EID Parry (India) Ltd

Review of EID Parry's business

E.I.D.-Parry, part of USD 3 Billion Murugappa Group, is one of the largest businessconglomerates in Southern India. The Sugar division (Sugar, Co-generation and Distillerybusinesses), being the predominant business of the Company, accounted for 95% of the totalrevenue at Rs. 1197 crores. The Company is also enhancing its market reach and productportfolio through its strong presence in the promising areas of Bio Pesticides andNutraceuticals. Today, E.I.D.-Parry is one of the Top 5 sugar producers in India and is onthe path to sweetening more lives around the world.

Sugar Facilities

E.I.D.-Parry continued to grow its sugar business by acquiring Parrys Sugar IndustriesLtd. (Previously known as GMR Industries Ltd.), and the company now has 9 sugar plantsspread across South India, of which, four are in Tamil Nadu, one in Puducherry, three inKarnataka (subsidiary) and one in Andhra Pradesh (subsidiary). Overall, the Company hasincreased the combined daily sugarcane crushing capacity to 32500 TCD, Co-generationcapacity to 146 MW and distillery to 230 KLPD across its sugar mills and distillery units.

E.I.D.-Parry's integrated Sugar Units have been designed to optimise process and energyefficiencies through reduced steam and power consumption. In addition, the company hasadopted measures to improve energy efficiency in three of its factories to optimise theconsumption of resources. In its endeavour to ensure safety of people and processes, thecompany has carried out Safety Audits across all its plants.

Parrys Sugar Industries Ltd. (PSIL), which was acquired by the company during the year,has three sugar facilities - two in Karnataka and one in Andhra Pradesh, with totalsugarcane crushing capacity of 11000 TCD, 46 MW of Co-generation capacity and 95 KLPD ofdistillery facilities with the following advantages:

• High Recovery Zone of North Karnataka.

• Closer to major Indian sugar markets.

• Opportunity for higher capacity utilisation of Co-generation facility.

The refinery and co-generation units of Silkroad Sugar Private Limited, a joint venturewith Cargill, went on stream during the year, with a capacity of 2000 TPD for refinery and35 MW power generation.

All sugar facilities of E.I.D.-Parry are located in South India, offering the company ageographical advantage of being the highest sugar recovery zone in India.

• Sugar recovery per unit land area is the highest in Southern India.

• Greater access to ports ensures lesser freight cost on import / export for millsin South India compared to those in the Northern part of the country.

• Good soil conditions and abundant water with sugarcane yield being highestacross India.

• Long crushing season. Cane and Manufacturing Cane R & D :

E.I.D.-Parry pioneered sugarcane research and probably runs the only private R&Dcentre for sugarcane and tissue culture to develop new and improved cane varieties. It hasalso been aggressively promoting eco-friendly pest management systems. The R&Ddivision is focused on developing sugarcane varieties having high yields, better sucrosecontent and greater pest resistance.

The company has enhanced the usage of Biological pesticides in cane fields over years.However, the biggest innovation spearheaded by E.I.D.-Parry has been the difference it hasmade to the sugarcane farmers associated with it offering them value added IT enabledservices, such as Remote Sensing, Geographic Information System and Global PositioningSystem for mapping and monitoring sugarcane growing area.

In addition, the company's Integrated Cane Management System helps and guides thefarmers on surface and subsurface drip irrigation, cane trash mulching, soil mapping andsoil nutrient analysis, detailed farm boundary mapping, mechanical harvesting, etc.

Services to Farmers:

The company provides agronomic support through its cane extension teams with a focus ontraining farmers on scientific applications and farming methodologies. Towards this end,the company has put in place plans to:

a. Train farmers to use modern and improved agronomic practices.

b. Use mechanical harvesters to reduce dependence on farm labour.

c. Promote rejuvenation programs, providing farmers with seed materials from SugarBreeding Institute, Coimbatore.

d. Increase the planting of high yielding varieties of sugarcane.

e. Increase the area under sugarcane cultivation by providing incentives and loans.

f. Provide Toll Free Access System.

g. Expand pest and disease control activities.

h. Continue soil fertility improvement activities (including Cane Trash Mulching).

i. Plant cane varieties suited to the soil conditions.

j. Increase the area under drip irrigation.

The company has also undertaken the following activities to further improve sucroserecovery:

• Optimum utilisation during peak recovery periods by balancing the cane supplyand operating days, capacity expansion, modernisation, efficiency improvement.

• Increasing the coverage of high sugarcane varieties.

• Ensuring application of fertiliser for improving quality of cane through soilanalysis, input supplies on right time by Parry Mayyams, extension activities and farmertraining programs.

Namadhu Parry Mayyam:

The Company has been working continuously to increase the effectiveness of its uniqueconcept of Namadhu Parry Mayyam (NPM), a service hub for farmers introduced in 2008-09.Here, a local entrepreneur, usually a sugarcane farmer, is trained to become a NamadhuParry Mayyam operator. The company provides agri inputs as well as extends interest freeloans to these operators for buying high end farm equipment, which in turn is hired out tosmall farmers who are unable to afford such sophisticated equipment.

This helps mechanised farm services accelerate sugarcane harvesting and save costs onmanual labour which is becoming increasingly expensive. The Mayyams also assume amulti-dimensional role of an Information and Knowledge Centre and a nodal centre for banktransactions, besides being an agri clinic disseminating information on improving soilhealth, increasing yield and profitability of the cane growers. When services are providedto the farmers by Mayyams, the company makes the payment to the Mayyam and this amount isrecovered from the farmer from the sugarcane payments. This is beneficial to the farmer ashe need not make payment at the time of receipt of service.

In the current year, E.I.D.-Parry went one step ahead by focusing on standardisation ofprocesses at all Mayyams and increasing the scope of activities at each of these outlets.During the year, the company opened 16 new Namadhu Parry Mayyam outlets, taking the totalnumber of NPMs to 70.

