KM Sugar Mills Ltd Management Discussions.

Industry Facts :-

• Sugar is one of worlds major agro- based industries and is also one of the most actively traded soft commodities on the exchange

• More than 80 % of Sugar produced is from sugarcane while balance is from sugar beet.

• Top 5 sugar producers in the world, namely, Brazil, India, EU, China & Thailand, account for over 60 % of the total production.

• The sugar prices have been seen high level of volatility and now it is at a comfortable level.

• India is the second largest producer of sugar in the world and its production in 2018-19 was 32.12 Million tonnes.

• Around 5 million hectares of land under sugarcane.

• 50 million cane farmers and their dependents.

• Around 700 sugar mills installed and 530 operational.

• India is Worlds largest consumer of sugar and usually consume all sugar produced domestically about 62-65% of sugar consumed directly by bulk users.

Global Sugar Industry

Global production is down 6.7 million tons to 178.9 million.

i. India is cut 2.8 million tons to 33.1 million on lower yields.

ii. EU is down 1.4 million tons to 18.2 million as drought took a toll on sugar beet production.

iii. Brazil is lowered 1.1 million tons to 29.5 million with more cane utilized for ethanol production versus sugar.

iv. Mexico is raised 186,000 tons because of good sugarcane yields.

- Global imports are little changed overall at 51.1 million tons.

i. India is boosted from zero to 1.2 million tons due to a Duty-Free Import Authorization scheme and higher imports from Brazil.

ii. United Arab Emirates is down 450,000 tons to 2.2 million on lower imports from Brazil.

iii. Japan is down 200,000 tons to 1.1 million on lower imports from Australia. Foreign Agricultural Service/USDA 3 May 2019

- Global exports are down 1.4 million tons to 56.4 million.

i. EU is lowered 1.0 million tons to 2.0 million in line with reduced production. o India is down 600,000 tons to 3.4 million.

ii. Mexico is up nearly 1.0 million tons to 2.1 million due to higher shipments to markets outside the United States. - Global ending stocks are lowered 1.9 million tons to 50.9 million.

iii. Brazil is down 1.0 million tons to 220,000 due to lower production. o Pakistan is lowered 785,000 tons to 2.1 million on less production. iv. Indonesia is raised 700,000 tons to 2.2 million on higher imports from Thailand and Australia.

As per the LONDON (Reuters) Report – The International Sugar Organization (ISO) said that the global sugar surplus is expected to be 641,000 tonnes in the 2018/19 season, down from a previous forecast of 2.17 million, The inter-governmental body said the smaller surplus was mainly due to a downward revision in production forecasts for Brazil and the European Union, although the forecast for Thailands output was revised up. Global production in 2018/19 was seen at 178.68 million tonnes, down from a previous forecast of 180.49 million tonnes.

The ISO said production forecast for Brazil had been revised down by 1.35 million tonnes and the European Unions forecast was lowered by 800,000 tonnes. Thailands projection was raised by 800,000 tonnes. However, Indias forecast was unchanged at 32.0 million tonnes but the ISO said that "if our forecast proves over-optimistic, a reduction in Indias actual output may have significant consequences for the global picture." Gobal consumption was seen at 178.04 million tonnes in 2018/19, a rise of 1.63 percent from the prior season, marginally below the 10-year average of 1.67 percent. The ISO said its assessment pointed to a well-balanced supply and demand although stocks remain high.

Indian Sugar Industry

Indias 2018-19 sugar production likely to be up by 1.5 per cent over previous year, says industry body Indian Sugar Mills Association (ISMA). Sugar mills across the country have produced 321.19 lakh tonnes of sugar between 1st October 2018 and 30th April 2019. This is about 9.36 lac tons more than 311.83 lac tons produced at the same time last year.

"However, as compared to 110 sugar mills which were still crushing sugarcane on 30th April 2018 last year, only 100 sugar mills are crushing sugarcane on 30th April 2019 this year. With lesser number of sugar mills working as of now, sugar production in the balance part of the current season will be much less than what was produced in the last year.

The sugar recovery in Northern India has been substantially better than the sugar recovery achieved in the last season. In the other parts of the country, including Maharashtra and Karnataka also, the sugar recovery is better than last year, though not as high as achieved in North India.

Therefore, even though the quantum of sugarcane crushing in the current season is less than that in the last season, the sugar production in 2018-19 will be marginally more than last year. Therefore, the sugar production in the current year for the whole country is expected to be around 330 lakh tonnes about 5 lakh tonnes more than last year.

