As mentioned, around 30% of world sugar production is traded in the worldmarket. The Sugar prices in the international markets are of vital importance. Thedemand-supply position is the main factor explaining changes in international prices. Itis difficult to measure consumption; therefore, it is often estimated as the disappearanceof stocks. The best indicator for explaining changes in sugar prices is the stocks-to-useratio which encompasses the growth in consumption. There is generally an inverse relationbetween changes in the stocks-to-use ratio and prices. During the year 2009-10, weatherplayed havoc with crops across the globe which resulted in significantly lower output innumber of countries with Brazil, China, Thailand and Mexico being the most notable ones.The world production was 153.5 million tonnes as against 143.5 million tonnes last yearshowing 7% growth year on year. The consumption was at 155.1 million tonnes, therebyreducing the global stocks by 1.6 million tonnes and shown growth of 1.3% in consumptionand export. Stock availability as a percentage of consumption (stocks-to-use ratio) isdown by 1% at 13% from 14% of last year which is at lowest level in last 20 years. For theseason 2010-11, surge in domestic prices led to more plantations in large-scale producerssuch as Brazil, India, China, Australia, Thailand, Pakistan and Indonesia, with estimatesof 165.0 million tonnes of sugar production the market can be expected to swing back intosurplus in 2010-11. Being global demand is expected to rise in 2010-11, the surplus willnot be burdensome and at the same time is even welcome as stocks need to be replenished tobe at reasonable level. The table below summarises the country-wise production of sugar:

Table 1: World Sugar Production (MMT,Raw Value)

Source: USDA and CRISIL Research The following table illustrates the World SugarBalance :

Table 2 : World Sugar Balance (MMT, Raw Value)

Source: USDA & CRISIL Research, Company Estimates for 2009-10.

Global Sugar Price Trends

Year 2009-10 was a year of wide variations wherein raw sugar prices hit 29 year high inNew York in February 2010, from there had a sharp decline of about 40% till May 2010. Andagain rose by 45% during the period June to October 2010. This rise was due to adverseweather conditions forcing a revision in production estimates in key exporters such asBrazil, Australia & Thailand. With floods affecting production in China & Pakistanand drought affecting Russian sugar supply, these countries are expected to dig deeperinto the global trade for additional imports.

The movement of prices was as follows :

Source: LIFFE and ICE Sugar Consumption

Consumption, being the driver of world sugar economy, shows a slight improvement in percapita consumption of

Brazil and Asian countries.

II. Indian Scenario

India is one of the largest producer and consumer of sugar in the world. The Indiansugar industry has a turnover of around Rs. 70,000 Crore and is the second largestagro-based industry, next to textile industry. Indian sugar industry is highly fragmentedwith mills of average capacity of 3,600 TCD, where in internationally the minimum economicsize is around 7,500 TCD. Out of various models of business in this industry, Sugar -Molasses - Power and Sugar - Ethanol - Power are more prevalent.

The sugar production in Sugar Season 2009-10 outstripped the expectation owing tohigher than anticipated production in UP and Maharashtra. Towards end of the year 2008-09,there was about 1.4 months stock available in pipeline but during 200910, once the pricesstarted falling and also stock limits controlled by Government, the trade resorted to handto mouth buying leaving hardly any stock in pipeline. The actual release was of 20.8million tonnes but the consumption was around 22.5 million tonnes. India imported roughlymore than 4 million tonnes in Sugar Season 2009-10 to meet the demand.

In year 2009-10, cane acreage reduced by 2.1 lac hectares due to increase in minimumsupport prices (MSP) of alternative crops especially wheat and rice. As a result, Indiawitnessed lowest sugarcane produce of last five years at 278 million tonnes. However,better yield at 66 tonnes per hectare was a support to some extent.

Table 3 gives trends of Domestic Demand and Supply of Sugar.

Table 3 : Trends in Domestic Demand and Supply of Sugar

Source: ISMA, NCSF & CRISIL Sept10 report, Company estimates for 2010 and 2011 *Adjustment made as per Central Excise Certificate

The volatile trends of production and resulted Stocks-to-use Ratio are separately shownin below chart capturing the ups and downs making difficult for sugar mills to maintainmargins.

Industry Drivers :

The Performance of the Industry mainly depends on :

1. External factors

a. Availability of sugarcane

b. Sugarcane prices

c. Government policy

d. Sugar prices

2. Internal factors

a. Plant size and location

b. Plant efficiency

c. Value addition from by-products

d. Financial Management.

External Factors a. Availability of Sugarcane

The following table gives the annual area under cultivation and sugarcane production : Table4 : Area Under Sugarcane cultivation, Sugarcane Production and yield per hectare

Area under sugarcane has consecutively declined by 5% in Sugar Season 2009-10 and 15%in Sugar Season 200809. This decline was mainly due to crop switching by farmers onaccount of higher Minimum Support Price received by them for alternate crops. Yield perhectare has improved marginally from 64 tonnes per hectare to 66 tonnes per hectare. Table5 gives the annual state-wise area under cultivation.