Manufacturing:

All the company's sugar plants in Tamil Nadu are integrated with co-generation facilitywhile Nellikuppam plant is also fully integrated with distillery. Distillery in Sivagangais converting molasses from Pugalur, Pettavaithalai and Pudukkottai plants. During2010-11, while the newly expanded Nellikuppam distillery started commercial production,the distillery at Sivaganga and the Co-generation facility at Pettavaithalai, stabilisedoperations.

E.I.D.-Parry is continuously working on improving operational efficiencies andproduction techniques, benchmarking with the best in the industry, globally. The companyis planning to establish a dedicated facility for the production of graded sugar, toincrease its penetration in high value industrial and pharmaceutical customer segments.

Leveraging co-products

E.I.D.-Parry converts bagasse into electricity in its Co-generation units and processesmolasses into various types of alcohol, thus completing the value chain. The Company isutilising opportunities to sell power to third parties to increase capacity utilisation.

In addition, the company has a stand-alone distillery at Sivaganga in Tamil Nadu. TheCompany has converted Pressmud into a value addition product from the Nellikuppam plant inthe current year and is in the process of extending it to the other units by establishingnecessary infrastructure and facilities.

Marketing

E.I.D.-Parry has a distinct distribution network that has helped it to derisk itselffrom the dependence on a few traders. Due to the adoption of this network, the company isable to provide customer-specific products directly, which is not possible in thetraditional distribution networks.

The company has also started focusing more on retail branding to create value premiumfor the product. In the retail segment, the company has a wide distribution network andhas been focusing to spread distribution to Tier 2 cities in South India.

The company's products have several certifications : ISO 9001-2008, Kosher, Halal,Indian Pharmacopoeia, Japanese Pharmacopoeia, US Pharmacopoeia, British Pharmacopoeia andEuropean Pharmacopoeia. These certifications help the company to expand the range ofinstitutional customers.

INTERNATIONAL SUGAR SCENARIO

The second revision of the world sugar balance in the 2010/11 (October/September) cropcycle by ISO puts world production at a record 168.045 Million MT, raw sugar value, up4.66% from the last season.

Although ISO still expect a record high world sugar production, it has been reviseddownwards by 0.910 Million MT from their previous assessment in November, 2010. Incontrast to output, world consumption has been revised marginally upwards and now is putat 167.849 Million MT. Consumption is expected to grow at 2.01% slower than the 10 yearaverage of 2.6%, due to historically high prices in both the world and domestic markets.

After two seasons of large deficits, the stocks/ consumption ratio had reduced to thelowest level for more than 20 years since 1989/90. The ratio is expected to decreasefurther to 35.04% in 2010/11 from 35.73% in the previous season of a large deficit.

Despite the downward revision of world production, export availability still coversprojected import demand. The absence of a physical trade deficit may act to cap prices forthe rest of 2010/11 season. The world export availability is put at 50.496 Million MT,exceeding import demand estimated at 50.309 Million MT.

World Sugar Balance

Source: ISO Quarterly Market Outlook, February 2011

The sugar output of Brazil, the world's largest producer, in the 2010/11 season wasrevised slightly upward to 38.7 Million MT from 15 Million MT forecast in September 2010after exceptionally dry weather in 2010 raised sugar concentration in cane. Braziliansugar exports in 2010/11 were estimated at 28 Million MT, up 14.6% from the previousseason. European Union (EU) would approve extra sugar imports and the sale of out-of-quotasugar on the EU market to address an expected supply shortage and to curb rising prices.

The European Commission said it would open an autonomous import quota for sugar fromany non-EU country, but there were no details on the total volume of the quota or anytariffs that may apply. A massive cyclone threat to the crop in Australia adds furtherpressure to global prices for the sweetener. Australia typically commands around 7 to 8.5%of the global raw sugar trade with most of its production shipped into growing Asianmarkets such as Indonesia. Australia harvested 27.4 Million MT of cane in 2010/11, wellbelow expectations of at least a 33 Million MT crop, as rain disrupted harvesting.

FUEL ETHANOL

Growth in global fuel ethanol production and consumption in 2011 is forecasted to lessthan 4% (reaching 89 and 88 Billion Litres respectively), well below the average yearlygrowth of 29% over the previous 5 years. Legislative constraints in US and only ananticipated modest increase in Brazil's production and use of ethanol underlie the outlookfor weaker growth.

Even so, there are new and expanding consumption mandates in the EU and severalcountries in Central and South America. Brazil's ethanol output is expected to rise onlymodestly in the upcoming 2011/12 campaign.

Persistently high sugar prices are likely to lower even further the allocation of caneto ethanol production with millers keen to maintain their primary focus on producing sugarfor the world and domestic markets. Ethanol prices are also forecasted to remainrelatively high and off-taken by the growing flex-fuel fleet will therefore be rationed bymore competitive gasohol prices in most States.

The anticipated bumper molasses output in India and a higher government set price thatoil marketing companies must pay to fuel ethanol is likely to ensure significantly higherfuel ethanol production and wide implementation of the Government's E5 mandate.

Source: Bloomberg, Morgan Stanley Commodity Research

Global fuel ethanol trade in 2011 is still not likely to recover from the slump whichoccurred in 2009. Availability from Brazil is anticipated to be limited in 2011.

Expanding US ethanol exports in 2010 were a result of the sharp increase inmanufacturing capacity in recent years coupled with a lack of Brazilian shipments, as wellas exchange rate movements which offer export opportunities.

A predicted surplus in US in 2011 may continue to offer potential for ongoing exportsto EU, at least until additional Member States implement the sustainability provisions ofthe Renewable Energy Directive (RED), under which US corn ethanol does not qualify.

