Management Discussion And Analysis Report
Sugar Season 2012-13 started with comfortable stocks of 8.0 Mn. tons (equivalent to 4months consumption). Artificially rising Sugar prices provided an opportunity for imports& once the higher production estimates started coming, then sugar prices starteddeclining steeply. About 0.8 Mn. tons sugar was imported (both Raws & Whites) despiteproduction estimates of 25 Mn. tons. Import Duty was marginally raised from 10% to 15% inthe month of July, 2013.
The Rangarajan Committee recommendations of 2012-13 were partially notified as under:
1. Removal of Monthly Free Sale quota system and 10% Levy obligation.
2. States to deregulate cane reservation area. However, pricing, cane reservation areaand minimum distance between two mills were left to the State Govts.
3. Linking of Cane Price to Sugar Price was left to SAP States.
Sugar season 2012-13 was one of the worst year for UP sugar mills wherein mills couldnot even cover the cost of cane and entire sugar industry suffered a loss of around Rs.3000 Crores and could not pay cane dues. U.P. cane arrears peaked at Rs. 7780 Crores andare at Rs. 2400 Crores at the end of the season.
In the World Sugar Market 2012-13 had another surplus year of 10 Mn. tons & sugarprices came down from 21.00 c/lb to 15.95 c/lb. Production was up 4% to 185 Mn. tons withconsumption up by 2% to 175 Mn. tons. Major countries who added to surplus were Brazil,Thailand & India. Low world sugar prices help stand alone Refineries in India. Renukawas a major player with two Refineries one at Kandla for re-export and another at Haldiato pump into deficit State of West Bengal. Thus, imports happened and exports were notviable hitting Indian sugar industry.
Sugar Season 2013-14
The Indian sugar outlook is very bleak. FRP went up from Rs. 170/qtl to Rs. 210/qtl.Maharashtra and Karnataka sugar mills want to pay FRP along with a formula for sharing ofsugar prices, but the same is not getting a positive response from farmers. Similarly, inUP mills have aggressively represented to Government & public in general highlightingthe most distressing situation of their financial performance where they cannot pay morethan Rs.220/qtl. The farmers meanwhile are agitating for Rs.320/- per qtl. Cane price.Sugar prices can only be expected to decline. The performance of sugar mills will dependupon how UP Government responds to industry requests on cane pricing 2012 - 13 was a goodand well spread monsoon season. Cane area was up by 5.78 % at 5.3 Mn. Hectares. All IndiaProduction is expected at 25 Mn. Tons. Major States like Maharashtra, U.P., Karnataka, andTamil Nadu are expected to produce the same as last year.
With season starting with a stock of 8.6 Mn. Tons and with the All India Productionestimates of 25 Mn. Tons & consumption at 23.5 Mn. Tons, a surplus of 1.5 Mn. Tonswill get added to stock which will be highest ever in the history of India.
The World Sugar Balance for 2013-14 is expected to remain in surplus of around 4.5 Mn.Tons.
The Ethanol program is moving forward with the Government of India making five percentblending of ethanol with petrol mandatory for the Oil Marketing Companies (OMC).
The price of ethanol has improved from Rs. 27/litre to Rs. 35/litre. The capacity ofETP of the distillery unit is being augmented to increase the production of ethanol andincreasing the capacity utilization of the plant.
CHLOR ALKALI DIVISION
Industry Structure and Development
The Chlor-Alkali is a basic heavy Chemical Industry comprising products such as Causticsoda, Chlorine, Hydrogen and Hydrochloric acid. These products are basic building blocksin the Chemical processing industry and are used in diverse industrial sectors, either asraw materials or intermediate or auxiliary chemicals. Some of the major industries wherethe Chlor-Alkali products used are as under:
|Chlor Alkali Products ||Product Usage Industries |
|Caustic Soda ||Aluminium, Pulp & Paper, Textile, Soap, Edible Dyes & Chemicals, Drugs & Drug Oil Refineries, Intermediates, Thermal Power Plants etc. |
|Chlorine ||PVC, CPW, Pulp & Paper, Pesticides, Chloromethanes, Refrigerant Gases, Water purification,Stable Bleaching Powder, Aluminium Chloride, Chlorinated Solvents etc. |
|Hydrochloric Acid ||Steel Pickling, Water Treatment, Effluent Treatment in Chemical Process industries, Thermal Power Plants |
|Hydrogen ||Hydrogenated Vegetable Oils, Sorbitol, Stearic Acid, Pesticides, Filament Lamps, Picture tubes, Steel units, Power Plants (in Turbo cooling), etc. |
The Chlor-Alkali sector plays an important role in the overall development of theeconomy. It contributes immensely to the manufacturing sector and to the external trade ofthe country. The Chlor-Alkali industry is thus a sector providing inputs to a large numberof other end user industries and the demand of its products is linked to the performanceof the end user products of these industries.
B) Industry Size
In India, as on 31.03.2013, there were a total of 33 Caustic Soda plants in operation.The installed capacity of Caustic Soda industry in the Country was 3.133 Million MT as on31.03.2013, as compared to 3.126 Million MT on 31.03.2012. There was a marginal increaseof 0.2% in the installed capacity during the year 2012-13 as compared to the previousyear.
During the year, the domestic production was 2.54 Million MT Caustic Soda representing81% utilization of the installed capacity. There was a decline in production of 0.016Million MT during the year 2012-13 as compared to the previous year. The total demand ofCaustic Soda was 2.81 Million MT, which grew by 4.4% over the previous year. The growth indemand for Caustic soda and Chlorine is linked to GDP growth.
