Global economy
Overview: The global economy was estimated to have grown at a slower
3.2% in 2022, compared to 6% in 2021. Some realities that defined the global business and
trading sentiment comprised the Russian invasion of Ukraine, return of inflation, pandemic
upsurge in China, global liquidity squeeze following higher interest rates, and
quantitative tightening by the US Federal Reserve.
The total outcome of these adversities translated into moderated global
capital and consumer spending, disrupted trade, increased energy costs and cautious
consumer spending. Even as the global conflict remained geographically distant from India,
ripples comprised increased oil import bills, cascading inflation, cautionary government
and a sluggish equity market.
Global inflation was 8.9% in 2022, among the highest in decades. US
consumer prices increased about 7% in 2022, the highest in four decades. The Federal
Reserve raised its benchmark interest rate to their highest in 15 years.
The global equities, bonds, and crypto assets reported an aggregated
value drawdown of USD26 trillion from peak, equivalent to 26% of the global gross domestic
product (GDP). What made 2022 unique was a concurrent decline in bond and equity markets;
2022 was the only year when the S&P 500 and 10- year US treasuries delivered negative
returns of more than 10%.
Gross FDI inflows - equity, reinvested earnings and other capital -
declined 8.4% to $55.3 billion in April-December. The decline was even sharper in the case
of FDI inflows as equity - these fell 15% to $36.75 billion during the first three
quarters of FY 2022-23.
Brent crude oil decreased significantly from a peak of around USD 120
per barrel in June 2022 to USD 70 per barrel at the end of the calendar year due to the
availability of cheap Russian oil.
The S&P GSCI (benchmark for commodity investments and a measure of
global commodity performance) fell from a peak of 4288 in June 2022 to 3233.4. There was a
sharp decline in crude oil, natural gas, coal, lithium, lumber, cobalt, nickel and urea
realisations.
Performance of major economies
United States: Reported GDP growth of 2.1% compared to 5.9% in 2021
China: GDP growth was 3% in 2022 compared to 8.1% in 2021
United Kingdom: GDP grew by 4.1% in 2022 compared to 7.6% in 2021
Japan: GDP grew 1.7% in 2022 compared to 1.6% in 2021 Germany: GDP grew
1.8% compared to 2.6% in 2021 [Source: PWC report, EY report, IMF data, OECD data]
Outlook
The current economic scenario in the first quarter of CY2023 shows
early indicators that the world economy could achieve a soft landing—with inflation
coming down and growth steady— have receded amid stubbornly high inflation and recent
financial sector turmoil. Central banks have raised interest rates and while food and
energy prices have come down, the underlying price pressures are proving sticky, with
labour markets tight in a number of economies. Commodity prices that rose sharply
following Russias invasion of Ukraine have moderated, but the war continues, and
geopolitical tensions are high. Infectious COVID-19 strains caused widespread outbreaks
last year, but economies that were hit hard—most notably China—appear to be
recovering, easing supply-chain disruptions. For advanced economies, growth is projected
to decline by half in 2023 to 1.3%, before rising to 1.4% in 2024. For emerging market and
developing economies, economic prospects are on average stronger than for advanced
economies, but these prospects vary more widely across regions. On an average, growth is
expected to be 3.9% in 2023 and to rise to 4.2% in 2024.
World output projections
Regional growth (%) |
2022 |
2023 (E) |
2024 (E) |
World output |
3.4 |
2.8 |
3.0 |
Advanced economies |
2.7 |
1.3 |
1.4 |
Emerging market and developing economies |
4.0 |
3.9 |
4.2 |
European Union |
3.7 |
0.7 |
1.6 |
Source: Global Prospects and Policies, International Monetary Fund : April
2023 |
Indian economy
Recovering from pandemic-induced contraction, Russian- Ukraine conflict
and inflation, the Indian economy is staging a broad-based recovery across sectors,
positioning to ascend to the pre-pandemic growth path in FY23. Private consumption in H1
is the highest since FY15 and this has led to a boost in production activity resulting in
enhanced capacity utilisation across sectors. With monetary tightening, the US dollar has
appreciated against several currencies, including the rupee. However, the rupee has been
one of the better-performing currencies worldwide, but the modest depreciation it
underwent may have added to the domestic inflationary pressures besides widening the CAD.