Sugar:

Sugar is one of the oldest commodities in the world and traces its origin to the 4thcentury AD in India and China. India is presently a dominant player in the global sugarindustry along with Brazil in terms of production. Given the growing sugar production andthe structural changes witnessed in Indian sugar industry, India is all set to continueits domination at the global level.

In 2009/10, Indian sugar production started recovering from an unprecedented fall of11.7 Million MT or 45% in 2008/09. The recovery continued in 2010/11 season also and asper ICRA report the region's output is likely to reach 25 Million MT as against 18.92Million MT in the previous season.

As per Indian Sugar Mills Association (ISMA) and National Federation of Co-operativeSugar Factories Ltd. (NFCSFL), the total expected sugar production of 25 Million MT inIndia includes 94 Lakhs MT from Maharashtra, 58.5 Lakhs MT from Uttar Pradesh, 36 Lakhs MTfrom Karnataka, 16 Lakhs MT from Tamil Nadu and 13 Lakhs MT from Gujarat.

Table 1 : Domestic Sugar Production and Consumption

Source : ISMA/Industry Sources/ICRA Research.

Note: * Import figure/CS for SY2008-09 excludes 2.0 million of unprocessed raw lyingwith sugar mills while import figures/CS for SY2009-10 includes the processing of theaforesaid raw sugar.

Demand-Supply Scenario and Outlook

The closing stock position as measured by sugar-year-end domestic closing stock (CS) asmonths consumption (Cons.) is given in Chart:

The domestic sugar industry prices had shown a hardening trend since Q4 of SY 2008-09in anticipation of continued depressed production in SY2009-10. This resulted in asustained uptrend in prices, which reached a peak of Rs. 40,000/MT by end of January 2010.However, there was a significant drop in sugar prices to, as low as Rs. 25,000/MT byAugust 2010.

The fall is attributable to a number of factors. Firstly, there was an upward revisionin production estimates for the sugar season ending September 2010. Secondly, there was asignificant drop in international sugar prices due to increased sugar production in Brazilas well as India, thus resulting in lower dependence on imports in India.

In addition, the Government of India took several measures in order to curb sugarprices. These measures included continued zero duty on imports, allowing bulk consumers toimport sugar freely; tight inventory restrictions imposed by the government on buyers andchanges in release norms (from monthly to weekly) for free sale sugar.

The downward trend in sugar prices continued until end of August 2010, after whichprices started rising from mid - September 2010. The price rise may be attributed to threereasons: - an increase in demand due to the festive season; a fall in sugar releasesduring October-November 2010; and a rise in the international prices of sugar, whichimproved the sentiments for the domestic sugar industry (on the anticipation that sugarmills would be able to export surplus production in SY 201011 at remunerative prices).Prices reached a peak of Rs. 30,000/MT by January 2011 although they showed a modestcorrection since then, following a pick-up in domestic sugar production and thegovernment's decision of withholding exports of sugar under Open General Licenses (OGLs).

Government Policies and Regulations

In March end, the Central Government has allowed export of 5 Lakhs MT of sugar underthe Open General License (OGL). The Government extended stockholding curbs on the quantityof sugar stocks that traders and wholesale dealers can hold upto 30th September, 2011. Thecurbs were due to expire on 31st March, 2011. But the government cushioned the move byraising the cap on stock quantity to 500 MT from 200 MT from 1st April, 2011.

The Government has released notification for increasing levy price in line with Fairand Remunerative Price and accordingly levy price has been fixed at Rs. 18.47 per kg ofsugar to mills for supplying sugar to the government in 2010/11 for onward sale to thepoor (levy sugar), 5.1% more than the Rs. 17.57 per Kg last year.

For the sugar season 2011-12, the Central Government has fixed the Fair andRemunerative Price at Rs. 145 per quintal linked to a basic recovery rate of 9.5% subjectto a premium of Rs. 1.53 per quintal for every 0.1% increase in recovery above that level.

Power:

Co-generation capacity is likely to show a significant growth, given the improvedfiscal and regulatory support and the significant untapped potential across large sugarproducing states. Co-generation sector growth is expected further by various regulatorymeasures including renewable energy portfolio obligation fixed under National Action Planfor Climate Control (NAPCC) of Government of India and generic tariff norms announced forco-generation projects; norms and pricing framework for Renewable Energy Certificates(RECs); and amendment of the provisions of the grid code to ensure smoother off take andtransmission of power by utilities. The total installed capacity for (sugar based)co-generation in India increased to 1411 MW in 2010 from 437 MW in 2005.

State Electricity Regulatory Commissions (SERCs) in some key sugar producing stateshave also taken proactive measures such as increasing co-generation tariffs, permittingthird-party sales, allowing usage of coal in off-season and power off take at preferentialrates.

However, the major bottlenecks in harnessing co-generation potential has been lack ofmanagement focus; weak financial position of many sugar mills, especially smaller unitsincluding those run by the co-operative sector; and relatively unattractive tariffsoffered by several SERCs. Capacity addition is likely to be driven by the centrality offorward integration into co-generation in improving the profitability of sugar mills andthe ability to ride the sharp fluctuation of sugar cycle. However, within the sugarindustry as a whole, longer crushing season and proximity to alternative fuel (foroffseason) makes co-generation more cost effective in a few states (mainly in the Southand the West) than others. Also, the quantum of co-generation profitability remainssensitive to the tariff rates and co-generation regulations of the respective location.

Ethanol:

The Indian Federal Government's Panel for the implementation of the fuel ethanolprogram has completed its report. However, there were dissent notes from the Ministries ofFood and Oil and by the Petroleum and Natural Gas Ministry. The panel has taken theposition that it would be possible to allocate 500 Million Litres of fuel ethanolannually. The panel also recommended a fuel ethanol reference price of Rs. 26.76 per litreex-distillery for the first quarter of the contracted period, based on the gasoline priceof the previous quarter. This would be below the Rs. 27 suggested by a group of ministerslast year. However, production of ethanol is still not recommended in Tamil Nadu.