Maharashtras sugar production has reached 107 lakh tonnesupto 30th April 2019 and all the mills except one have ended their operations for the season.

UP sugar mills have produced 112.65 lakh tonnes of sugar as on 30th April 2019, which is 0.27 lac tons higher than the production achieved by them last year on the corresponding date. Out of 119 mills operated this year, 51 mills have ended their crushing, and 68 mills continue their operations now. All sugar mills in Karnataka have ended their crushing for the season 2018-19 SS and they have produced 43.20 lakh tonnes of sugar till 30th April 2019. Sugar mills in Gujarat, Tamil Nadu, Andhra Pradesh &Telangana and Madhya Pradesh &Chhatisgarh have produced 11.19 lakh tonnes, 7.05 lac tons, 7.60 lakh tonnes and 5.30 lakh tonnes respectively.

Similarly, sugar mills of Bihar, Punjab and Haryana have also produced 8.35 lac tons, 7.70 lac tons and 6.75 lac tons as on 30th April .2019. Considering the opening balance of 107 lakh tonnes on 1st October 2018, estimated production of 330 lakh tonnes and domestic consumption of 260 lac tons as well as exports of 30 lakh tonnes of estimated sugar exports, sugar stocks at the end of the current 2018-19 SS i.e., 30thSeptember 2019, are expected to be at a higher level of around 147 lakh tonnes.

The field reports from Maharashtra suggest that sugarcane planting in most of the regions in Maharashtra for harvesting in next 2019-20 season is significantly lower than the sugarcane harvested in the current season. Additionally due to substantially lower rainfall during last seasons monsoon (June to September 2018) as also during the retreating monsoon i.e. North East Monsoon (October to December 2018), water in most of the reservoirs in Maharashtra is much below normal levels, which remained so, for most of the last 7 to 8 months. Therefore, the indications are that the acreage under sugarcane in Maharashtra for next years harvesting will be significantly lower than the current season.

Therefore, at an all India level there is a general expectation that the sugarcane availability will be much lower in 2019-20 than what has been in the current season, thereby reducing sugar production next year. ISMA will obtain satellite images of the sugarcane area across the country in latter part June 2019 to make its preliminary estimates of sugarcane availability and sugar production for 2019-20 sugar season.

Government Policies :

- To provide up to Rs 10,540 crore as soft loans to sugar mills NSE -4.41 % will help them in clearing arrears of cane growers by about Rs 9,000 crore. It would cost exchequer up to Rs 1,054 crore as interest subsidy.

- The interest subsidy of 7-10 % will reduce expenditure of 800-900 crore on account of interest burden of mills.

- To ensure that farmers are paid their dues expeditiously, the Centre has asked banks to seek bank account details of cane growers from mill owners, so that amount is paid directly to farmers. In order to incentivise the mills to clear their dues, CCEA also decided that the approved soft loans will be provided to those units which have already cleared at least 25 per cent of their outstanding dues in the sugar season 2018-19.

- The Central Government raised benchmark selling price of sugar at factory gate by Rs 2 to Rs 31 per kg.

- An assistance of Rs 5.50 per quintal of cane crushed was announced, amounting to Rs 1,540 crore to mills, for 2017-18. This has been raised to Rs 13.88 per quintal for 2018-19, costing over Rs 4,100 crore to the exchequer.

- Around Rs 1,200 crore was allocated for the creation of 30 lakh tonnes of buffer stock of sugar.

- The Central Government is providing assistance worth Rs 1,375 crore to mills by compensating expenditure towards internal transport, freight, handling and other charges to facilitate 50 lakh tonnes export during the 2018-19 marketing year.

POLICY :

- Sugarcane Production and Pricing Policy

According to industry sources, the sugar industry will continue to be subject to production controls by state governments, including sugar industry licensing, cane area reservation, minimum distance criteria, adoption of the cane price formula, specified cane procurement areas for sugar mills, and cane pricing.

On a side note, the sugar procurement for public distribution system (PDS) operation is being made from the open market by the state/Union Territories, and the Government is providing a fixed subsidy at INR 18.50 per kg for restricted coverage only to the Antyodaya Anna Yojana (AAY) families who will be provided 1 kg of sugar per family per month.

Sugar surplus is bad for everyone. It depresses the prices apart from affecting the cash flow of the mills. They struggle to pay the farmers and as arrears mount the government is forced to step in and help the mills clear the dues through relief packages.