Table 5 : Sugarcane - State-wise Area under cultivation ('000 hectares)

Source: CC Lucknow. ISMA, Company research

Area under sugarcane in Uttar Pradesh also has declined by 4% in Sugar Season 2009-10and 3% in Sugar Season 2008-09. This decline was mainly due to crop switching by farmerson account of higher Minimum Support Price received by them for alternate crops.

b. Sugarcane prices

Sugarcane is the main raw material in the production of sugar and accounts for around65-70% of the cost of production. Financial performance therefore has a high co-relationto cane prices. Any increase in the sugarcane price adversely impacts profitability.Minimum price of sugarcane are regulated by the Government and upper side by marketdemand-supply. The Central Government decides the minimum price called the Fair andRemunerative Price (FRP), which is the basis for minimum price to be paid by the sugarmills to purchase cane from farmers across the country. The FRP was based on therecommendations of the Commission for Agricultural Costs and Prices. FRP was fixed at Rs.129.84 per qtl. for sugar season 2009 -10 and is linked to a base sugar recovery of 9.50%subject to premium of Rs.1.37 per qtl. for every 0.1% increase in recovery.

Last year, Hon'ble Supreme Court empowered State Governments to fix sugarcane price forthe respective State. This price is termed as State Advised Price (SAP).

The Government of UP has announced SAP for the season 2006-07 which was beingchallenged in court of law and got revised in sugar season 2007-08 from Rs. 125 per qtl.to Rs. 110 per qtl.

In sugar season 2008-09 & 2009-10, SAP of Rs. 140 and 165 was fixed, which has alsobeen challenged in the court of law.

The FRP announced for the sugar season 2010-11 is Rs. 139.12 per quintal linked torecovery of 9.5% subject to premium of Rs 1.46 per quintal for every 0.1 % increase inrecovery. SAP fixed by UP State Government is Rs. 205 per qtl. for the same period.

c. Government Policy

Sugar being an essential commodity and having weightage (1.74%) in the WPI 2004-05base, is highly regulated industry wherein 9 different legislations controlling canepricing, external trade and control on sugar, molasses that can be sold in the openmarket.

Domestic sugar sales are regulated by the Central Government which decides how much amill can sell in the open market i.e. free sale quota and how much is to be released bythe mills for distribution through the public distribution system that is levy quota whichis presently at 10%. This levy quota was 20% till season 2009-10. For Season 2010-11 it isagain revised as 10% Levy & 90% Free. In view of SMP being replaced by FRP, the levyprice will also undergo a revision and now levy sugar price may be calculated by takingFRP as a base instead of SMP. Levy sugar prices are usually lower than market prices.Sugar sales are subject to release orders from time to time.

In anticipation of shortage of sugar perceived by the country, the government has comeout with slew of measures to contain the sugar prices from rising. These measures areallowing duty free import of raw sugar without export obligation, allowing duty freeimport of white sugar, imposing stock limits on dealers, wholesalers as well as industrialusers of sugar etc.

Few of such measures taken during the season 2009-10 are briefed below:

Cane and Sugar Policy

The Central Government has announced several policy measures during the year underreview as well as for the future. The salient features of the sugar policy measures are:

• October 2009: Levy sugar quota increased from 10% to 20% for the sugar year2009-10.

• November 2009: The Government of Uttar Pradesh banned import of raw sugar intothe State as well as its movement. Relaxed in April 2010.

• January 2010: Extension of export obligation period for advance authorisationsissued for import of raw sugar to March 31, 2011.

• February 2010: Set a weekly sub-quota within the free sale quota allocated tomills for selling in the open market this month. Reduced the stock-holding limit on bulkconsumers from 15 days to 10 days.

• March 2010: Extended the validity period for sale and delivery/ dispatch ofnon-levy sugar on weekly basis each by one week.

• April 2010: Increased the fair and remunerative price (FRP) of sugarcane toRs.139.12 per quintal for the year 2010-11, from Rs.129.84 per quintal in 2009-10. Relaxedthe norms of liquidating monthly free sale quota on weekly basis reverting to thefortnight quota.

• May 2010: Stock-holding limit on bulk consumers increased from 10 to 15 days.

• June 2010: Levy sugar price was increased nearly by Rs. 4 for the 2009-10season.

• August 2010: Stock-holding limits on bulk sugar consumers relaxed for 90 days oftheir usage from the 15 days limit announced in May 2010 and 10 days in February 2010.Permitted export of about 0.2 MMT of raw sugar that was imported by millers.

• September 2010: Allowed mills to meet their re- export obligations under ALStill March 2011.

• October 2010: Levy sugar obligation brought down from 20 to 10% effective fromOctober 1, 2010. UP state has announced SAP of Rs. 205 per quintal for the season 2010-11.

Ethanol Policy

The Government of India has reiterated its stand to

implement mandatory 5% ethanol blending with petrol. This is expected to result inbetter utilisation of the Alcohol business segment of the Company. The Cabinet approved aninterim price of Rs. 27 per litre of ethanol to be procured by the Oil marketing companiesfrom sugar mills for blending at 5% with petrol. This would be in place until a finaldynamic price, taking into account the prevailing oil and molasses prices is announced byan expert committee. However, there is no clarity when the ethanol blending programme willcommence.

d. Sugar Prices

In SS 2009-10, the average sugar prices were at decadal highs for most part of theseason mainly on account of higher cost of sugar cane and huge imports to meet the demand.

Initial estimate of sugar production during the crushing season 2009-10 was around 14.7million tonnes against annual consumption of around 22 million tonnes and due to this, theprices of sugar in the first half of the year upto February, 2010 remained high. Averagemonthly sugar prices were in the range of Rs 2950 to Rs 3800 per qtl. during this period.However, because of prices going high, with a view to check the inflation, the CentralGovernment imposed several restrictions such as fixing weekly restrictions on quantitiesto be sold and despatched, fixing stock limits not only for the Trade but also for bulkconsumers etc. At the same time, the production estimates also got revised and the actualproduction was 18.7 million tonnes. Due to all these reasons, the prices started crashingand went down from Rs. 32 per kg in March, 2010 to Rs. 26 per kg in September, 2010.