Global commodity prices may have eased but are still higher compared to pre-conflict
levels. The upside to Indias growth outlook arises from the limited health and economic
fallout for the rest of the world from the current surge in Covid-19 infections, a return
of capital flows to India amidst a stable domestic inflation rate below 6%; and overall
impetus to private sector investment. The Economic Survey of 2023 projects Indias
baseline GDP to grow at 6.5% in FY24 and is broadly comparable to the estimates provided
by multilateral agencies such as the World Bank, the IMF, and the ADB.
Outlook: India is expected to grow 6.8% in FY2024, catalysed in no
small measure by 35% capital expenditure growth by the government. The growth could be
catalysed by broad-based credit expansion, better capacity utilisation and improving trade
deficits. Headline and core inflation rates could down. The private sectors investments
could revive, strengthening the economy. India is poised to sustain its outperformance.
The landscape favours India: Europe is moving towards a probable recession, US economy is
slowing, Chinas GDP growth forecast of 4.4% is less than Indias GDP estimate of 6.1%,
America and Europe are experiencing the highest inflation in 40 years.
India Real GDP Consumer Prices, Current Account Balance, and
Unemployment ¦ 2022 ¦ 2023 ¦ 2024
6.8 63 6.7
II
-2.6 -2.2 -2.2
Real GDP Consumer Prices Current Account Balance Unemployment Source:
Global Prospects and Policies, International Monetary Fund : April 2023
The outlook for private business investment remained positive despite
an increase in policy rates. India was less exposed to Chinese economic weakness, with
much less direct trade with China than many Asian peers. Broad-based credit growth,
improving capacity utilisation, governments thrust on capital spending and infrastructure
should bolster investment activity. According to our surveys, manufacturing, services and
infrastructure sector firms are optimistic about the business outlook. The protracted
geopolitical tensions, tightening global financial conditions and
slowing external demand are the downside risks.
Union Budget FY 2023-24 provisions
The Budget 2022-23 sought to lay the foundation for the future of the
Indian economy through projects like PM GatiShakti, Inclusive Development, Productivity
Enhancement & Investment, Sunrise Opportunities, Energy Transition and Climate Action,
as well as Financing of Investments.
The capital expenditure of the Indian government expanded 35.4% from
H5.54 lakh crore to H7.50 lakh crore. An outlay of H5.25 lakh crore was made to the
Ministry of Defence (13.31% of the total Budget outlay). An announcement of nearly H20,000
crore was made for the PM Gati Shakti National Master Plan to catalyse the infrastructure
sector. An expansion of 25,000 km was initiated for the national highways network. An
allocation of H2.37 lakh crore was made towards the procurement of wheat and paddy under
the MSP safety net. An outlay of HI .97 lakh crore was announced for Production Linked
Incentive schemes across 13 sectors.
Global sugar sector review
The global sugar market size is pegged at 180431Lakh Tons in 2022/23.
According to the IMARC Group, the market is expected to reach 2172.0 LakhTons by 2028,
registering a growth rate of 1.20% during 2023-2028. Global sugar production is expected
to have decrease by 17.11Lakh tons to 1804.31 Lakh tons. A poor finish to the EU harvest
and an unprecedented truncation of the UK beet harvest, due to freezing temperatures and
snow fall mid-December, is added to by a lower Indian Sugar production. Meanwhile, Brazil
and Thai sugar production figures were revised higher, tempering the aggregate downward
revision in Global production, but also increasing the export market origin concentration
still further. Sugar consumption is expected to create new records on account of growth in
markets like China, Indonesia and Russia. Higher exports from Brazil and Thailand are
expected to offset the decline in India. Stocks are expected to remain at a low level as
growth in global consumption surpasses production growth. (Source: einnews.com, apps. fas. usda.gov)
Prominent sugar producing nations
USA: Sugar production in USA is expected to be flat at 92.31Lakh tons.
Sugar consumption stood at 113 Lakh tonnes while stocks are lowered with the drop in
production and imports.
Brazil: Sugar production in Brazil is expected to enhance by 15.4 Lakh
tons to reach 336.0 Lakh tons as higher sugarcane yields from favorable weather resulted
in additional sugarcane available for crushing. Sugar consumption is expected to remain
unchanged at 95 Lakh tonnes while exports are expected to increase with higher exportable
supplies.