To avoid this situation, the government typically encourages the mills to export. But that is easier said than done. The high cane prices (Indian mills pay Rs. 2,890 per tonne of cane compared with Rs. 1,732 in Brazil, Rs. 1,739 in Australia and Rs. 1,842 in Thailand) and lower economies of scale, the cost of production in India is way above the international sugar prices.

In 2017-18, the production cost was Rs. 3,580 per quintal of sugar while the international prices averaged Rs. 2,080. To get exports going, the government offers subsidies which, at best, cover only a part of the cost. Mills still export at a loss to reduce the stock and release the badly needed working capital. That is why India, despite its significant surplus, is not a serious player in the global sugar market.

The ideal way to manage sugar surplus is to link the sugarcane price to output price. Today, cane price keeps increasing irrespective of the price of sugar. That is the root of the problem. The government should come up with a formula that arrives at the cane price after factoring the value of the output (including price of sugar, ethanol and power generated from bagasse). That way supply-demand economics will come into play again.

If sugar and ethanol prices rise, it means demand is good and the formula will throw up a higher price of cane and farmers will plant more of the crop to meet the demand. The cane price offered will be low if there is a surplus in the market and the farmers will shift to another crop restoring the balance.

If the government is still keen on keeping the farmers happy, it can pay a higher price (above the one the formula puts out) and fund it from its Budget. That will ensure that the sugar sector is not forced to foot its populism. But it will come in the way of managing the surplus in the most efficient manner.

- Ethanol

It is time for the government to look at a more efficient and less controversial way (in line with the WTO norms) of dealing with the sugar surplus. India imports 82 per cent of its crude oil requirements and for the sake of energy security it is imperative for it to reduce this dependence on imports. At times of high crude prices, Indias economy feels the heat as the current account deficit widens putting pressure on the rupee and as inflation rises, the monetary policy tightens, slowing down the growth.

Brazil has shown that blending ethanol with petrol is a good way to reduce dependence on imported crude and, at the same time, manage the sugar surplus. The Central Government has done well on this front by giving a fresh impetus to the ethanol-blending programme and, most importantly, announcing remunerative prices for procurement by oil companies. It has set a 10 per cent blending rate by 2022.

Typically, ethanol is manufactured from molasses, which is a by-product of sugar. But it can also be manufactured directly from sugarcane juice. This will reduce sugar production and help manage the glut. As India alternated between sugar surplus and deficit earlier, the government did not permit large scale conversion directly to ethanol as that would have hurt sugar production.

It has now allowed sugar mills to do so and has also announced a premium price for the ethanol so produced, compensating for the revenue foregone for not manufacturing sugar. As many as 114 mills are expanding their ethanol capacities, which in the next 24 months will add 90-crore litres of capacity. In 2018-19, Brazil converted 65 per cent of its cane into ethanol directly.

This helped it to keep sugar production at the required level and also reduce significantly its oil import bill at a time when crude oil prices rose sharply. This option too has a catch. When global crude oil prices decline, oil marketing companies may not be willing to procure ethanol at a higher price.

Power Sector

Cogeneration of bagasse is one of the most attractive and successful energy projects that have already been demonstrated in many sugarcane producing countries such as Mauritius, Reunion Island, India and Brazil. Combined heat and power from sugarcane in the form of power generation offers renewable energy options that promote sustainable development, take advantage of domestic resources, increase profitability and competitiveness in the industry, and cost-effectively address climate mitigation and other environmental goals.

According to World Alliance for Decentralized Energy (WADE) report on Bagasse Cogeneration, bagasse-based cogeneration could deliver up to 25% of current power demand requirements in the worlds main cane producing countries. The overall potential share in the worlds major developing country producers exceeds 7%. There is abundant opportunity for the wider use of bagasse-based cogeneration in sugarcane-producing countries. It is especially great in the worlds main cane producing countries like Brazil, India, Thailand, Pakistan, Mexico, Cuba, Colombia, Philippines and Vietnam. Yet this potential remains by and large unexploited.

Using bagasse to generate power represents an opportunity to generate significant revenue through the sale of electricity and carbon credits. Additionally, cogeneration of heat and power allows sugar producers to meet their internal energy requirements and drastically reduce their operational costs, in many cases by as much as 25%. Burning bagasse also removes a waste product through its use as a feedstock for the electrical generators and steam turbines.