In the crushing season 2010-11, presently the production is being estimated as 24.5million tonnes and Government is also likely to allow export of sugar from the country.Due to this, the sentiment is positive and prices have already gone up from Rs. 26 per kgin September 2010 to Rs. 28 per kg in November, 2010. In coming months also, the pricesare expected to remain firm subject to actual production figures mainly in UP andMaharashtra and the Government policies.

a. Plant Size and Location

As with any other industry, size is of vital importance in the sugar industry. Largesize will enable mills to take advantage of economies of scale and reduce cost ofproduction.

Sugar plants need to be located in an area where adequate sugarcane is available. It isalso vital that the mill is able to attract a high percentage of cane for crushing out ofthe total cane grown in the area.

Sugarcane is bulky and also needs to be crushed as soon as it is harvested. Hence it isimportant that the plants are located close to cane farms.

b. Plant Efficiency

Sugar recovery is one of the major factors affecting financial performance. Even asmall increase in recovery level could have a significant impact on the profitability of acompany. Sugar recovery inter-alia depends on internal plant efficiencies, time taken bythe mill to crush cane from the time it is harvested, processing losses etc. Factors likedevelopment of infrastructure around the plant, maintenance of plant and machinery alsohelps in obtaining higher recoveries.

c. By-products

Optimal utilisation of by-products is another key variable in company performance.Integrated sugar mills which produce Bagasse, Alcohol and Power are more likely to performbetter than those which only produce sugar and sell Bagasse and Molasses. By opting for anintegrated model, mills earn a higher margin due to higher value addition and partiallymitigate risk arising out of a down turn in sugar business.

d. Financial Management

Sugar industry is highly working capital intensive. Sugar operations are seasonal innature. Crushing operations last for an average of around 125 days, whereas sale of

Table 6 : BHL plant capacities:

sugar is throughout the year. However, crushing duration varies across the countrydepending on cane availability etc. In UP for instance crushing is done around 150 - 160days in a year from October till April. Working capital is therefore required during thecrushing season and gets liquidated out of sales proceeds. Efficient working capitalmanagement lowers interest cost and improves profitability.

Capacities and Locations

BHL has 10 sugar plants having an aggregate crushing capacity of 96,000 TCD. Apart fromthis, BHL has 5 distilleries with aggregate capacity of 640 KL/day and also generatesabout 90 MW of surplus power.

Erstwhile Bajaj Hindusthan Sugar and Industries Limited (BHSIL) had 4 sugar plantshaving an aggregate crushing capacity of 40,000 TCD, a 160 KL/ day distillery and asurplus co-gen power of 15 MW.

Post Amalgamation of BHSIL into BHL, BHL has 14 sugar plants having an aggregatecrushing capacity of 1,36,000 TCD, 6 distilleries with aggregate capacity of 800 KL/dayand about 105 MW of surplus power generation.

The following table details individual plant capacities:

Ethanol Opportunity

In order to exploit the opportunity thrown open by Government of India decision toallow blending of Ethanol with petrol at 5% level, we increased our Ethanol productioncapacity from 60 KL/day to 380 KL/day and 160 KL/day in erstwhile Bajaj Hindusthan Sugarand Industries Limited.

The Company has been one of the largest supplier of Ethanol in country for blendingpurpose and had supplied a quantity of 151.9 million litres during last three years tender(2006-2009) to Public sector oil companies which is 26% of the total supply of 585 millionlitres during the period.

During the year 2010, BHL and group companies have quoted a quantity of 100 millionLitres almost 10% of total requirement of 1050 million litres of Oil companies duringSeptember 2010 - September 2011.

Government of India has fixed interim basic price of Rs. 27 per Litre as against lastprice of Rs.21.50 per Litre. The Company certainly sees big potential in Ethanol blendingprogram due to benefits attached to it like boost to farming / rural community, valueaddition to by-product of Sugar Industry Molasses, curb on pollution, less dependence onfossil fuels, cut of import bill, etc. As per the Bio-Fuel policy, Government has plans toincrease the blending percentage from current level of 5% to 20% by the year 2017.

Other than Ethanol for blending purpose, we have equally good presence in market forsale of Alcohol for Industrial and Potable use. We maintain product-mix of alcohol (meanssale of Alcohol for potable, Industrial, blending) such that we get the optimumrealisation on our product.

Power

The Company is operating co-generation facilities at all of its fourteen sugar unitswith a total installed capacity of approximately 428 MW of power. Most of the powergenerated is used for captive consumption. Out of the surplus co-generation capacity ofaround 105 MW, the surplus power is exported to the Uttar Pradesh State grid.

Power Capacity Expansion

Considering the Company's experience in power generation and tremendous scope forgrowth of power and energy business, the Company has considered diversifying into powersector by setting up coal fired thermal power plants in the state of Uttar Pradesh. Tobegin with the Company plans to set up around 4,500 MW of Power Generating Capacity.