Thailand: Thailands sugar output is expected to increase by 3.49 Lakh
tons to reach 123.49 Lakh tons from earlier estimate
of 120 Lakh tons. Sugar consumption is expected to increase by 100,000
tons to reach 25.2 Lakh tons on account of the countrys anticipated economic recovery.
Exports are expected to surge due to large exportable supplies while stocks are expected
to reduce sharply following strong exports.
China: Chinas sugar production increased by 1.12 Lakh tons to 98.88
Lakh tons with increased cane sugar and beet sugar production. Sugar consumption is
expected to enhance on the assumption that Covid-related restrictions ease. Sugar imports
decline as high world sugar prices encourage drawdown of stocks
European Union: Sugar production in the European Union is expected to
decline by 11.83 Lakh tons to reach 142.28 Lakh tons as farmers reduced sugar beet
plantings by replacing it with profitable crops like corn and sunflower. Sugar consumption
and imports are unchanged while exports and stocks are moderated with the lower available
supplies.
Indian sugar sector review
India possesses around 700 sugar mills in the country with a capacity
to crush 340 lakh metric tonnes of sugar with an annual turnover of H 1,00000 crores. The
sugar industry has provided livelihood to nearly 50 Lakh Indians. India is expected to
produce 320 to 330 Lakh tonnes of sugar in 2022-23 after considering diversion of 40Lakh
tonnes of sugar for ethanol production. Indias domestic sugar consumption is expected at
around 275 Lakh tonnes in SS 2022-23. India had an opening balance of sugar between 80-100
Lakh tonnes in the past few years which is expected to be around 58 Lakh tonnes in SS
2022-23.
The area planted under sugarcane in the country has enhanced by 6%. The
government allowed sugar mills to export 60 Lakh tonnes of sugar in SS 2022-23. Sugar
mills have contracted to export about 56 Lakh tonnes till January 2023; producers.
Expectations of a decline in sugar production have dampened prospects of any additional
exports during the 2022-23 sugar season. Going forward, the sugar sector is expected to
gain traction due to the governments continuous support and growing focus on diversion
towards ethanol production to promote the ethanol blending program in India.
(Source: Economic Times, reuters,
Mongabay.com)
Particulars (Lakh tonnes) |
SS 2022-23 (E) |
Opening balance (as on 1st Oct, 2022) |
58 |
Estimated sugar production |
328 |
Estimated sugar consumption |
275 |
Estimated export |
61 |
Closing balance (as on 30th Sept, 2023) |
50 |
Stock to use ratio |
22.5% |
(Source: Industry)
Indian sugar exports and imports
India remains the second biggest exporter of sugar globally. India is
expected to export around 61 Lakh tonnes plus of sugar in the 2022-23 sugar season.
According to the Indian Sugar Mills
Association (ISMA), India entered into a contract to export 35 lakh
tonnes of sugar in 2022-23 sugar season. The government announced the sugar export policy
of 2022-23 which permitted exports of 60 lakh tonnes of sugar on a quota basis till 31st
May.
Sugar exports (in Lakh tonnes)
Sugar season |
Exports |
2018-19 |
38 |
2019-20 |
58 |
2020-21 |
70 |
2021-22 |
112 |
2022-23 (Expected) |
61 |
Fair and remunerative prices (FRP)
The government increased the fair and remunerative price (FRP) of
sugarcane for the 2022-23 sugar season by H15 per quintal to H305 for a basic recovery
rate of 10.25%. It is 5.1% higher than H290 per quintal fixed for the sugar season
2020-21.The growth in fair and remunerative price is on account of the inducing demands
from sugar mills for a corresponding rise in the minimum sale price (MSP) of sugar to
remain competitive.
Indias major sugar producing states Uttar Pradesh: The area for sugar
cultivation in Uttar Pradesh increased by 3% to reach 23.8 lac hectares in 2022-23 SS
compared to 23.1 lac hectares in 2021-22 SS. The states sugar output is expected to remain
same at 102 Lakh tonnes in 2022-23 SS like in the previous year (2021-22 SS).
