Shree Renuka Sugars Ltd

Quick facts

• One of the world’s major agro-based industries

• Around 75% of the global sugar production comes from the top 10 producers

• Brazil is the world’s largest sugar producer, followed by India (which isthe world’s largest consumer as well), the EU and China

Production and consumption

As of November, 2010, global sugar production stands at 168.95 Million tons, increasing5.27% over that of the previous year. Owing to record high prices in both the world marketand, more importantly, domestic markets, and lingering impacts of global downturn, theworld’s global consumption (167.67 Million tons) registered a slower growth rate,compared to the long-term 10 year average of 2.59%.

World sugar balance (Million tons, raw value)

Source: ISO Quarterly Market Outlook, November 2010

Global sugar production, consumption, and ending stocks

Source: Foreign Agricultural Service

Sugar Price

Over the preceding two years, the sugar markets were characterised by dramatic swingsin sugar prices due to tight demand and supply situation prevalent in the sector. Afterreaching a high of USD 29.9 cents/pound(lb), the prices dropped significantly betweenJanuary 2010 to May 2010. After that prices rebounded very sharply and gone as high as34.5 cents/pound(lb) in December. It actual highlights the two underlying factors, one isthe historically low levels of inventory across the world and impact of adverse weatherconditions. The prices would stabilise in the coming years with the prospect of betterweather conditions in Brazil and India, combined with more optimistic sugar productionestimates.

World sugar demand to grow at 2%

Source: ISO, Industry data, September 2010

Sugar price rebounded 50% after slump in June

Going forward given low stock to use ratio present in the industry, any supply shockswill result in higher prices

Quick facts

• Largest and among the lowest-cost producers of sugar in the world

• Accounts for over 70% of global raw sugar exports

• Ethanol market supported by growth of Flex-fuel veichles

BRAZILIAN SUGAR SECTOR FOLLOWING DEREGULATION

• The Brazilian sugar industry grew rapidly after deregulation of the sugar sectorin 1990. Prior to liberalisation, the Brazilian industry was ruled by IAA – the Sugarand Ethanol National Institute. Brazilian sugar production increased from around 7.3 mt inCY91 to around 31 mt in CY09.

Following is the history of Brazilian liberalisation process:

1990: Elimination of public production and export controls

1991: The mandate for national agencies and sector ministries to look over some ofthe IAA tasks

1997: Establishment of CIMA – The sugar and ethanol Inter-ministerial Council(responsible for recommendation for ethanol blending etc.)

1999: Creation of the sugarcane payment model ‘Consecana’. An arrangementbetween sugar and ethanol producers and sugarcane growers to share risks and profits.

Sugar

High global prices have encouraged Brazil to produce sugar for export, as sugarcanerefiners in Brazil continue to reallocate their production mix of sugar versus ethanol.During 2010-11, Brazil produced 33.5 Million MT of sugar out of which around two-thirds ofthe production will be exported, accounting for more than 48% of global trade flow. Totalglobal sugar imports, on the other hand, are expected to decline. The reasons: increaseddomestic production in many countries will meet the sugar demand in the internationalmarket, and particularly in India, which was the biggest sugar importer in 2009/10.

Center - South Brazil production update

Source: UNICA

Brazil’s market share of global sugar exports* (%)

* Sugar exports including white and raw sugar,

Source: UNICA

Ethanol

Brazil is the second largest producer preceded only by USA. The demand of ethanol hasincreased in Brazil with the advent of full flexi fuel vehicles in 2003. Currently Brazilis sugar: ethanol production mix is 55% skewed towards ethanol production. 90% of theethanol produced is consumed domestically. The industry also helps the country to de-riskitself from the rising crude oil prices by the way of providing bio-ethanol for fuellingof flexible-fuel vehicles. With growing number of flexible fuel fleet, the ethanol supplyand demand scenario in the domestic market is expected to remain balanced.

• Flex fuel cars represent around 40% of the Brazilian fleet. UNICA estimates alikely product mix of sugar and ethanol to be 46:54 in 2011, compared to 45:55 in 2010.

Sugar/ethanol break-up (%)

Source: UNICA

Brazil’s sugar and ethanol industry is expected to witness a new wave ofconsolidation as producers and distributors diversify their businesses. Besides, manyinternational energy majors are looking at Brazil’s ethanol industry to establish ascalable and profitable position in sustainable bio-fuels by building competitivepositions in the most efficient ethanol producing country in the world, and by exploringopportunities to produce and sell ethanol globally.