In the first phase, the Company had commenced project for an aggregate power generatingcapacity of 400 MW comprising of 80 MW thermal power plants at five locations on theunused land available in the vicinity of the sugar mills of the Company at Khamberkhera,Barkhera, Maqsoodapur, Kundarkhi and Utraula all located in the State of Uttar Pradesh.Subsequently the capacity of these thermal power plants were upwardly revised to 450 MW(90 MW x 5). The project cost was estimated at around Rs. 2,320 Crore to be funded by wayof debt to equity mix of 3:1.

The requisite Power Purchase Agreement for these five coal based thermal power plantshave been entered into with the Government of Uttar Pradesh. The project is beingdeveloped through a SPV- Bajaj Energy Private Limited, a subsidiary of the Company.

The financial closure of Rs. 1,740 Crore for the debt portion for this project has beenachieved. The Company and an entity belonging to its promoter group have jointlysubscribed towards the equity component of project funding. The commercial operation ofpower plants at these five locations is expected to commence as per the schedule withinnext eight to ten months.

The Company was further been awarded two Ultra Mega Power Projects (UMPPs) of (3X660MW)1,980 MW to be set up in district Lalitpur and Chitrakoot respectively in the state ofUttar Pradesh. These projects are also proposed to be implemented through SPVs, viz.Lalitpur Power Generation Company Limited and Bajaj Power Generation Private Limited. Theapproximate cost of both these projects are estimated at around Rs. 12,000 Crore each. TheCompany had entered into the Memorandum of Understanding with Government of Uttar Pradeshfor both the UMPPs. The Company had entered into separate MOUs in these regard withgovernment of U.P. and long-term PPAs for supply of power to the Uttar Pradesh State gridwill be finalised shortly.

The process of land acquisition for these projects has been initiated. Necessaryapplication for coal linkage and processes of obtaining clearance for use of undergroundwater, environmental and other clearance from relevant authorities, award of EPC contract,Plant Ordering, etc. are in progress at various stages. The commercial operation of thepower plant at Lalitpur is expected to commence around 4 to 5 years.

Particle Board (PB) and Medium Density Fibre Board (MDF) Project

Bajaj Eco-Tec Products Limited (BEPL) has successfully set up three plants formanufacturing Particle Boards (PB) and Medium Density Fibre Boards (MDF), from sugarcanebagasse.

BEPL is one of the only two companies in the world, to manufacture MDF from sugarcanebagasse. The two Medium Density Fibre Board plants are situated at Palia Kalan, DistrictLakhimpur Kheri, U.P. and at Kundarkhi, District Gonda, U.P., each having a capacity tomanufacture 80,000 m3 boards per annum. The Particle Board plant is situated at Kinauni,District Meerut, U.P., and has a capacity to manufacture 50,000 m3 boards per annum. Thecombined capacity of all three plants, at 210,000 m3 boards per annum, is the largest inthe country, and has been set up at a total cost of around Rs.300 Crore. BEPL hasinstalled the latest, state-of-the-art Plant & Machinery, at all three locations,which have been imported brand new, from Europe and China.

BEPL commenced Commercial Operations in the year 2008-09 and launched its "ZEROWOOD, ECO-FRIENDLY PARTICLE BOARDS AND MEDIUM DENSITY FIBRE BOARDS" in the IndianMarket, under the brand "Bajaj Boards".

During the financial year 2009-10, BEPL has been able to overcome quality relatedissues, especially in MDF and now all its products have been registered/ approved by BIS,DGS&D, CPWD, IGBC and various other government and semi government agencies. Further,being manufactured from sugarcane bagasse, an agricultural residue, the Bureau of IndianStandards has also accorded "ECO-MARK" to BEPL's products. BEPL has also earnedprestigious membership of Indian Green Building Council (IGBC), an organisation committedto promote and develop green building concepts, in India. BEPL's products enjoy zeroexcise duty and concessional VAT in number of states.

BEPL's products are now widely used by large furniture manufacturers, architects,interior designers, and carpenters / contractors. BEPL has also been able to establish astrong country-wide network of distributors and dealers, and today, BEPL's products areavailable at more than 3,000 outlets across the length and breadth of the country, makingit "the largest Manufacturer & Seller of Particle Boards & MDF inIndia".

Operating Margins of BEPL during the financial year 2009-10 remained under tremendousstress, due to unprecedented rise in the price of its major raw material - sugarcanebagasse, coupled with substantial increase in the costs of chemicals and other inputs. Onthe other hand, BEPL was not able to increase the prices of its finished products, due tostiff competition from cheaper imports, consequent upon global meltdown.

With the improvement in the overall sentiment over last few months, the demand andconsequently prices of BEPL's products have already started moving upwards. The order bookof BEPL is also quite healthy. Further, with the increase in sugarcane cultivation, theavailability of sugarcane and consequently availability of bagasse, is expected to improvethis year, as a result of which the bagasse prices are expected to ease a bit. Besidesthat, BEPL has also been successful in sourcing chemicals and other inputs at relativelymuch lower prices, which will significantly reduce the overall production costs. All thesetogether, will have a positive impact on the profitability and operations during comingyears.

Outlook

The Indian economy has shown its strength and remained aloof of global recession. Thegrowth figures are improving in current year and are expected to continue. The sugarprices have started showing signs of stabilisation with improved inventory levels & onexpectation of opening of exports and, with the support of State & Central Governmentinitiatives; the sugar sector is turning around after a very difficult year of lowmargins.