Maharashtra: Sugarcane acreage in Maharashtra is expected to increase
by 7% to 14.5 lakh hectares in 2022-23 SS compared to 13.5 lakh hectares in 2021-22 SS.
Maharashtras sugar output is expected to decline to 105 Lakh tonnes in 2022-23 SS
compared to 137 Lakh tonnes in 2021-22 SS on account of lower cane yields.
Karnataka: Sugarcane acreage in Karnataka is expected to enhance by 11%
to reach 6.5 lakh hectares compared to 5.9 lakh hectares in 2021-22. Installation of new
distillation capacities in the sugar units of the state has resulted in the decline in
sugar output at 56 Lakh tonnes in 2022-23 SS as against 61.50 Lakh tonnes in 2021-22 SS.
Global ethanol sector review
The global ethanol market is pegged at US $ 109 billion in 2022 and is
expected to reach US$ 170 billion by 2032, reporting a CAGR of 4.6%. The growth of the
ethanol market is expected to be fast progressive compared to a previous compounded annual
growth rate of 3.9% between 2016 and 2021. Growing interest in using the substance as a
biofuel coupled with growth in alcohol consumption are expected to be significant drivers
of the global ethanol market.
North America is the largest ethanol market with an ethanol market
share of more than 18.6% worldwide. Supportive government regulations of the countries in
North America towards ethanol production, deployment of ethanol as a
biofuel and growing awareness of the necessity to moderate
environmental pollution were the major factors contributing to the dominance of the
region. United States remains the primary contributor in the North American region. Europe
contributes around 16.3% of the global ethanol market. Ethanol prices enhanced during the
second quarter of 2022 in line with the expansion of the European market.
The Asia Pacific region is expected to record the quickest CAGR growth
between 2022 and 2032 on account of growing fuel consumption and increased industrial
activity. India and China are significantly employing ethanol in the pharmaceutical
ethanol market in the Asia Pacific region. The developing countries in the region have
embarked into a brand new renewable energy programme that is cleaner and better suited to
lower high crude oil and petrochemical imports. (Source: Future market insights. com)
Indian ethanol sector review
Ethanol has emerged among the major priority sectors in the 21st
century India. India remains the fifth largest ethanol producer worldwide after US,
Brazil, European Union and China. Ethanol is mainly used across the world for consumption
purposes but
countries like Brazil and India use it as a biofuel. According to the
International Energy Agency, India is on the course to surpass China as the third largest
ethanol consumer by 2026 with the objective of becoming carbon neutral by 2070. In 2022,
Indias ethanol production stood at a record high of 350 crore liters compared to 330
crore liters produced in 2021.
According to the ministry of consumer affairs, food and public
distribution, Indias ethanol production capacity has jumped to 947 crore litres per annum
till 30th November 2022. Of these, molasses-based distilleries enjoy a capacity of 619
crore liters whereas grain based distilleries possess a capacity of 328 crore liters. The
capacity expansion is expected to save around foreign exchange for the country worth
around H30,000 crore per annum. Moreover, the achievement of E10 has resulted in
additional revenue of about H18,000 crores of sugar mills which will surpass H3,500 on
achievement of E20 blending with petrol by 2025.
The government aims to achieve 12% ethanol blending with petrol in
2022-23. The country aspires to reach 20% ethanol blending target by 2025 which will
require to produce 1,000 crore liters of ethanol. 13,200 Lakh tonnes of sugarcane, 190Lakh
hectares of additional land and 348 billion cubic meters of additional
water will be required to achieve the ethanol blending target through molasses. 228
ethanol projects have received loans of more than H18,500 crores sanctioned from banks.
Out of the loans sanctioned, more than H9,000 crores has been disbursed to the 196
projects. (Source: Mint, Statista, scroll.in, chini mandi.com)
Pricing: In November 2022, the CCEA approved higher ethanol price
derived from different sugarcane based raw materials under the EBP Programme for the
forthcoming sugar season 2022-23 during ESY 2022-23 from 1st December 2022 to 31st
October, 2023:
¦ The price of ethanol from C heavy molasses route be increased
from H46.66 per litre to H49.41 per litre,
¦ The price of ethanol from B heavy molasses route be increased
from H59.08 per litre to H60.73 per litre,
¦ The price of ethanol from sugarcane juice/sugar/sugar syrup
route be increased from H63.45 per litre to H65.61 per litre,
Co-generation
Sugar cane is one of the most promising agricultural sources of biomass
energy. Sugar cane yields two kinds of biomass (sugarcane trash and bagasse). Bagasse is
the fibrous residue left after milling sugarcane with 45-50% moisture content and a
mixture of hard fibre with soft and smooth parenchymatous (pith) tissue with high
hygroscopic property.
