Sugar Industry - Global scenario
Sugar is one of the worlds major agro-based industries and is also one of the most
actively traded soft commodities on the exchang Brazil, India, the EU, China and Thailand
rank amongst the top global producers of sugar. Around 80% of the sugar is produced fr
sugarcane while the balance is from sugar beet. Brazil and India are the largest sugar
producers from sugarcane and EU and U.S are major sugar producers from beet. India, the
EU, China, Brazil and U.S are the major sugar consuming countries.
Global trends in Sugar
During the current five-year period, the Global Sugar Manufacturing industry has had to
contend with unstable production and pr levels. Till 2012 adverse weather conditions and
increasing diversion of sugar stocks to ethanol production reduced the production sugar,
inflating the world price of sugar. In 2012, the prices crashed due to high global
production and unhealthy stocks-to-use ratio a continued to decrease throughout the
period, pushing the revenue down. In the next five years, the sugar industry is expected
to perfc better due to rising demand for renewable energies, growing global sugar
consumption and government policies.
Sugar Industry - Domestic scenario
The domestic sugar production upto March 31,2016 stood at 23.7 million tonnes, with a
drop of 1.1 million tonnes less than last yi Lower production along with exports brought
down the closing stocks to around 7.6 million MT in SY2016 from around 9.5 million in
SY2015. The estimated decline in sugar stocks was a positive sign resulted in an
improvement in domestic sugar realizations sir August 2015. Despite the estimated decline
in domestic sugar production, production may marginally outstrip domestic consumption
around 0.3 million MT. The decline in production is mainly driven by severe drought in the
sugar producing States like Maharashtra a Karnataka, which impacted sugar cane
availability. The production in Maharashtra is estimated to decline by 20% to around 8.4
million 1 In UP, production during SY2016 is estimated at similar levels to that in the
previous year. In Karnataka, weaker monsoons are expectec negatively impact sugar
production, while production is expected to marginally increase in Tamil Nadu.
Price of Sugar Cane
For the sugar year 2015-2016, the Commission for Agricultural Costs and Prices (CACP)
has recommended a Fair and Remunerative Pr @ Rs. 2300/- per Tonne for a basic recovery
rate of 9.5% with a premium of Rs. 2.42 for every 0.1% increase in the recovery rate.
There has be a steady increase in the Fair and Remunerative Price, without any
corresponding increase in the sale price of sugar. For a recovery of 9. per ton, the FRP
has continued to rise from Rs. 2100 in SY 2013-14 to Rs. 2200 for SY 2014-15 to Rs. 2300
per tonne for SY 2015-2016. Howe for SY 2016-2017, the Government has committed to
continue with the FRP of 2300 per ton. Further the Central Government announce production
subsidy of Rs. 45 per metric ton of cane, subject to certain conditions by sugar mills,
pegging the effective cane price at Rs. 225 Mt for a recovery of 9.50%. The CACP has also
recommended for creation of a Sugarcane Price Stabilization Fund mobilized through li of a
special cess to meet the differential price between the price determined through a Revenue
Sharing Formula and the FRP which Rs. be an effective mechanisim to support the Industry
in case of fall in sugar price.
Apart from FRP, some of the State Governments fix a higher price for cane, called the
State Advised Price (SAP) which has also be continuously increased over the years. The
State Advised Price (SAP) fixed by the UP Government for cane remains high at Rs. 280/quir
for SY2016. In Tamil Nadu, the State government increased the SAP to Rs. 285/quintal in
SY2016 from Rs. 265/quintal in SY2015. The abi of the industry to secure a linkage between
cane price and sugar realizations is critical for its long-term sustainability. Unless
such linka is established as per the report of the Dr. Rangarajan committee and as
implemented by the states of Karnataka/ Maharashtra with Central Government support for
any difference between such price and the FRP is holistically adopted, the sugar cane cost
will remai cause of concern for the Industry.
Sugar Price
The sugar prices touch a three-year low of around Rs. 20,000/- to Rs. 23,000/MT in July
2015 caused by consecutive years of surplus product from SY2013 leading to surplus sugar
in the domestic market along with the international sugar-surplus scenario and muted
internatio sugar prices. However, since August 2015 the sugar realizations are on a rising
trend with prices increased marginally to around Rs. 24,0 MT in August 2015 with the
government considering the option of exporting surplus sugar. After the government
notified the mandat export quota for SY2016, domestic sugar prices firmed around Rs.