Risks and Concerns

Sugar industry is cyclical in nature & primarily faces the following risks:

1. Uncontrollable

A. Raw material risk

B. Sugar price risk

C. Regulatory risk

A. Raw Material Risk

Sugarcane is the principal raw material used for the production of sugar. Businessdepends on the availability of sugarcane and any shortage of sugarcane may adverselyaffect operations. A variety of factors beyond our control may contribute to a shortage ofsugarcane in any given harvest period. Some of the main factors that could contribute to ashortage of sugarcane are set forth below : -

i. Diversion from cane production to other cash crops.

ii. Adverse weather conditions, crop disease.

iii. Drop in Drawal rate.

iv. Un-remunerative cane procurement price declared by the State Government and/orCentral Government.

The Company has sought to mitigate raw material availability risk by diversifying intomultiple locations within Uttar Pradesh and, at the same time, has an impeccable record ofcordial relationship with farmers.

B. Sugar Price Risk

The market price for sugar is function of demand and supply. Fluctuations in demand andsupply occur for various reasons, including :

i. changes in the availability and price of sugarcane;

ii. variances in the production capacities of our competitors;

iii. the availability of substitutes for the sugar products; and

iv. International demand and supply.

The wholesale price of sugar has a significant impact on our profits. Like otheragricultural commodities, sugar is subject to price fluctuations resulting from weather,natural disasters, domestic and foreign trade policies, shifts in supply and demand andother factors beyond control. In addition, approximately 15% to 30% of total worldwidesugar production is traded on exchanges and is thus subject to speculation, which couldaffect the price of sugar worldwide and our results of operations. As a result, anyprolonged decrease in sugar prices could have a material adverse effect on our Company.

The Group has addressed this issue to an extent with its expansion plans whereby, BHLhas become the largest sugar producer in India with an overall share of more than 20% ofthe Uttar Pradesh production. This would enable better pricing power while reducing costs.

1. Environmental risks

The Industry & Company is subject to environmental regulations and may be exposedto liability as a result of our handling of hazardous materials and potential costs forenvironmental compliance.

ii. Government policy-related risks

The Industry is regulated and the Company operates in a regulated environment. Centraland State Government policies and regulations affect the agricultural sector and relatedindustries and affect our operations and our profitability. Ethanol business is highlydependent on Government policy. Sugarcane price is controlled by the State Government andis generally increased every year. This is a systemic risk, which cannot be alleviatedunless the industry is completely decontrolled.

2. Controllable Risks

1. Productivity

2. Drawal rate

3. Management Bandwidth

Selection of appropriate machinery and maintenance of the same is critical forcontinuous operations during the crushing season. The Company has consistently operated atan optimum capacity of around 90% to 95% in most of the years.

With its leadership position in the industry and professional work practices, theCompany is able to hire and retain appropriate talent.

De-Risking Strategy

As part of our business strategy, we are rapidly de-risking our business with newinvestment in power generation capacity. This business is non cyclical and thereforeexpected to generate steady cash flows year on year.

Internal control systems and their adequacy

The Company has in place, an adequate system of internal control to reasonablysafeguard its assets against loss through unauthorised use and pilferage. A comprehensivesystem of internal controls employed by the Company ensures optimal use of the resourcesavailable at its disposal. Internal audits and checks are an ongoing process within theCompany

The internal audit department has looked into various functional areas of the Companywith the following primary objectives :

• To ensure strong internal control system to minimise the risk of frauds, errors& omissions and safeguarding of assets.

• To ensure compliance of corporate policies and procedures in line withDelegation & HR manuals.

• To critically analyse various systems and suggest remedial measures for theweaknesses persisting in the system.

• To ensure proper compliance of Standard Operating Procedures (SOPs) to achieveoverall uniformity in operations and reporting across all the units.

• To ensure cost consciousness, compliance of accounting and taxation principlesthrough Pre & Post Audits.

• To submit reports for the deviations in policies, procedures and principlesalong with recommendations and to ensure their timely implementation. The internal auditdepartment submits its reports to the management, outlining its findings, along withanalytical reviews of the functional areas looked into, and providing practical solutionsfor the problems observed. An illustrative list of scope of activities of areas ofInternal Audit is broadly summarised as under :

• Checking of Accounts vouchers on test check basis.

• Physical verification of Stores Inventory and analysis of Surplus, Discarded andNon moving Items.

• Checking of Stores Ledger with respect to timely accounting of Receipts andIssues of Material.

• Reporting on overdue debtors on A/c of Sales of Sugar, Molasses, Press Mud &Organic Manure etc.

• Reconciliation of Empty Sugar Bags.

• Review of Statutory dues and timely filing of Returns.

• Checking of Tools & Tackles issued to Employees & Contractors.

• Checking of Excise and Service Tax Reconciliations for timely availing inputcredit in eligible cases.

• Pre Audit of Purchase and Work orders issued from units & Post Audit atCorporate office Noida.

• Verification of system of recording all incoming materials including freightincurred thereon.

• Review and reporting on material sent to outside parties for repair/ Jobwork.

• Review of Inter unit and Inter Company Material in Transit cases.

• Surprise checking of despatch of Sugar, Molasses, Bagasse and Press Mud onSample basis.

• Surprise check of Cane Centers, records maintained thereat and review of Canecontrol, checks & MIS reports.

• Checking of Safety measures and civic conditions of Sugar Godowns at Units.

• Checking and reporting on Employee's Imprest debit balances.

• Checking and reporting on Excess Interest charged by Bank on OD/ CC Accounts.

• Other Assignments as attributed from time to time with specific instructionsfrom management.