For every 100 tonnes of sugar cane crushed, a sugar factory produces
nearly 30 tonnes of wet bagasse. Bagasse is used as a primary fuel source by sugar mills.
When bagasse is burned, it produces sufficient heat and electrical energy to supply sugar
mill needs. The carbon dioxide emitted on burning the bagasse is equal to the amount of
CO2 that the sugarcane plant has absorbed from the atmosphere during growth, making
cogeneration greenhouse gas neutral.
Company review
Avadh Sugar and Energy Limited is a part of the prestigious K.K Birla
Group of sugar companies with a eight decade exposure in the countrys sugar sector. The
Company is an integrated sugar player dealing in sugar, ethanol and spirits, cogeneration
and other by-products. The Company has four sugar mills in Uttar Pradesh with a combined
crushing capacity of 31,800 TCD, two distilleries with an overall ethanol production
capacity of 325 KLPD and a cogeneration facility that can produce 74 MW power.
Financial overview
Analysis of the profit and loss statement Revenues: Revenues from
operations reported a 1.98% growth from H274365.91 lakhs in 2021-22 to reach H279801.49
lakhs in 2022-23. Other income of the Company reported a 124.64% growth and accounted for
a 0.33% share of the Companys revenues, reflecting the Companys dependence on its core
business operations.
Expenses: Total expenses increased by 3.22% from H258055.70 lakhs in
2021-22 to H266367.05 lakhs in 2022-23.
Analysis of the Balance Sheet Sources of funds
The capital employed by the Company decreased by 2.29% as on 31 March,
2023 owing to decreased accruals.
The net worth of the Company increased by 9.97% during the year owing
to plough back of profits. The Companys equity share capital comprised 2,0018,420 equity
shares of H10/ each.
Long-term debt of the Company reduced by 16.29% to H43687.19 lakhs as
on 31 March, 2023 owing to scheduled repayment. The debt-equity ratio of the Company stood
at 1.20 in 2022-23 compared to 1.50 in 2021-22 owing to scheduled repayments and lower
accruals during the year.
Finance costs of the Company reduced by 21.62% from H8842.41 lakhs in
2021-22 to H6930.62 lakhs in 2022-23 owing to lower borrowings, especially to fund working
capital.
Applications of funds
Fixed assets (net block) of the Company increased by 8.20% from H
107688.12 lakhs as on 31 March, 2022 to H116514.08 lakhs as on 31 March, 2023 owing to an
increase in capex during the year.
Investments
Non-current investments of the Company increased from H4682.17 lakhs as
on 31 March, 2022 to H4747.56 lakhs as on 31 March, 2023, due to fair valuation of quoted
investments.
Working capital management
Current assets of the Company reduced by 7.63% from H127420.36 lakhs as
on 31 March, 2022 to H117699.09 lakhs as on 31 March, 2023 owing to reduced inventory and
declining debtors. The current ratio of the Company stood at 1.00 and at the close of
2022-23 compared to 1.07 at the close of 2021-22.
Inventories including raw materials, work-in-progress and finished
goods among others reduced by 7.24% from H116973.02 lakhs as on 31 March, 2022 to
H108503.06 lakhs as on 31 March, 2023 owing to lower inventory. The inventory turnover
ratio improved from 1.77in 2021-22 to 2.13 in 2022-23.
Despite marginal growth in revenues, trade receivables declined by
15.22% from H8568.62 lakhs as on 31 March, 2022 to H7264.72 lakhs as on 31 March, 2023.
Trade receivable turnover ratio stood at 35.34 as on 31 March, 2023 as compared to 37.11
as on 31 March, 2022 owing to declining debtors.