Execution of growth and de-risking strategy:

During 2010-11, the new distillery at Nellikuppam expanded capacity from 40 KLPD to 75KLPD and started commercial production. The Co-generation facility at Pettavaithalai hasstabilised its operations during the year.

The company crushed 28.36 LMT (25.46 LMT in 2009-10) of cane with sugar production(incl. raw sugar) of 2.89 LMT (2.89 LMT in 2009-10). The company continued to makesubstantial revenues from co-products, its exports to grid were at 3147 Lakh units (2572Lakh units) and total alcohol sales were at 275.05 Lakh litres (162.81 Lakh litres)(including the ENA sales of 162 Lakh litres (117.44 Lakh litres)

The change in the product mix lends greater stability and predictability to thefinancial performance of the company. With the completion of new investments inCo-products, the share of profitability from Co-products is slated to increasesubstantially in the coming years, thus de-risking from Sugar cycles.

Refinery Joint Venture

A port-based stand-alone sugar refinery set up by Silkroad Sugar Private Limited, ajoint venture company between E.I.D.-Parry (India) Ltd., and Cargill International S.A. inKakinada, Andhra Pradesh has commenced operations in 2010-11. E.I.D.-Parry holds 50% inthis joint venture.

A. Bio-Pesticides

The Bio-Pesticides Division registered revenue of Rs. 5839 lakhs, including operatingincome of Rs. 7 Lakhs in 2010-11 accounting for 4% of the Company's Revenue.

Highlights

• The sales of Azadirachtin (AZA) in US Home & Garden segments registered animpressive growth of 43% over the previous year. The total sales clocked in USA is 2333 Kgof Aza accounting for 34% of total Aza sales for the year 2010-11. The Brazil market isemerging as another important market for the Division with a sale of 604 Kg Aza during2010-11. Sales through Trifolio to the European markets viz., Spain and Italy alsowitnessed considerable growth registering the highest ever sales of 1818 Kg (27% of totalAza sales)

• The domestic business had recorded an impressive growth of 62% over last year.Azadirachtin based products grew by 53% with a 92% growth in sales in the North-East teamarkets. In the Non-Aza product category, Abda sales grew by 123% over last year, with therice markets of Tamil Nadu, Karnataka and Andhra Pradesh in South and West Bengal andOrissa in East contributing to the growth. New non Aza products viz., Abda Gold, Spreadmaxand Yieldsmor were received well by the farmers across crops and zones registering Rs. 350lakhs sale.

Divisional performance

• Revenue for the year was Rs. 5839 lakhs as compared to Rs. 3626 lakhs ofprevious year. PBIT for the year was Rs. 1149 lakhs against Rs. 561 lakhs in 2009-10.

Industry Scenario and Development

Market for Bio-pesticides is gaining momentum in Europe & US due to pressure fromproduce marketers for clean vegetables and fruits. Major Store chains like Wal-Mart andTarget are adding more variety of organic foods taking organic products closer to massconsumers. At the same time, these stores are putting pressure on organic food produceprice, impacting price of Agri inputs while US Organic insecticide market continues togrow at 10% Compounded Annual Growth Rate (CAGR). Consumer Lawn and Garden organicproducts provide market opportunities both in Americas and Europe and the industry isdeploying resources for creation of product variables to address these markets. Two majorlow cost, high ph, strong but eco-unfriendly molecules viz., Methyl Bromide and Nemacurare being phased out in most of the overseas markets leaving a gap in the market place.Bio-pesticides are expected to fit into this segment. Overall, the Bio-pesticides businessis recording strong growth in the global pesticide market. This segment is expected togrow at a 15.6% CAGR from $1.6 billion in 2009 to $3.3 billion in 2014.

The Indian market is turning out to offer ample market opportunity for natural productsas the government agencies and scientific institutions which are the recommending bodiesin the field of agriculture inputs have started accepting and disseminating the importanceof Bio-pesticides as an economic means of crop protection as a part of Integrated PestManagement, against their earlier assessment of Bio-pesticides as expensive alternativesto synthetics especially the pyrethroids. Natural products in the field of crop protectionwhen alternated or applied as tank mix partners with the synthetics have led to reducingthe crop protection cost per hectare as the pest control is more effective due to lowresistance development and extended spray intervals that eventually result in reducednumber of spray applications.

Operating results

Outlook

The market for commercial Biopesticide products has been seeing healthy growth over thepast 5 years. Biopesticides offer a safer, sustainable and generally more targetedapproach to pest control which is reflected in their growing popularity for use inagriculture, greenhouses, nurseries, forestry, turf and home gardens. The years ahead arevery clearly set for the growth of biological products in the light of growing emphasisand need for sustainable production.

The primary drivers for biopesticides globally are organic crops followed by IPM andgrowing through sustainable approaches. Organic Ag/ animal produces and its value addedproducts are estimated to reach US $43 billion with almost 34% in the US, 33% in Europeand 33% in rest of the world.

The Indian Government is promoting research, production, registration and adoption ofbiopesticides, through various rules, regulations, policies and schemes. The Department ofBiotechnology (DBT), Indian Council of Agricultural Research (ICAR) and National Centrefor Integrated Pest Management (NCIPM) play a key role in the promotion of biopesticidesfor increasing agricultural production, sustaining the health of farmers and environment.

Parrys Bio's mission is to emerge as a significant biopesticides company, capitalisingon the growing trends of sustainable, organic and low toxic pest control around the worldby maintaining leadership on Aza biopesticides through customer friendly productdeliveries, IPR's and direct market access, adding NEEMAZAL synergistic microbialbiopesticides with quality and cost efficiency and a long term R&D focus to innovatenatural products from India's rich biodiversity for global markets.