The Caustic soda production and capacity utilization for last five years is as follows:
|Year ||2008-09 ||2009-10 ||2010-11 ||2011-12 ||2012-13 |
|Capacity Utilization % ||76.9 ||74.3 ||76.3 ||81.8 ||81.1 |
|Production (Million MT) ||2.20 ||2.33 ||2.46 ||2.56 ||2.54 |
C) Market Scenario and Outlook
During the year 2012-13, Caustic Soda and Chlorine prices remained highly volatile. Asa result of global recession, the demand of Chlorine in the Vinyl and PVC segmentsremained sluggish resulting in abysmally low prices for Chlorine during the beginning ofthe year. Caustic Soda prices, however, remained at reasonable levels. The trend changedin Quarter Q2 when demand of Caustic Soda came under severe pressure as several PaperUnits in the North Zone closed down temporarily. The situation aggravated with inflow oflow priced Caustic Soda from Middle East countries into West Zone and from Pakistan intothe North zone.
The Chlorine prices improved as overall production was reduced so as to match thesudden drop in Caustic Soda demand. The demand of Chlorine also improved as imports ofChlorine derivatives were less because of weaker rupee. During the second half of theyear, prices of Caustic Soda were partially restored. The Industry witnessed a drop ofnearly Rs 3000-4000 PMT in the ECU (Electrochemical Unit) realizations compared to theprevious year.
In the year 2013-14, with a growth of around 5%, the domestic consumption of CausticSoda is expected to reach 2.96 Million MT. Overall Production would be largely governed bythe demand growth in Chlorine. The limitation in lower demand of Chlorine compared toCaustic Soda would require Caustic Soda demand to be partially met through imports.
The coming year on Indian market looks to be strong as prices of both Caustic Soda andChlorine are likely to remain firm because of weak rupee and imports being more expensive.The demand for Caustic will be driven by higher consumption from the key consumingindustries such as Aluminium, Paper and Pulp, Fibre, Soaps etc. Due to low prices of EDCin the international markets, PVC manufacturers in the country would continue to importEDC rather than manufacturing EDC by sourcing Chlorine from the domestic markets. Exportsof CPW would have a good potential.
The Company is sourcing Power through Punjab State Power Corporation Limited andthrough Indian Energy Exchange under open access. With the commissioning of two PowerPlants (Capacity addition around 1400 MW) one at Rajpura and another at Goindwal Sahib inPunjab, the power availability in the State will improve.
D) Risks and Concerns
The increasing energy cost will remain cause of concern for the industry in the comingyear, which shall increase the cost of production. The Company will focus on reduction inPower consumption and raw material costs. The increasing demand of the industries to drawpower through open access shall limit the availability of power through this route.
The expansion of installed capacities of around 2.7 Million MT in the domestic causticindustry, cheaper imports of Caustic Soda, reduced demand of Caustic Soda withinstallation of Caustic Soda Recovery Plants in the Paper Units, replacement of Chlorinewith Chlorine dioxide / ECF bleaching process and increase in Logistics costs shall beother areas of concern in the coming year.
Chlorine prices in the North will remain under pressure, as demand is limited, with CPWand Paper as the only major segments utilizing Chlorine.
The energy consumption of our Chlor-Caustic plant is very high owing to the technologybeing 1st generation. Were we to switch the latest generation availabletechnology to (5th generation) we would have to incur a capex of about Rs.100 crores, butthe contribution would go up by around Rs.22 crores per annum for the same productionvolumes.
E) SWOT Analysis Strengths
- Located in sugarcane rich belt of Western UP
- Integrated sugar plants producing ethanol, supplying green power to the State grid
- Multiple product range with specialty sugars catering to food and pharma industry
- Strong governmental control on cane prices
- Deterioration of cane quality resulting in lower recoveries
- Soil deterioration following an overuse of fertilisers
- Higher value by-products
- Potential to increase cane productivity by varietal change to increase sugar recovery
- Technology up-gradation in sugar and by-product utilisation
- Unfavourable Government regulations towards cane pricing, raw sugar imports and sugarexports
- Rising cane payment arrears may force farmers shifting their preference to othercrops resulting in lower cane availability
- Cane quality dependent upon factors not entirely within our control.
- Impact on domestic operations due to raw sugar imports
INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY
Commensurate with the size and nature of its business, your company has proper systemsof internal controls which ensure acceptable utilization of resources and reliablefinancial reporting. Your company has a well defined comprehensive organization structure,authority levels and internal rules and regulations.
Extensive use of SAP and other software systems have also resulted in strengthening theinternal controls and accurate reporting of operational and financial data.
The HR vision of your company is committed to inspiring and developing the potential ofpeople and providing them opportunities for growth. Training and learning initiatives aimat upgrading the competencies, taking early responsibility and fostering a climate ofcreativity and innovation is our aim. Your company continuously evolves policies andprocesses to attract and retain its pool of technical and management resources through afriendly work environment that encourages individual and learn initiatives.
Owing to BIFR registration, several aspects of HR are coming under strain and we aretrying to manage the fall outs creatively.
Relations between the employees and management have remained cordial during the periodof the report.
Some of the statements in this Management Discussions & Analysis, describing theCompanys objectives, projections, estimates, expectations and predictions may be`forward looking statements within the meaning of applicable laws and regulations.Actual results may differ from those expressed or implied. Important developments thatcould alter your Companys performance include change in material costs, technologydevelopments and significant changes in political and economic environment, tax laws andlabour relations.