Margins
Cost absorption impact due to flat revenues impacted the margins during
the year. The EBITDA margin of the Company reduced by 1.77 basis points from 11.17% in
2021-22 to 9.41%
while the net profit margin of the Company improved by [ ] basis points
due to exceptional gains on account of disposal of shares in the associate company.
Key ratios
Particulars |
2022-23 |
2021-22 |
Net profit Ratio (%) |
4% |
5% |
Debt-equity ratio |
1.20 |
1.50 |
Return on capital employed (%) |
11.00 |
12.00 |
Debtors turnover ratio |
35.34 |
37.11 |
Inventory turnover ratio |
2.13 |
1.77 |
Interest coverage ratio |
3.81 |
3.47 |
Current ratio |
1.00 |
1.07 |
Debt service coverage ratio |
1.46 |
1.23 |
Return on net worth |
12.69 |
17.52 |
Risk management at Avadh
Geographical risk: A long distance between factories and cane fields
could affect the companys recovery.
Mitigation: All the Companys factories are situated within [ ] kms of
its command areas and connected by good roads, moderating its cut-to-crush tenure.
Demand risk: Surplus sugar supply over demand could affect
profitability.
Mitigation: The company has prudently sacrificed sugar production in
favour of ethanol, strengthening realisations per stick of cane. The competitive cost of
sugar manufacture has helped the companys sugar business remain profitable in challenging
market cycles.
Procurement risk: The Company may not be able to mobilise adequate
sugarcane.
Mitigation: The Company enjoys a strong partnership with H2.82 lakhs
cane farmers. The company engaged in aggressive cane development, enhancing raw material
access. The result is that the company enhanced cane procurement in of the last decade.
Liquidity risk: The Company might not have the ability to meet
short-term financial obligations without incurring major losses.
Mitigation: The Companys focus on its ethanol business is expected to
help the company generate quicker revenues, strengthening the companys liquidity
position.
Competition risk: The Company might face challenges to retain its
market share due to increased competition from larger players.
Mitigation: The Company created a network of wholesalers who remained
with the company since its inception. Majority of the companys wholesalers are associated
since inception.
Climatic risk: The Companys command areas might be affected by heavy
rainfall and flood which might damage the crops, leading to reduced sugar recoveries.
Mitigation: The Company undertook necessary farming practices, timely
varietal replacements and faster decision making to curb the climatic risk.
Regulatory risk: The Companys operations might be impacted due to
change in regulatory operations.
Mitigation: The Company complies with all the regulatory measures
announced by the government.
Quality risk: The Companys inability to maintain the required product
quality standards might affect its market share.
Mitigation: The Company overcame quality risks through process-driven
systems, training, certifications and sampling.
Financial risk: Increase in debt might pose a risk for the company.
Mitigation: The Company regularly repays its debt, strengthening its
Balance Sheet and credit rating. Going ahead, the company expects to grow through its
accruals.
Internal control systems and their adequacy
The internal audit system of the company has been regularly tracked and
reformed to make sure that assets are protected, established regulations are complied with
and pending issues are addressed on time. The audit committee reviews reports presented by
the internal auditors on a routine basis. The committee records the observations of the
auditors and takes corrective actions, if necessary. It maintains constant dialogue
with statutory and internal auditors to ensure that internal control
systems are operating effectively
Human resources and industrial relations
The Company considers that the value of the employees is the key to its
success and is devoted to provide them skills which will enable them to seamlessly evolve
with ongoing technological advancements.
The Companys permanent workforce stood at 817 as at 31st March, 2023.
During the year, the Company arranged training programmes in different areas such as
technical skills, behavioural skills, business excellence, general management, advanced
management, leadership skills, customer orientation, safety, values and code of conduct.
Corporate social responsibility
The Companys CSR policy focuses on practicing its corporate values
through its commitment to grow in a socially and environmentally responsible way, while
meeting the interests of its stakeholders and with an intent to make a positive difference
to society and to conduct the business in socially responsible, ethical and transparent
manner to demonstrate commitment to respect the interest of and be responsive towards all
stakeholders, including shareholders, employees, customers, suppliers, project affected
people, society at large etc. and create value for all of them.
Cautionary statement
This statement made in this section describes the Companys objectives,
projections, expectation and estimations which may be forward-looking statements within
the meaning of applicable securities laws and regulations.
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