Human Resources/ Industrial Relations

The industrial relations at the Company's Sugar Mills and Head Office were cordialthroughout the year under review. The Company is committed to create an organisation thatnurtures the talents and enterprise of its people, helping them grow and find fulfillmentin an open culture. Its growth strategies are based on a strong Human Resource (HR)foundation created through a judicious use of innovative and complementary HR processesand systems.

The various HR initiatives introduced by the Company during the year are listed below :

• Training on Safety, Housekeeping, Fire Fighting, Communication skills, teambuilding, 5S etc. by internal and external faculties.

• Interactive induction programs supplemented by power point presentation aboutthe company programs are regularly conducted at unit level and Offices by HR departmentfor all the new employees.

• Quality Circle are Organised at Zones. Our team participated in NationalConvention of Q.C. organized by QCFI (Quality Circle Forum of India) held on 21st December2009 & won excellent award.

• HIV / AIDS Education & Prevention Programme in collaboration withInternational Labour Organisation was conducted to enhance the knowledge of participantsabout the global and national scenario of HIV / AIDS and the National AIDS controlProgramme. The Company identified 5 Master Trainers from unit who trained 28 Peereducators, for spreading awareness among staff and local villagers.

• A 3 day Yoga Programme was conducted under the guidance of Swami Om ji fromPatanjali Yogpeeth Trust, Haridwar. Large number of Officers and Workers and their familymembers participated.

• Various CSR Activities:

• Food packet distribution in flood affected villages.

• Two medical camps organised in villages.

• Fogging at villages after flood.

• Alao (Fire) at every chouraha by distributing bagasse in winter.

The Employees celebrated religious, cultural, national integration programmes likeAnnual function of Laxmi Narain Temple, Janmashtami, Republic Day, Independence Day alongwith various sports meets.

The Company continued its programme of providing training to its workers with a view toimprove efficiency, quality of products and avoid breakdowns. Further, behavioural /attitudinal training programmes for Executives and Managers, technical training programmefor Engineers and Executives, Computer and IT related training programme, HR relatedtraining and workshop and training for Cane growers, etc. were conducted.

IV. Financial Analysis of Operations of the Company

A Scheme of Amalgamation of Bajaj Hindusthan Sugar and Industries Limited (hereinafterreferred to as 'Amalgamated Company') with the company under Sections 391 to 394 of theCompanies Act, 1956 was sanctioned by Hon'ble High Court having Judicature at Bombay videOrder dated November 26, 2010.

Current year figures includes the stand-alone figures of Bajaj Hindusthan Limited forthe period from October 01, 2009 to September 30, 2010 and the figures of Bajaj HindusthanSugar and Industries Limited (Amalgamated Company) for the period from April 01, 2010 toSeptember 30, 2010. Further the assets and liabilities as on September 30, 2010 of theCompany also includes assets and liabilities of the Amalgamated Company as per the Schemeof Amalgamation.

Table 7: Operational Data

During the year, the production of Sugar and Molasses has increased to 10,97,380 MT and4,42,433 MT as compared to 4,93,268 MT and 2,67,241 MT respectively in previous yearrecording a growth of 122% and 65% respectively. This was mainly due to higheravailability of sugarcane and processing of Imported Raw Sugar. Similarly IndustrialAlcohol / Ethanol production was higher at 94,719 KL as compared to 32,070 KL in previousyear recording a growth of 195%. Power generation was also higher at 4,48,901 MW ascompared to 2,76,300 MW in previous year recording a growth of 62%, largely due to higherquantum of bagasse available from the crushing of sugarcane.

Looking to the reduced sugarcane crop acreage in sugar season 2009-10, the Company tooknecessary steps to ensure availability of cane so that mills can operate at optimumcapacity. Though, cane crop acreage reduced in U.P., the quality of sugarcane improved,resulting into higher production of sugar and other related products i.e. molasses andalcohol. Recovery of sugar from sugarcane was also higher this year at 9.24% as against9.09% in the previous year. The farmers have again shifted from other crops to sugar canecrop this year due to higher Fair and Remunerative Price (FRP), State Advisory Price (SAP)fixed by the Central Government and State Government respectively and incentive paid tocane growers by the sugar mills.

Table 8 : Summarised Financial Results

Turnover

Increase in revenue is due to higher quantum of sugar sold, higher sales realisation ofsugar and revenue of amalgamated company for the period from April 1, 2010 to September30, 2010.

Analysis of sales

During the year the Company sold 9,26,966 MT of sugar as against 6,72,180 MT during theprevious year, registering an increase of 38%. The Company also sold 54,602 MT of Molassesas against 71,120 MT in the previous year, reporting a down fall of 23% due to moremolasses used for production of alcohol during the year. Alcohol/ Ethanol sales during theyear were also higher at 63,123 KL as against 32,128 KL during the previous year,reporting an increase of 96%. The Company exported 1,30,635 MW of power during the year asagainst 73,271 MW during the previous year, reporting an increase of 78%.

Product-wise sales quantity, value and per unit realisation details are given in Table9:

Table 9 : Sales revenue

Approximately 20% of total sugar sales were to certain parties against permits (Levy)issued by the Government of India. The remaining 80% being free sale sugar was sold in thedomestic market through a network of agents.

Industrial Alcohol was sold in the local market directly to end users, mainlyalcohol-based chemical plants. Ethanol was sold to oil companies, who use it for blendingwith gasoline.

Other Income

Other income for the year was Rs. 1 55.38 Crore against Rs. 231.15 Crore in theprevious year.