Most Sugarmills around the globe have achieved energy self-sufficiency for the manufacture of raw sugar and can also generate a small amount of exportable electricity. However, using traditional equipment such as low-pressure boilers and counter-pressure turbo alternators, the level and reliability of electricity production is not sufficient to change the energy balance and attract interest for export to the electric power grid.

On the other hand, revamping the boiler house of sugar mills with high pressure boilers and condensing extraction steam turbine can substantially increase the level of exportable electricity. This experience has been witnessed in Mauritius, where, following major changes in the processing configurations, the exportable electricity from its sugar factory increased from around 30-40 kWh to around 100–140 kWh per ton cane crushed. In Brazil, the worlds largest cane producer, most of the sugar mills are upgrading their boiler configurations to 42 bars or even higher pressure of up to 67 bars.

Technology Options

The prime technology for sugar mill cogeneration is the conventional steam-Rankine cycle design for conversion of fuel into electricity. A combination of stored and fresh bagasse is usually fed to a specially designed furnace to generate steam in a boiler at typical pressures and temperatures of usually more than 40 bars and 440C respectively. The high pressure steam is then expanded either in a back pressure or single extraction back pressure or single extraction condensing or double extraction cum condensing type turbo generator operating at similar inlet steam conditions.

Due to high pressure and temperature, as well as extraction and condensing modes of the turbine, higher quantum of power gets generated in the turbine–generator set, over and above the power required for sugar process, other byproducts, and cogeneration plant auxiliaries. The excess power generated in the turbine generator set is then stepped up to extra high voltage of 66/110/220 kV, depending on the nearby substation configuration and fed into the nearby utility grid. As the sugar industry operates seasonally, the boilers are normally designed for multi-fuel operations, so as to utilize mill bagasse, procured Bagasse/biomass, coal and fossil fuel, so as to ensure year round operation of the power plant for export to the grid.

Latest Trends

Modern power plants use higher pressures, up to 87 bars or more. The higher pressure normally generates more power with the same quantity of Bagasse or biomass fuel. Thus, a higher pressure and temperature configuration is a key in increasing exportable surplus electricity.

In general, 67 bars pressure and 495C temperature configurations for sugar mill cogeneration plants are well-established in many sugar mills in India. Extra high pressure at 87 bars and 510C, configuration comparable to those in Mauritius, is the current trend and there are about several projects commissioned and operating in India and Brazil. The average increase of power export from 40 bars to 60 bars to 80 bars stages is usually in the range of 7-10%. A promising alternative to steam turbines are gas turbines fuelled by gas produced by thermochemical conversion of biomass.

The exhaust is used to raise steam in heat recovery systems used in any of the following ways: heating process needs in a cogeneration system, for injecting back into gas turbine to raise power output and efficiency in a steam-injected gas turbine cycle (STIG) or expanding through a steam turbine to boost power output and efficiency in a gas turbine/steam turbine combined cycle (GTCC). Gas turbines, unlike steam turbines, are characterized by lower unit capital costs at modest scale, and the most efficient cycles are considerably more efficient than comparably sized steam turbines.

SWOT ANALYSIS :

KM Sugar Mills consists of manufacturing and trading facilities of sugar, alcohol and power. Each of its business segments has its own strengths and weaknesses and exposures to a variety of opportunities and threats. The Company has the following SWOT attributes broadly:

Strengths and Opportunities

i) The promoters are in this line for over 5 decades and are having good experience of the line.

ii) Company has integrated Sugar Plant, along with distillery and Co -Generation situated in the sugarcane-rich Indian State of U.P.

iii) Company has integrated facilities to produce sugar and also has ability to Process Raw Sugar.

iv) Company Produces Ethanol, Power which enhances the Revenue of the Company.

Weaknesses and Threats

i) Though de-licensed, sugar industry remains a highly regulated industry with the acts and orders through which government regulates the sugar Industry.

ii) Sugarcane being an agricultural commodity, its availability is dependent on vagaries of monsoon.

iii) Non availability of sugar cane may adversely affect the sugar mills as well as alcoholproduction and cogeneration power plants.

iv) Sugar Industry has political intervention.

v) Steep decline in sugar price may adversely affect the sugar mills.

SEGMENT–WISE OR PRODUCT-WISE PERFORMANCE.