B. Nutraceuticals

The Nutraceuticals division's revenue was Rs. 4393 lakhs for the year ended 31st March,2011 representing 3% of the Company's Revenue. About 82% of this represents exports. TheNutraceuticals products continued to grow in all the markets and are currently exported toover 38 countries. Certified Organic Spirulina continues to outperform competition in itssegment, recording a 17% increase in sales of the product over the previous year.

The Organic Spirulina produced by the Company is produced according to leading Organicstandards -USDA NOP, Naturland - Germany, ECOCERT France and OCIA - IFOAM certifications.

The company already holds 5 quality certifications (ISO 9001, ISO 14001, HACCP - FoodSafety, Kosher and Halal) for its facility and entire algae product range in addition toUS Pharmacopeia certification for its Organic Spirulina. Organic Spirulina has alsoreceived GRAS (Generally Recognised As Safe) status in the US market opening up itsincreased use in functional foods and beverages. The Nutraceuticals division is planningto leverage the Parry brand into the wellness sector in the Indian Nutraceutical market bylaunching a range of OTC products under the Parry brand addressing various healthconcerns.

The products will cover preventive as well as health specific management segments.Changing lifestyles and increasing health concerns of an ageing population, offer anemerging opportunity for the business. As part of this initiative, Nutraceuticals divisionhas launched Protein drink products under the brand 'Pro9' and 'Pro9D' during the lastquarter of 2010-11. While the former is for the general public the later is a variant forthe diabetic segment.

The Company holds a stake of about 63% in Parry Phytoremedies Pvt. Ltd., Pune. The saleof Lycopene products grew by 46% over the previous year. As most of the customers preferthe dry forms of the Lycopene products, the company has set up an in-house dry formsfacility at the Pune unit which was hitherto being outsourced. The company has developedkey customer accounts and will focus on further developing the business during the year.The company is in the process of obtaining the ISO 9001 quality certification for itsmanufacturing facility. The company's stake in US Nutraceuticals LLC (ValensaInternational), Florida, USA has been increased from 48 to 51% during the year.

Valensa International is a leading science-based developer and provider of high qualitybotanically sourced products for nutritional supplements and functional foods and is inthe process of drawing up health condition specific formulations covering eye and jointhealth.

Valensa has developed a new formulation-Phycocyanin (a blue pigment extracted fromParry's Organic Spirulina) coated SpiruZAN tablets (Spirulina and Astaxanthin). Thisformulation is manufactured by the company for Valensa International.

Industry Scenario and Development

The size of the global Nutraceuticals industry is estimated well over US $27 billionper annum growing at 12% per annum (Source: BCC 2009). Preventive health care is bound togrow at a steady pace with increasing awareness on the positive effects of Nutraceuticalsin health maintenance.

Worldwide, the Nutraceuticals industry is increasingly being regulated to safeguardconsumer interests with science based product claims. Consequently, a major portion ofR&D spend by leading players in the Nutraceuticals industry is in establishing productclaims through clinical studies. The use of Nutraceuticals in functional foods andbeverages would increase demand for these products.

Outlook

The Nutraceuticals industry is set to play an important role in preventive healthcareand in improving the quality of life across all sections. With our strategic investmentsin Valensa International and Parry Phytoremedies, the Division has strengthened itsposition in the fast growing Carotenoid segment which has wide applications in theNutraceuticals, functional foods and beverage sector.

The Company is also set to participate in the Omega 3 fatty acids, one of the fastestgrowing segments, backed by scientific claims and studies. The company is continuing itstrials to produce Omega3 fatty acids from the algal source and the pilot plant leveltrials so far are encouraging.

Omega3 Algal oil being a new ingredient, the company has been successful in getting theGRAS approval for this. Parry Nutraceuticals is committed to provide completemanufacturing solutions to its customers from carrying out formulation development and tocarry out private labelling for customers both in India and overseas.

Financial Analysis and Review 2010-11

During the year 2010-11, Sugar division reported a Net Loss Before Interest of Rs. 5096Lakhs on account of steep fall in sugar sale realisation from January 2010 onwards coupledwith one time loss of about Rs. 5100 Lakhs incurred from import of high cost sugar. Biopesticides sale increased due to higher demand for formulation, Home and Garden Segmentsin US and Europe. Expansion to new crop and markets with new products and increasedmanpower had contributed to increased sale in domestic market. Nutraceuticals business andNon-Operating Income of the company have also contributed for the overall income of thecompany. Detailed analysis of the operations is given: I) Results of Operations Turnover

The Company's operations are classified into the following segments:

The Total Turnover of the company grew by 9% from Rs. 118576 Lakhs in the year 2009-10to Rs. 129115 Lakhs in the year 2010-11. The increment was the result of the following:

• Sugar division's sales increased from Rs. 108887 Lakhs in 2009-10 to Rs. 115901Lakhs in 2010-11 mainly driven by increased Power export and Alcohol sales.

• Bio Pesticides division's sales has increased by 63% to Rs. 5832 Lakhs.

• Nutraceuticals division's sales has increased by 17% to Rs. 4393 Lakhs.

Other Income

Other income for the year was Rs. 17981 Lakhs as against Rs. 14950 Lakhs in 2009-10which includes profit on sale of balance 3% stake in Roca Bathroom Products Pvt. Ltd.(formerly Parryware Roca Pvt. Ltd.) - Rs. 2214 Lakhs, dividend income of Rs. 11431 Lakhsagainst Rs. 10017 Lakhs in 2009-10. Interest income earned during the year was Rs. 1689Lakhs as against Rs. 772 Lakhs in 2009-10.

EBIDTA

The Earnings Before Interest, Depreciation, Tax and Amortisation for the year was Rs.16139 Lakhs (excluding Profit on sale of Investments of Rs. 2214 Lakhs) representing 11%of total revenues and showed a dip of 54% over previous year's EBIDTA of Rs. 34738 Lakhs.Losses of Sugar segment was the main contributor to the dip in EBIDTA. However, betterperformance of Bio-pesticides, Nutraceuticals, other value added products of sugar such asCo-generation and Distillery and dividend income have contributed towards positive side ofEBIDTA during the year.