The major component of other income was gain due to Foreign Exchange Fluctuation ofRs.47.73 Crore, Lease Rent at Rs.15.84 Crore, Provision no longer required/ credit balanceappropriated of Rs.32.19 Crore and Profit on sale of long term investment of Rs. 16.61Crore.The balance amount has been received against sale of scrap/store/bio manure andmiscellaneous receipt etc. which also includes Rs. 23.32 Crore on account of profit onsale of raw sugar during the year.

Other expenses

During the year other expenses were Rs.246.27 Crore as against Rs.138.28 Crore in theprevious year. The increase in other expenses was largely due to higher crushing ofsugarcane and processing of raw sugar during the year.

Earnings before Interest, Depreciation, Tax and Amortization (EBIDTA)

The EBIDTA achieved for the year was Rs. 613.82 Crore as against Rs.595.29 Crore in theprevious year. The increase in EBIDTA margins was mainly on account of higher volume ofsales, higher realisation of sugar and power sale as compared to previous year.

Interest & Finance Charges

Increase in interest expense was mainly due to higher loans and additional workingcapital utilised for making early cane price payments to growers as compared to theprevious year. This year Company also held higher stocks of sugar and alcohol due tohigher production and lower demand of sugar (due to import of white sugar allowed by theGovernment) in market as compared to the previous year.

Depreciation & amortisation

The depreciation for the year increased from Rs.202.21 Crore to Rs.257.44 Crore mainlydue to depreciation on revaluation of assets of the Company as on April 01, 2010 anddepreciation on assets of amalgamated company i.e. Bajaj Hindusthan Sugar and IndustriesLimited w.e.f. April 01, 2010.

Provision for Tax

Provision for taxation includes current tax of Rs.16.35 Crore, deferred tax liabilityof Rs.3.19 Crore and wealth tax of Rs.0.10 Crore. During the year MAT credit entitlementis Rs.16.35 Crore. In the previous year provision for current tax was Rs. 33.09 Crore,deferred tax liability of Rs. 49.11 Crore and provisions for wealth tax and fringe benefittax was Rs. 0.66 Crore and MAT credit entitlement was Rs. 33.09 Crore.

Balance Sheet

The summarised Balance Sheet as at September 30, 2010 is as under (Table 10) :

Table 10 : Summarised Balance Sheet

Rs. Crore

Capital

The Company has allotted 1,45,00,000 new Equity Shares on January 4, 2010 to thepromoter group of the Company in terms of warrants allotted to them on May 18, 2009 onpreferential basis carrying right to subscribe for and be allotted one (1) fully paidequity share of face value Re. 1 each per warrant, at a price of Rs. 52.14 per equityshare in accordance with the SEBI Preferential Issue Guidelines. Accordingly, after theallotment of these new Equity Shares, the paid up Equity Share Capital and SecuritiesPremium Account have increased by Rs. 1.45 Crore and Rs.74.15 Crore, respectively.

Equity Share Suspense

Equity Share Suspense of Rs. 3.70 Crore represent the face value of an aggregate of3,70,00,000 equity shares of Re. 1 each of the Company to be allotted in accordance withthe terms and conditions of the Scheme of Amalgamation of Bajaj Hindusthan Sugar andIndustries Limited with Bajaj Hindusthan Limited as sanctioned by Hon'ble High Courthaving Judicature at Bombay vide Order dated November 26, 2010.

Reserves and Surplus

Securities premium account increased by Rs.806.63 Crore represent (i) Rs. 722.05 Crorewas credited in accordance with the Scheme of Amalgamation being the aggregate of excessof the fair value of net assets of Amalgamated Company over the paid up value of EquityShares to be issued and allotted; net effect on fair valuation of assets and liabilitiesof the Company identified by the Board of Directors of the Company reduced by the cost ofstamp duty and other expenditure payable on amalgamation (ii) Rs.74.15 Crore Premiumreceived on issue of equity shares to Promoters Group of the Company (iii) Rs. 10.43 Crorebeing change in Provision for Premium on redemption of FCCBs due to fluctuation in foreigncurrency rate.

Loan Funds

Loan funds increased to Rs.5,543.13 Crore as against Rs.3,075.15 Crore in the previousyear mainly due to further loan taken for fulfillment of working capital requirement andloan funds of the amalgamated company.

Fixed Assets

Gross Block increased from Rs. 3,407.48 Crore to Rs. 6,509.87 Crore was mainly due torevaluation of certain assets of the Company and assets of amalgamated company w.e.f.April 01, 2010.

The increase in fixed assets (net of depreciation) by Rs.2,807.41 Crore (includingCapital Work In Progress) from Rs. 2,763.78 Crore to Rs. 5,571.19 Crore was mainly due torevaluation of certain assets of the Company and assets of amalgamated company w.e.f.April 01, 2010.

Investments

During the year Company invested Rs. 137.00 Crore in Bajaj Energy Private Limited(Subsidiary), by Subscribing to 69,90,000 equity shares of Rs. 10 each at a premium of Rs.186 per share and Rs.92.31 Crore in Bajaj Hindusthan (Singapore) Pte. Ltd. (Subsidiary) bysubscribing to 2,70,00,000 equity shares of S$ 1 each.