Quick facts

• India contributes about 12% of world sugar production with an expected annualsugar production of 25 Million tons (as per Indian Sugar Mills Association) in 2010-11

• Over 5 Million hectares of land is allocated for sugarcane cultivation with aproductivity of 69 tons on each hectare

• There are 624 sugar factories, dispersed over UP, Maharashtra and other states,with average crushing capacity of approximately 3,500 TCD

• Second largest agro-based processing industry after the cotton textiles industryin country, involving more than 4.5 crore farmers in the sugarcane cultivation

Production and consumption

India’s sugar industry has entered the strongest up-cycle (lowest stock to useratio) in the last half-a-century after witnessing a supply shortfall in previous twoconsicutive sugar seasons in a row. The production reached an all-time low of 14.7 Milliontons during SS 2008-09 owing to declining sugarcane acreage. In view of the adversedemand-supply scenario, the government revised the cane pricing system that encouragedfarmers towards increasing the sugarcane plantation area. Moreover, good monsoons boostedcane productivity. As a result, the sugar output increased to 19 Million tones, and isfurther expected to reach 23-25 Million tons for the next season, thus providing exportopportunity. However, sugar consumption continued to grow steadily on account of risingper capita income and government interventions to adjust stocks and facilitate trade toensure adequate monthly availability. Despite rising prices, the sugar demand did notwitness a decline among bulk consumers.

Source: ISMA

Sugar Price

Sugar prices in India have eased considerably from February 2010 on improvedexpectations of domestic production. At present, the Indian sugar prices are at a 25-27%discount to global prices.

Sugar price comparison

Ethanol and Cogeneration in India

The Cabinet Committee on Economic Affairs mandated 5 % blending of ethanol with petrolin November 2009. The ethanol blending programme is primarily based on indigenouslyproduced ethanol from sugarcane molasses, which, besides augmenting fuel availability inthe country, would also provide better returns for sugarcane farmers. The Ministry alsorecommended an interim ethanol price at Rs. 27 per litre for three years in December 2009,which came into effect from October 2010.

Bagasse enjoys a very strong demand in paper and biomass-based power projects.Currently, bagasse generation accounts for just 0.6% of the total power generated, but ithas the potential to generate 6% of future power requirements in 2017. The StateElectricity Regulatory Commission (SERCs) encouraged the cogeneration projects byincreasing price and providing permission to sell a part of power produced through openaccess in the market (Source: ICRA Research Report, June,2010).

Consolidated year-on-year performance

* Pro-forma EPS calculated at Rs. 1 per share and paid up capital at the end of theyear

Key ratios

DURING 2009-10

Total income increased 178% EBITDA increased 188% PAT increased 215% EPS increased 37%

Segmental operational performance

Sugar plant

* Including operational performance of Gokak Sugars Limited

DURING 2009-10

• Sugar contributed to 67% of the total revenues

• Sugar revenues and PBIT increased 97% and 127%, respectively

• Sugar assets increased 17%

Cogeneration plant

DURING 2009-10

• Co-generation contributed to 7% of the total revenues

• Co-generation revenues increased 33% while PBIT declined 53%

• Co-generation assets increased 29%

Ethanol plant

Revenues

At SRSL, our total turnover (including total revenues net of excise duty and includingother income) increased 150% to Rs. 55,979 Million for the year ending September 30, 2010,compared to Rs. 22,398 Million in the previous year. The increment was the result of thefollowing:

• Increase in sugar segmental sales to Rs. 36,683 Million from Rs. 18,616 Millionin the previous year

• Enhanced segmental sale of power generation to Rs. 3,944 Million from Rs. 2,955million in the previous year

• Decline in segment sales of Ethanol to Rs. 1,419 Million from Rs. 1,686 Millionin the previous year

• Increase in revenues of Trading to Rs. 16,646 Million from Rs. 1,703 Million inthe previous year

The segment sales of manufactured sugar increased 52% to 1,217,425 MT from 802,485 MTin the previous year with an average net realisation of Rs. 28,606 per MT for the year,compared to Rs. 21,398 per MT in the previous year. The manufactured sugar sales in Q42010 increased 36% from 285,271 MT in Q4 2009 to 384,591 MT of sugar with an average netrealisation of Rs. 26,670 per MT for the quarter as compared to Rs. 24,762 per MT forcorresponding quarter for the last year.

Cogeneration revenue stood at Rs. 1,894 Million, owing to a rise in power export toGrid by 71% from 232 million units to 397 million units. There has been a decrease in netrealisation from Rs. 6.45 to Rs. 4.78 per unit export of power. Besides, there was anincrease in export of power to Grid by 67% from 33 million units in Q4 2009 to 55 millionunits in Q4 2010.