(Rs. in lakhs)
Particulars Sugar Distillery Co-generation Others Total
2019 2018 2019 2018 2019 2,018 2019 2018 2019 2018
Revenue
Gross sales 38,110 46,051 4,621 4,225 6,815 5,489 - - 49,546 55,765
Less: Inter segment sales 6,698 5,481 - - 3,843 3,306 10,541 8,787
External sales 31,412 40,570 4,621 4,225 2,972 2,183 - - 39,005 46,978
Add: Other income 1,334 1,994 79 1,373 3 323 - 8 1,416 3,698
Total revenue 32,746 42,564 4,700 5,598 2,975 2,506 - 8 40,421 50,676
Segment results 2,875 1,051 83 2,391 1,018 616 - (4) 3,976 4,054
Less: Finance cost 693 841 13 27 56 254 - - 762 1,122
Profit before tax 2,182 210 70 2,364 962 362 - (4) 3,214 2,932
Current tax 651 617
Deferred tax 128 429
Profit after tax 2,435 1,886
Other information
Segment assets 39,175 22,278 5,076 5,134 4,417 3,798 - - 48,668 31,210
Segment liabilities 26,848 18,156 464 484 24 9 - - 27,336 18,649
Capital Expenditure 1006 443 745 781 3 - - - 1,754 1,225
Depreciation and amortisation 637 703 399 405 204 236 - - 1,240 1,344

* Capital expenditure includes fixed assets capitalized during the year and net increase/decrease in capital work-in-progress.

RISKS AND CONCERNS .

The Company has a robust risk management framework to identify and evaluate business risksand opportunities. It seeks to create transparency, minimize adverse impact on the business objective and enhance the Companys competitive advantage. It aims at ensuring that the executive management controls the risk through means of a properly defined framework.

The Company has laid down appropriate procedures to inform the Board about the risk assessment and minimization procedures. The Board periodically revisits and reviews the overall risk management plan for making desired changes in response to the dynamics of the business.

Key areas of risks identified and mitigation plans are covered in the Management Discussion and Analysis Report. The Company is not currently required to constitute a Risk Management Committee.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY.

The Company has in place adequate internal financial controls with reference to financial statements. During the year, such controls were tested and no reportable material weakness in the design or operation were observed.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES/INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED.

Your Companys approach to talent development is founded on the belief that learning initiatives must remain synergistic and aligned to business outcomes, emphasise experiential learning, provide an enabling and supportive environment and promote learning agility. Deep functional expertise is fostered through immersion in solving complex customer problems by the application of domain expertise early in managerial careers. Key talent is provided critical experiences in high impact roles and mentored by senior managers. Managers are assessed on your Companys behavioural competency framework and provided with learning and development support to address any areas identified for improvement. As part of your Companys managerial development and capability building strategy, various programmes have been designed and customised to your Companys requirements under these platforms. Your Company has further strengthened its performance management system and its culture of accountability through renewed emphasis on Management by objectives which includes clearly defined goals and outcomes based assessment.

DETAILS OF SIGNIFICANT CHANGES OF 25% OR MORE IN KEY FINANCIAL RATIOS:

(i) Debtors Turnover: It enhanced from 17 days (previous year) to 26 days during the year under review due to lower turnover and increase in debtors as on 31-03-2019 as compared with 31-03-2018.

(ii) Inventory Turnover: It reduced from 2.84 (previous year) to 1.47 due higher inventory and lower turnover of the Company during the year under review.

(iii) Interest Coverage Ratio: It increased from 3.71 times (previous year) to 6.33 times due to better Earnings before Interest and Tax (EBIT) and reduction in interest cost during the year under review.

(iv) Current Ratio: Not changed by 25% or more as compared to the immediately previous financial year

(v) Debt Equity Ratio:- Debt Equity ratio reduced from 1.06 (previous year) to 0.59 during the year under review due to change in the net worth the Company as the Company revalued its leasehold land during the year under review.

(vi) Operating Profit Margin (%) :- Not changed by 25% or more as compared to the immediately previous financial year

(vii) Net Profit Margin (%):-

It increased by 53.31% from 4.07 % ( previous year) to 6.24 % during the year under review due to better recovery of sugar from 9.72% to 11.01% during the year under review, which resulted better Net Profit Margin.

DETAILS OF CHANGE IN RETURN ON NET WORTH AS COMPARED TO THE PREVIOUS FINANCIAL YEAR :-

Return on Net Worth changed from 22.35% (previous year) to 14.40 % during the year under review. The change is due to consideration of revaluation of its leasehold land by Rs.6063.46 lacs during the year under review.