The investment of Rs. 358.72 Crore and advance amounting to Rs 335.00 Crore aggregatingto Rs. 693.72 Crore in the amalgamated company i.e. Bajaj Hindusthan Sugar and IndustriesLtd. has been converted into equity shares of the Company and shown as investment in anindependent Trust of which the Company is the sole beneficiary as per the Scheme ofamalgamation duly approved by Hon'ble High Court of Bombay.

Inventories

The inventory of sugar at the end of the year was 4,60,097 MT equivalent to 181 days'sales as compared to 95 days' sales in the previous year. This was due to higherproduction, raw sugar processed into white sugar and gradual liquidation of stocks due todemand being met by import of white sugar allowed by the Government. Alcohol inventory atthe end of year was 45,038 KL equivalent to 260 days' sales as compared to 41 days' salesin the previous year. In view of expected volume growth, the inventory liquidation ismonitored very closely and the Company does not foresee any difficulty in selling theproducts manufactured by it.

Debtors

In line with the Company's focus on effective working capital management, vigorousefforts were made to recover dues from debtors. The debtors at the end of the year wereequivalent to 20 days' sales as compared to 6 days' sales in the previous year.

Significant non-recurring income, expenditure and other items Income

The profit on sale of investment of Rs. 16.61 Crore and the provisions no longerrequired / credit balance appropriated, Rs. 32.19 Crore, were of a non-recurring nature.

Expenditure

The loss on assets sold/discarded, Rs. 0.10 Crore is of a non-recurring nature.

Contingent Liabilities

The status of contingent liabilities as at September 30, 2010 has been reviewed by themanagement. Efforts are being made for speedy settlement of pending cases.

Control measures for cane procurement

Besides smooth functioning of plants, timely and regular procurement of sugarcane isthe most important activity of the Company. Continuous efforts are being made to ensuresystematic indenting, procurement and crushing of sugarcane. The regular supply of canealso depends upon regular flow of payment to the farmers for which the Company has a goodreputation in the entire sugar industry. Though the current systems are adequate, as amatter of routine, these systems are periodically reviewed by the senior management teamfrom time to time and corrective measures, if and when considered necessary, are taken toensure the smooth flow of sugarcane.

Division-wise Operations Sugar Division

Crushing details of plants during the year 2009-10 are given in Table 11. Table 11 :Cane crushing, Sugar Recovery and Sugar Production

Apart from the above, during the year the Company processed the raw sugar at nineplants and produced 315,262 MT of sugar (previous year nil).

Distillery Division

The distillery division produced 94,719 kilolitres of industrial Alcohol /Ethanolagainst 32,070 kilolitres in the previous year registering an increase of 195%. LikewiseAlcohol/Ethanol sales aggregated 63,123 kilolitres against 32,128 kilolitres in theprevious year registering an increase of 96%.

In value terms, the sale of industrial alcohol/ Ethanol during the year was Rs.162.82Crore as against Rs.85.81 Crore in the previous year registering an increase of 90%.

Increase in production and sale was due to availability of more sugarcane resultinginto higher production of molasses.

Power Division

The sale of power was at Rs.51.97 Crore in the current year as against Rs.22.62 Crorerecorded in the previous year registering an increase of 130% mainly due to availabilityof more bagasse from sugar cane crushing.

Accounting Policies

The financial statements have been prepared in compliance with the requirements of theCompanies Act, 1956 and Generally Accepted Accounting Principles in India. The managementof Bajaj Hindusthan Limited accepts responsibility for the integrity and objectivity ofthese financial statements, as well as for various estimates/judgements used inpreparation of these statements. The estimates and/or judgements have been made on aconsistent, reasonable and prudent basis to reflect a true and fair picture of thefinancial performance of the Company

Cautionary/Futuristic Statements

Statements in the management discussion and analysis report describing the Company'sobjectives, projections, estimates and expectations may be "forward lookingstatements" within the meaning of applicable laws and regulations and futuristic innature. Actual performance may differ materially from those either expressed or implied.Such statements represent intentions of the management and the efforts put into realisecertain goals. The success in realising these depends on various factors both internal andexternal. Investors, therefore, are requested to make their own independent judgmentsbefore taking any investment decisions.

CEO / CFO Certification

The Board of Directors, Bajaj Hindusthan Limited, Mumbai.

Re: Financial Statements for the year 2009-10 - Certification by CEO and CFO

We, Shishir Bajaj, Chairman & Managing Director and Manoj Maheshwari, Chief FinanceOfficer of Bajaj Hindusthan Limited, on the basis of the review of the financialstatements and the cash flow statement for the financial year ended September 30, 2010 andto the best of our knowledge and belief, hereby certify that:-

1. These statements do not contain any materially untrue statements or omit anymaterial fact or contains statements that might be misleading.

2. These statements together present a true and fair view of the Company's affairs andare in compliance with existing accounting standards, applicable laws and regulations.

3. There are, to the best of our knowledge and belief, no transactions entered into bythe Company during the year ended September 30, 2010 which are fraudulent, illegal orviolative on of the Company's code of conduct.

4. We accept responsibility for establishing and maintaining internal controls, we haveevaluated the effectiveness of the internal control systems of the Company and we havedisclosed to the auditors and the Audit Committee those deficiencies, of which we areaware, in the design or operation of the internal control systems and that we have takenthe required steps to rectify these deficiencies.

5. We further certify that:-

(a) there have been no significant changes in internal control during this year;

(b) there have been no significant changes in accounting policies during this year; and

(c) there have been no instances of significant fraud of which we have become aware andthe involvement therein, of management or an employee having significant role in theCompany's internal control systems.