EBIT

EBIT (excluding Profit on sale of Investments) was Rs. 8769 Lakhs as against Rs. 27805Lakhs of 2009-10, down by 68%.

Finance charges

The Company incurred finance charges of Rs. 4243 Lakhs for the year 2010-11 as comparedto Rs. 3857 Lakhs for the year 2009-10. Term loan interest was Rs. 2871 Lakhs as againstRs. 2815 Lakhs in 2009-10. Other Interest cost was Rs. 1372 Lakhs compared to cost of Rs.1042 Lakhs in 2009-10.

Depreciation

Depreciation was Rs. 7370 Lakhs for the year 2010-11, as compared to Rs. 6933 Lakhs forthe year 2009-10 which was marginally higher by 6% mainly due to normal capitalexpenditure incurred on plants. There is no change in the method of depreciation.

PAT

PAT (excluding Profit on sale of investments) stood at Rs. 5712 Lakhs as against Rs.19820 Lakhs in the previous year. This represents 4% and 15 % of total revenue for theyear ended March 31, 2011 and 2010 respectively.

Networth

The Networth as on 31st March, 2011 was Rs. 114474 Lakhs (net of fixed assetsrevaluation reserve) as against Rs. 109066 Lakhs in 2009-10 contributed by profit madeduring the year and premium received on issue of shares under ESOP. During the year, thecompany sub-divided its equity shares from Rs. 2 per share to Re. 1 per share. Further,481260 Equity shares were issued to the employees on exercise of Employee Stock optionsfor an aggregate premium of Rs. 365 Lakhs as against Rs. 374 Lakhs in 2009-10 and thetotal number of outstanding shares as on 31st March, 2011 were 173198200. CapitalRedemption Reserve and Capital Reserve remain unchanged. Amount transferred to DebentureRedemption Reserve from Profit and Loss Account during the year was Rs. 750 Lakhs.

Borrowing

The loan fund of the company increased by 14% from Rs. 57552 Lakhs in 2009-10 to Rs.65380 Lakhs in 2010-11. Long Term Debt/Equity is 0.40 times against 0.44 times in 2009-10.

During the year, the company issued 400 - 9.40% Secured Redeemable Non-convertibleDebentures aggregating to Rs. 4000 Lakhs, availed Rs. 790 Lakhs from the Sugar DevelopmentFund at a concessional rate of interest and availed from IndusInd Bank Rs. 5000 Lakhs asterm loan.

Working capital borrowing utilised was Rs. 27921 Lakhs on 31st March, 2011 as againstRs. 13970 Lakhs in previous year end. High inventory was maintained at year end whichincluded Raw sugar and other stocks held for exports under various Government releases.

Fixed Assets and Depreciation

The company has spent Rs. 3862 Lakhs (Rs. 4451 Lakhs during 2009-10) of Capitalexpenditure during the year towards normal capex. Since the company has already completedthe expansion projects in 2008-2010, the Capex spent was lower by 13% in 2010-11 comparedto previous year.

Investments

The total investment of the company as at 31st March, 2011 was Rs. 43414 Lakhs againstRs. 68282 Lakhs in 2009-10. During the year the Company made investment in equity sharesof Parrys Sugar Industries Ltd. (formerly GMR Industries Ltd.) for Rs. 8475 Lakhs and inPreference shares of Parrys Sugar Industries Ltd. (formerly GMR Industries Ltd.) for Rs.1412 Lakhs. Other investments include amount of Rs. 1956 Lakhs in Coromandel InternationalLimited and Rs. 291 Lakhs in US Nutraceuticals LLC, an overseas subsidiary of the company.

The reduction in investments was mainly due to liquidation of surplus money parked inMutual funds by Rs. 37010 Lakhs. Further, balance 3% stake in Roca Bathroom ProductsPrivate Limited (formerly Parryware Roca Pvt. Ltd.,) has been divested for Rs. 2220 Lakhsand the profit on sale of investment was Rs. 2214 Lakhs.

Rating

During the year, rating agency CRISIL has reaffirmed Long term Debt rating to AA/Stableoutlook post acquisition of Parrys Sugar Industries Ltd. It has reaffirmed P1+ rating forShort Term Borrowings.

The same ratings have also been assigned by CRISIL as bank loan rating as per BASEL IIrequirements for the existing and proposed bank facilities.

Book Value and Earnings Per Share

Book value of the Company increased from Rs. 64 per share (Rs. 127 per share of facevalue of Rs. 2 per share) to Rs. 66 per share of face value of Re. 1 per share, on accountof increase in reserves.

Earnings Per Share for the year ended 31st March, 2011 stood at Rs. 4.58 per share andEarnings Per Share (excluding Profit on sale of investment) decreased by 71% to Rs. 3.30per share.

Ratios

(Note: EPS, Book Value per share and P/E Multiple for the year 2009-10 was at facevalue of Rs. 2 per share)

Risk Management

The Company has a Risk Management Committee which systematically evaluates the businessrisks, operational controls and policy compliance associated with its business through itsrisk document, on an ongoing basis.

The risk document details the various risks, the probability of their occurrence, theirlikely impact and the strategies to mitigate the risks. The Board is apprised of the riskdocument and the mitigation plans at the Board Meetings.

Business Risks - Sugar

The major risks faced by Sugar business are Cane availability, Government regulations,Linkage of sugar price and sugar cane price (Cyclicality of sugar business), and capacityutilisations of plants.

Cane availability - Sugarcane is the key raw material for sugar and any disturbance ingetting cane at right time will have impact on the business.

