JK Sugar Ltd Merged Management Discussions

JK SUGAR LIMITED ANNUAL REPORT 2011-2012 MANAGEMENT DISCUSSION AND ANALYSIS GLOBAL SUGAR INDUSTRY SCENARIO: As per International Sugar Organisation (ISO), the global sugar production is expected to rise by 9.6 Million tons to a record of 173.8 Million tons in 2011-12 with bigger crop in Thailand, China, India, Russia and European Union, Sugar supplies will exceed demand by 6.5 Million tons in 2011-12. Further Global sugar surplus is likely to be higher by 15% in the next season 2012-13. Sugar supply is likely to exceed demand by 7.8 Million tons in 2012-13 as compared to earlier estimate of surplus of 6.8 Million tons. This would be third consecutive year in which production will be higher than consumption. Analysts anticipate lower sugar prices during the next six months due to higher sugar production in India and Brazil. The new agriculture year in Brazil started in March 2012 with the expected increase of 5.4% sugar cane harvest. Due to surplus production the International prices during the year remained under pressure. The sugar prices which were prevailing at around USD 760 per MT in May-June, 2011 has come down to USD 560 in May, 2012 registering a downfall of over 26%. With the prevailing crude oil prices around USD 125 per barrel , Brazil the largest sugar producer on the globe may divert its cane crop for production of Ethanol on economic consideration. This may improve the international prices of sugar to some extent. SUGAR INDUSTRY SCENARIO IN INDIA As per Indian Sugar Mills Association (ISMA), it is expected that Sugar production in the country will cross the estimated figure of 260 lac tons and may touch 265 lac tons as against the production of 245 lac tons last year. 251 lac tons of sugar has already been produced upto the end of April, 2012 - which is almost 25 lac tons more than the corresponding period of last year. Most of the increase has been contributed by U.P. which has seen an increase of almost 11 lac tons at a total production of 70 lac tons as against 59 lac tons last year. During the year, Central Government had revised upwards the Fair and Remunerative Price (FRP) of cane to Rs. 145 per quintal from Rs. 139.12 last year. Against the increase of 4.2% in FRP by Central Government, the state of UP had announced the State Advised Price (SAP) of cane for 2011-12 at Rs. 240 per quintal, up by over 17% from previous year figure of Rs. 205 per quintal. Sugar prices remained almost constant during the entire year with marginal variation between Rs. 27500 per MT and Rs. 28500 per ton, compared to last year average realisation of about 27000 per MT, despite heavy increase in cane prices, which has gone up by 17% in U.P This mismatch of cane price and sugar price has created an acute pressure on profitability, raising questions on the survival of sugar industry especially in U.P The uneconomic high price of cane has made the operations unviable for most of the sugar mills in U.P. resulting in an all time high outstanding arrear of cane price at Rs. 4500 cr at the close of the season 2011-12. On consistent pressure from industry, the Central Government had allowed exports of 35 lacs tons of sugar in 5 installments. Subsequently, in the month of May, 2012, the Government has freed sugar exports. This is an appreciable step by the Government, however, due to delayed decision, sugar industry may not reap the benefit as the international prices of sugar has come down to USD 560 per ton making the exports from India unattractive. OPPORTUNITIES With the increased focus on clean environment, the prospects of power from renewable sources of energy is gathering momentum. Bagasse, a residual substance generated while cane crushing, has great potential to produce green power. In 2008, National Action Plan for Climate Change (NAPCC), has set a target of obligatory use of atleast 5% energy used, produced from green sources. The obligation of use of Renewable Energy is likely to increase to 15% in next couple of years. This has created a great opportunity for sugar industry. Even after 65 years of Independence, there is a great shortage of electricity in almost every part of the country. Sugar Industry has potential to produce over 7500 MW of power by using its bagasse if favourable policies are in place. Molasses is another substance which comes out from the boiling and curing process during sugar production. Molasses is a good raw material for production of ethanol, a better oxygenate as adhesive fuel for motor spirit. Brazil, the largest sugar producer in the world has developed engines which can work with 70 to 80% ethanol. In India, 5% ethanol is blended with petrol. The Government is actively considering to increase the mixing percentage of ethanol to 10%, however, the decision is yet to be announced. The higher production of ethanol will help the country to reduce its dependence on import of petroleum and save foreign currency. With the increasing price of crude oil, the prospect of ethanol is very bright in context of the sugar industry. Molasses is also used for production of Extra Neutral Alcohol (ENA), Rectified Spirit (RS), absolute Alcohol, Special Denatured Spirit (SDS) and many high value added chemicals. Another by-product commonly known as Press Mud or Filter Cake contains high quantity of sulphur and other nutrients. Press mud is used as organic manure which enhances the fertility of the land. A technology have been developed to extract Sugar Wax from press mud which is high value product used for superior variety of cosmetics and medicines. If the situation evaluated in totality, there is great scope for industrial complex consisting of sugar plant, co-gen plant and a distillery together. THREATS AND CONCERNS In spite of the much propagated industrial liberalisation, sugar industry is still reeling under the era of total regulatory controls. Right from raw material, including cane area, procurement of cane, its movement etc., to finished products and by-products are totally regulated by Government Policies. Sugar industry being an agro based industry has inherent risk of natural calamities. Availability of sugar cane which constitute about 80- 85% of the cost of production, is highly dependent on climatic conditions besides being greatly influenced by Govt. policies and prices of other competing crops. Due to a huge farmer base, sugar industry is greatly influenced by political decision also. In addition, there is no linkage between the raw material prices and the price of the finished commodity resulting in uncertainty of the business. Sugar industry is obliged to supply 10% of its production at substantial concessional price, much below the cost of production, to the Government for supply to the Public Distribution System (PDS). This directly affects the bottom-line of the sugar mill and is causing losses to the tune of Rs. 3000 Crore each year. The remaining 90% of production of sugar is also controlled by the Central Government through a monthly release mechanism. Archaic control system that the Central Government exercises on the monthly sale of sugar by each sugar