Sales from Ethanol division during the year decreased 26% compared to previous year dueto declining sales from 65,025 KL to 51,149 KL. The average realization increased to Rs.27,744 vis--vis Rs. 25,924 in the previous year. Sales from Ethanol plant in Q4 2010have decreased by 44% from 16,950 KL to 9,551 KL as compared to the sales for Q4 2009 withaverage realization from Rs. 30,441 to Rs. 24,272, an 20% decrease.

Production

A total of 4,030,068 MT of cane was crushed across all the plants for the year endingSeptember 30, 2010, as compared to 3,519,953 MT in the previous year. Sugar baggedincreased 19% to 449,263 MT from 377,750MT. Sugar yield (recovery) per ton of caneincreased to 11.15% from 10.73% in the previous year. Total sugar produced in therefineries from raw sugar increased from 637,089 MT to 829,000 MT. Total sugar producedfor the year increased 26% to 1,278,263 MT vis--vis 1,014,794 MT in the previous year.

The closing sugar stock was recorded at 359,451 MT (including 244,153 MT of whitesugar, 26,733 MT of imported white sugar and 88,565 MT of raw sugar) as on September 302010. Inventory of Ethanol and Molasses was 30,716 KL and 64,733 MT, respectively.

Expenditure

The total expenditure (excluding provisions for tax, interest and depreciation)increased by 160% to Rs. 48,733 million for year ending September 30, 2010 vis--visRs.18,713 million in the previous year.

Raw materials

Cumulative raw material consumption touched Rs. 45,061 Million for the year endingSeptember 30, 2010 vis--vis previous year’s Rs. 16,035 million. This is owing to anincrease in crushing and rise in cane price.

Interest

The interest cost as a percentage of total revenues increased marginally to 1.47% foryear ending September 30, 2010 from 3.95% in the previous year. The interest cost declined7% to Rs. 825 Million from Rs. 884 Million in the previous year, as a result of betterworking capital management and interest cost. The long term debt outstanding as onSeptember 30, 2010 is Rs. 12,924 million.

Profit before tax

The profit before tax increased 158% to Rs. 5,606 Million for the year ending September30, 2010 from Rs. 2,176 Million in the previous year, due to changes in various revenueand cost items discussed above.

Provision for income tax

Income tax provision surged 103% to Rs. 1,504 Million for the year ending September 30,2009 from Rs. 741 Million in the previous year due to a rise in taxable income.

Profit after tax

Profit after tax increased 186% to Rs. 4,102 million for the year ending September 30,2010 from Rs. 1,435 million in the previous year due to changes in various revenue andcost items discussed above.

INTERNAL CONTROL SYSTEM

The Internal Audit function has been outsourced to a firm of Independent CharteredAccountants who conduct audit on the basis of Annual Audit Plan, as approved by the AuditCommittee of the Board, covering all the factories and locations of the Company. Theobjective of such audits is to ensure adequacy of internal control systems and processes,adherence to the Company’s policies and guidelines and compliance with applicablestatutes.

These audits also determine whether adequate controls are in place to mitigate risks.Internal Audit has a follow up process in place to verify the implementation ofrecommendations made. Special audits are also conducted as directed by themanagement/Audit Committee. The Audit Committee of the Board of Directors inter-aliareviews the observations made by the internal auditors on the control mechanism and theadequacy of the internal control system, recommendations for corrective actions andimplementation thereof, compliance related matters, operations of the Company, adherenceto the laid down processes and guidelines.

The Company has implemented SAP at all its units to ensure effective IT security andsystems thus ensuring real time availability of information at various locations.

RISKS AND CONCERNS

Risks are both internal and external, some of which could be largely anticipated,whereas others could not. Risks are an integral part of any business and the risk profile,to a great extent, depends on the economic and business conditions and the markets andcustomers we serve.

The Company has adopted a ‘Risk management Policy ‘ which is reviewed on aperiodic basis in order to recognize and reduce exposure to risks wherever possible. TheCompany’s Forex policy offers a natural hedge to currency exposure. TheCompany’s risk management policies are based on the philosophy of achievingsubstantial growth while mitigating and managing risks involved. Few of the risksassociated with our businesses are enumerated below :

• Fluctuations in demand and price for finished products viz. sugar, ethanol andpower

• Fluctuations in the price and availability of key raw materials, includingsugarcane, raw sugar, energy prices

• Increase in interest rates

• Adverse fluctuations in the exchange rate of the Rupee against majorinternational currencies

• Increasing transportation costs

• Strikes or work stoppages

• Changes in government policies affecting the sugar industry in India or globally

• Accidents, natural disasters or outbreaks of diseases