The key factors that influence cane availability are:-

1. Climatic Condition: Climatic changes have adverse effect in quantity and quality ofcane. The timing, intensity and periodicity of rains have varying impact on the growth andmaturity levels of cane.

2. Availability of Cane Harvesting Labour (CHL): During recent times continuousavailability of CHL has become a challenge. The scarcity in availability of CHL isattributed to varying factors including availability of lesser effort jobs elsewhere. Tomitigate this risk, the company is systematically increasing the area that can be broughtunder mechanised harvesting.

3. Farmers opting competitive crops: The prices of competitive crops vis-a-vis sugarcane prices also has a significant influence on planting of sugarcane. Farmers may opt toplant competitive crops instead of cane due to benefits like higher margin, shortergestation period, lower water requirement etc.

The risk is mitigated by carrying out yield improvement activities which could increasethe total cane proceeds received by the farmer and also by providing services throughservice provider Namadhu Parry Mayyam to make cane growing hassle free.

Moreover the risk of cane non-availability is also mitigated by maintaining a goodrelationship with farmers, timely payments, introducing modern technologies to Farmerslike drip irrigation, mechanical harvesting, improved cane varieties and carefullymonitoring the scheduling of planting and harvesting etc.

Government regulations - The policies on cane are regulated by both central and stategovernment. The government made the following regulations during 2010-11.

• Reduced the levy quota from 20% to 10%.

• The weekly free release order mechanism was changed to monthly basis.

The risk being mitigated by working closely with ISMA and SISMA towards developing andappropriate policy recommendations, to represent the needs of industry to the government.

Linkage of sugar price and sugar cane price - Sugar price depends upon caneavailability and sugar demand in the country. Sugar prices fell to a low of Rs. 25/Kg inOctober 2010 compared to previous year high of Rs. 40/Kg in January 2010. The averageSugar price for the SY 2010-11 was Rs. 27.14/Kg. On the other hand sugarcane priceincreased to Rs. 1901/tonne for the SY 2010-11 compared to Rs. 1701/tonne last year. Therisk is mitigated by concentrating on retail sugar sales and making direct bulk sales toinstitutional customers.

Capacity utilisation of plants - Utilisation of plant depends upon the caneavailability. Sugar being a seasonal business, cane is available for crushing during 7 to8 months in a year. Non-availability of cane leads to under utilisation of sugar plant andco-generation plant capacities. This risk is mitigated by operating the sugar plant withimported raw sugar and co-generation plants with other types of fuel.

Business Risks - Bio-Pesticides

The major risks faced by the Bio-Pesticides division include dependence on singleproduct, Raw material price and procurement and currency risks.

Raw material price and procurement - Neem seed trade is unorganised, with no governmentsupport, no new plantations and unlawful felling of trees. Increase in neem seed price isa cause of concern. These risks are mitigated by procuring seeds from non-traditionalareas in Tamil Nadu, planned procurement from the Mysore market, and preserving Azacontent in neem seeds / kernels through cold storage facilities. It is also proposed tomotivate the seed pickers in villages by providing incentives, schemes etc.

Currency risks - Part of the bio-pesticide sale is exported and hence currencyfluctuations have an impact on the income. This risk is mitigated by implementing hedgingpolicies.

Business risks - Nutraceuticals

The major risks in Nutraceuticals division include dependence on weather, sourcing ofraw materials and currency risk.

Dependence on Climatic Conditions - The micro algae production is weather dependent andchanges in the weather pattern can have an adverse impact on productivity and cost ofproduction. The risk is mitigated through continued and focused initiatives taken tomanage the controllable factors.

Currency risks - The Nutraceuticals business is largely export oriented. The divisionoperates in multiple markets with multiple currencies; hence exchange fluctuations have adirect impact on the income. Also there are some raw materials which are imported, wherethe division is posed to currency risks. This risk is mitigated by taking exchange coverand implementing hedging policies.

Internal Control and Systems

The Company believes that internal control is a necessary part of the principle ofgovernance and that freedom of management should be exercised within a framework ofappropriate checks and balances.

The Company remains committed in its endeavour to ensure an effective internal controlenvironment that provides assurance on the efficiency and effectiveness of operations,reliability of financial reporting, statutory compliance and security of assets.

The Company has a well established and robust internal systems and processes in placeto ensure smooth functioning of the operations. An effective internal control system,supported by an Enterprise Resource Planning platform for all business processes, ensuresthat all transaction controls are continually reviewed and adequately addressed. Thecontrol mechanism involves well documented policies, authorisation guidelines commensuratewith the level of responsibility and standard operating procedures specific to therespective businesses.

The Company has its own Internal Audit department that monitors and makes continuousassessments of the adequacy and effectiveness of the internal controls and systems acrossthe Company.

The status of compliance with operating systems, internal policies and regulatoryrequirements are also monitored. The Board, Audit Committee and the Management review thefindings and recommendations of the Internal Audit department and take corrective actionswherever necessary. It is a matter of satisfaction and reassurance that the Company'sInternal Audit function is certified as complying with ISO 9001:2008 quality standards forits process.

Information Technology

The Company has been constantly focusing on judicious usage of IT applications toimprove utilisation leading to lesser cost and improving collaboration between employeesand the organisation and external entities at large and align with the business strategy.

Internal controls

To validate the internal control systems of the ERP, Systems audit was conducted in theFinance and Materials Management modules of SAP and the recommendations were implementedto strengthen the controls. The controls were found to be adequate and commensurate withthe Business requirements.

Network and IT security policy

The IT Security policy for the company was communicated to all the users and the keyfeatures are the Password policy, Firewall and internet security policy. The existingservers CMS and Pro MIS SQL 2000 were upgraded to SQL 2008 to improve performance and alsobetter security. The bandwidth in all factory locations have been increased in order toensure smoother functioning of operations.