mill through the regulated release mechanism is applicable only to the sugar industry in India. Thus, the industry is not even free to plan their cash flow. This in turn leads to cyclicality in production cycles causing sharp swings in national sugar production from year to year. Inspite of the announcement of a Fair and Remunerative Price (FRP) for cane by the Central Government, some of the States like U.P., Punjab, Haryana etc have their policies of announcing State Advised Price (SAP) which is much higher than FRP as well as cane prices paid by some other States. In the year gone by, Uttar Pradesh had announced unprecedented historically high SAP of Rs. 240 per quintal for the year 2011-12. In just two years time the cane price has been increased from Rs. 165 to Rs. 240 per quintal an increase of over 45% whereas, the sugar price has not even increased by 10% during this period. These uneconomic and irrational increases have led to serious pressures on the sugar business leading to poor payments to the farming community also. Major sugar producing countries in the world including Brazil, Thailand, Mauritius, etc have established an excellent practice of fixing sugar cane price linked to sugar price. OUTLOOK The impact of increase in cane price and other input cost could not be absorbed in the sugar price resulting in acute pressure on the financial health of sugar industry in India. Due to high cane price in last couple of years, farmers switched over to cane cultivation in comparison to other competing crops which resulted in continuously increasing production of sugar. Sugar production in India which was 145 lac tons in 2009-10 increased to 245 lac tons in 201011 and further increased to 260 lac tons in the year 2011-12 whereas the consumption remained almost constant between 220 to 230 lac tons. As can be seen, the availability of sugar exceeds its demand creating pressure on domestic prices of sugar. On top of this, till last year export of sugar was not freely allowed and only in the month of May 2012 has sugar been freed for exports. Unfortunately this delay may not allow the industry to take full advantage due to falling international prices on account of new sugar coming from Brazil. However, this has led to a marginal improvement in sugar prices domestically. For the survival of the sugar industry, long term policies are needed to link cane price to sugar price, increase the distance between two sugar mills from existing 15 KM to at least 25 KM preferably 40 KM, as this will allow sugar industry to expand its capacity to make the operation commercially viable. The expansion of cogenerated power as well as increased use of Ethanol will help the industry to balance its revenue from different sources, hedging its dependence on the commodity cycles of sugar alone. The industry has been continuously requesting Government for a phase-wise reform of sugar sector by implementing various decontrol measures. The release mechanism should be abolished and the sugar factories should have the freedom of selling sugar as per their commercial decision. The Government should consider withdrawal of the mandatory levy system and like in case of other crops such as wheat, rice etc. consider procuring suger directly from the market for public distribution system (PDS). HUMAN RESOURCES The company recognizes its Human Resources as valuable Assets. It endeavors to increase the skill of its manpower through well-defined training and development programs. The company is committed to create an organization that nurtures talent and enterprise of its people, helping them grow and find fulfillment in an open culture. Its growth strategy is based on a strong Human Resource (HR) foundation created through a judicious use of innovative and complementary HR system. The company has a strong Performance Appraisal System supported by a well laid down reward and performance recognition policy through which the performance of the employees of the company is assessed periodically. Training needs of employees are appropriately identified and meticulously addressed, thereby having a positive impact on the performance. The Industrial relation during the year remained quite cordial. FINANCIAL PERFORMANCE The Financial Results for the year ended 31st March, 2012 are summarized below: (Rs. in Crore) Particular 2011-12 2010-77 Turnover 166.69 164.71 Profit before Interest, Depreciation & Tax 1.51 (-)6.04 Profit before Depreciation (-)8.33 (-)14.44 Profit before Tax (-)13.55 (-)19.52 Less: Exceptional Items (Differential cane price for Season 2007-08) 7.88 - Profit after Tax and exceptional items (-)21.43 (-)12.74 During the year under review, the turnover of your Company was at Rs. 166.69 crore as against Rs. 164.71 crore in the previous year. The quantity of cane crushed during the year under review was 40% higher at 58.71 lac quintal against 41.95 lac quintal last year. The recovery during the year, had improved to 9.15% from 8.93% last year. Power export has significantly improved by 66%, from 169 lac units in previous year to 281 lac units during the year under review. In spite of significant increase in all operating parameters such as cane crush, recovery and power export, PBDIT stands marginally positive at Rs. 1.51 crores. The benefits of improvement in operating parameters could not be reflected on the profit mainly due to mismatch of increase in cane price and sugar realisation. During the year under review cane price has increased by 17% where as sugar realization has increased by 4% only. This has resulted in erosion of gross margins. INTERNAL CONTROL SYSTEM The internal control system of the company are designed to ensure that financial reporting and Management information is reliable. The Internal audit program are designed in such a way that all the functions of the company involving critical aspects are periodically audited and reviewed .The internal control system of the company is regularly reviewed by the internal auditors for its effectiveness and is constantly modified in line with the changing business requirement. The key findings of the audit and action taken in response to audit observations are placed before the audit committee members. The Internal control system ensure that there is no revenue leakage in the system and resources and assets of the company are efficiently utilized and are not prone to misappropriation, theft and fraud. CAUTIONARY STATEMENT Managements Discussion and Analysis Report contains forward looking statements, which may be identified by the use of words in that direction, or connoting the same. All statements that address expectations or projections about the future, including, but not limited to statements about the Companys strategy for growth, product development, market position, expenditures and financial results are forward looking statements. The Companys actual results, performance or achievement could thus differ materially from those projected in any such forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any onward looking statements, on the basis of any subsequent development, information or events.