New Initiatives

The company took the initiative of upgrading the IT environment in its subsidiaries andjoint venture. SAP and Web based Cane management system were implemented in Parrys SugarIndustries Ltd., SAP was implemented in Sadashiva Sugars Ltd., and the Joint ventureentity Silkroad Sugar Pvt. Ltd. To ensure better control on receivables for sugar with thebusiness initiative, the Company implemented the credit terms based on credit period forinstitutional customers and retail customers which has resulted in benefit by monitoringthe overdue.

To enhance the customer satisfaction, the Company automated the order and invoicingdetails by sending it to key institutional customers which improves the customerrelationship. To ensure faster payment to cane farmers established a Host to Hostconnectivity with State Bank of India with all our sugar factories thereby reducing thelead time for payment to farmers and also to the vendors.

Cane Management System

To improve the service to farmers and ensure farmer satisfaction, Company hasimplemented solutions through Cane Management System to address the new initiatives andalso provided solutions for the Namadhu Parry Mayyam which provides farmers service.

Farmer being the key stakeholder of your Company, to improve the service to canefarmers, printed the Ryot ledger and for the harvesting labour and transporters in Tamillanguage which would be beneficial and help retention of the cane farmers. Providingtimely information to the farmers is important. The company is generating alerts, SMSwhich can reach the farmers' mobile and cane field staff, which would enable them to plantheir activity. For Parrys Sugar Industries Limited, developed a new purchase centreconcept which is unique to Andhra operations (Sankili).

Production Management Information System (ProMIS)

The shop floor information system was implemented in Pugalur and Pettavaithalai whichwill facilitate the shop floor executives to analyse data and take proactive actions.

Audio-conferencing facility

Audio conferencing facility was implemented in all factories to facilitate fastercommunication and also to reduce the travel time of executives thus helping in fasterdecision making.

E waste policy

Based on the group guidelines during the year, removed the e-waste from all thelocations to an authorised e-waste agency which will ensure proper disposal of e-waste andthereby remove obsoletes.

Human Resources

EID Parry is a value based company with a culture that promotes empowerment andfreedom. In a challenging and competitive environment, the Company believes that peopleare the key to success. The Human Resources function proactively develops innovative andbusiness focused methods to attract, develop, motivate and retain our talented competitiveresources - Our People.

The Human Resources vision, "Building Organisational Capability to deliversuperior business performances", is delivered by a high level of policy deploymentinitiatives and contemporary HR practices focusing on the five key imperatives :Capability Development, Talent Management, Employee Engagement, Productivity and Cost andHR Excellence.

Capability Development

E.I.D.-Parry is committed to build a learning organisation, which continuously improvesskills and performance of employees, as we believe that a company's human capital is acritical asset and a success factor. The Learning & Development initiatives arecommitted to deliver benefits to the employees by ensuring complete satisfaction with needbased, timely and high quality training solutions that contribute to continuousdevelopment and improving the intrinsic level of competence of employees.

With the objective of creating a culture of coaching in the Company, LeadershipDevelopment Coach Accreditation programme was launched. A cadre of coaches from theleadership team have been accredited as a 'coach'. Each coach assumes the role of internalcoaches to strengthen and deepen our talent pipeline. Addressing the need to ensure timelyavailability of cane, we conducted a cane signature program for our cane officers. Thisprogram focused on helping the participants communicate to the farmers better.

Talent Management

The Company values both experience and fresh talent. The Company has inductedexperienced talent for its existing and sunrise businesses in support of the Company'soverall growth strategy. With a view to build a future talent pipeline in the Company,participation in campus placement programs continues. Adequate importance is placed on jobenrichment as a means of retention of talent. Recognising the need for concentrating onthe existing talent to develop and retain them, the Company identified the keycompetencies required to perform the critical jobs in the company. A structured assessmentwas conducted on the critical talent to identify the gaps in competencies, which could befurther developed to ensure the timely availability of talent.

Employee Engagement

Employees are the biggest asset of the Company and hence the Company pays a lot ofemphasis on their engagement at workplace. The Company's philosophy is to work top downwhen it comes to employee engagement. Our leadership team institutionalises the tenets ofengagement in their teams and also pay a lot of emphasis on cascading it down to the lastemployee in the organisation tree.

The Company places importance on the health and well being of its employees, childrenof employees and the society. This is done by promotion campaigns which include lectures,free screening facilities, provision of informative booklets, etc. on prevention andmanagement of major diseases such as Diabetes and AIDS.

Employees are also encouraged to participate in voluntary blood donation camps that areorganised on a regular basis. Workshops on yoga and meditation are organised for employeesand their families to further emphasise the importance of good health and well being.

Productivity and Cost

While we strive for growth in our business, we also focus on being efficient and tryand benchmark ourselves for achieving best in class performance through robust processeswhich helps us to enhance productivity and improve our costs. Some of the key areas wefocused were redesigning the organisation structure for sales team members and enrichingtheir job profile. We also launched interactive methods to propel performance whichcreated excitement at workplace.

HR Excellence

The company decided to be best in class in all its process and practices. Keeping inline with the philosophy the HR department also embarked on the journey of HR Excellence.This has helped us in streamlining a lot of our processes and also help us benchmark ourpractices with other company HR teams of the country. In this journey of achievingexcellence we have been conferred by a "Commendation for Strong Commitment toExcel" by Confederation of Indian Industries (CII).

In continuation with this, our HR department also won the prestigious awards like"Greentech Award for Best HR strategy" awarded by Greentech foundation andawards for "Innovative HR practices and Institution Building" by Asia PacificHRM Congress. With aggressive growth targets for the future, Human Resources practices atParry strives to deliver the business requirements of an organisation that is committed toits people and responds to them with care and concern.

Cautionary Statement

Statements in this Management Discussion and Analysis describing the Company'sobjectives, projections, estimates and expectations may constitute "forward lookingstatements" within the meaning of applicable laws and regulations. Actual resultsmight differ materially from those either expressed or implied.