25,500/MT in September 2015. Festive demand for sugar during months of October and
November 2015 led to an increase in sugar prices to nearly Rs. 26,000/MT in October 2015
and to nearly Rs. 26,7 MT in November 2015. The announcement of cane production subsidy
in December 2015, the expected increase in sugar exports and sugar deficit scenario due to
drought have combined to cause sugar prices to firm up to Rs. 31,000/MT in February 2016
and to Rs. 31,600/ in March 2016. However, going forward, despite lower sugar production
during SY2016, the sustainability of the upward trend in su prices remains critical on the
sugar exports for SY2016 season as well as expectations on production figures for SY2017.
Over the medium term, international sugar prices will be largely determined by
fluctuations in world sugar production as well as crude prices, which determine the raw
sugar-ethanol blend in major exporting countries like Brazil. In the medium term, lower
sugar prices will boost consumption, but on the supply side, farmers are likely to shift
to other crops, which in turn would reduce the sugar output, leading to a supply
correction. However, with a decline in the output of major supplying nations including
India and Brazil, and the resultant lower supplies to the world market, a supply deficit
appears likely. Nevertheless, in the near to medium term, significant accumulated stocks
would provide insulation from any sharp spikes in international sugar prices.
Sugar Division
The Companys Sugar Plant located at Ramdurg, Belagavi District in Karnataka, was taken
on 25 years lease from Shri Dhanalakshmi Sahakari Sakkare Karkhane Niyamat (DSSKN). During
the year the Company fared well in the production front adding about 1.9 Lakh MT of cane
to the crushing over the previous year. The Company crushed around 7.4 Lakh MT of cane as
against 5.5 Lakh MT of cane last year. The average recovery percentage, though was lower
at 11.91% as compared to 12.14% of last year, it was higher than the nearby mills in North
Karnataka. During the year all operational parameters have been better than last year.
Cogeneration
Co-generation is the concept of producing two forms of energy from one fuel. One of the
forms of energy must always be heat and the other may be electrical or mechanical energy.
Cogenerated power has environmental benefits in terms of replacing fossil fuels and is
also renewable in nature. For a sugar mill, opting for cogeneration of power has the
advantages of getting an additional stream of revenue by selling electricity to the
consumer through power grids.
The power produced through co-generation substitutes the conventional thermal
alternative and reduces greenhouse gas emissions. In India, interest in high-efficiency
bagasse based cogeneration started in the 1980s when electricity supply started falling
short of demand. High-efficiency bagasse cogeneration was perceived as an attractive
technology both in terms of its potential to produce carbon neutral electricity as well as
its economic benefits to the sugar sector. In the present scenario, where fossil fuel
prices are shooting up and there is a shortage and non-availability of coal, co-generation
appears to be a promising development. The thrust on distributed generation and increasing
awareness for cutting greenhouse gas emissions increases the need for cogeneration. Also
it helps in controlling pollution from fossil fuels. The major bottlenecks in harnessing
co-generation potential has been lack of management focus; weak financial position of many
sugar mills, especially smaller units including those run by the co-operative sector; and
relatively unattractive tariffs.
During the year, the Companys Unit at Ramdurg has generated power of 541 Lakhs units
as against 383 Lakh units over the previous year. Marketing
The Company is targeting lucrative sugar markets and increasing its sales target to
Institutions, retail and to sugar deficit regions primarily in and around the Eastern part
of the Country. With the production of M30 grade sugar, the Company is expanding its
customer base. Besides the ability to sell the higher volumes of production, sales to
these markets also has the advantage of a premium price as compared to local trade. The
Company has also been participating in the PDS through e-tender and ventured into futures
trading through NCDEX. During the financial year 2015-16, the Company has considerably
increased the sales to institutions which offer a better price of its products.
OUTLOOK
The long-term profitability of Indian sugar companies will remain highly cyclical and
dependent on domestic and international supply- demand trends. The latter in turn would
hinge on agro-climatic conditions in the major sugar producing countries and the trends in
crude oil prices. The price trends in the international markets will be one of the key
determinants of the future profitability. Further, government/ court action in ensuring
removal of mandatory crushing by sugar mills for the entire cane offered to them by
farmers in the command area and a rational linkage between cane and sugar prices will have
a critical bearing on the long-term viability of sugar operations, especially in States
governed by SAP. However, the sugar industry players with high operating efficiencies,
forward integration and strong capital structure will be best placed to ride out the
cycles.
RISKS AND CONCERNS
The Company has constituted a Risk Management Committee. The details of the Committee,
its terms of reference are given in the corporate governance report. The methodology for
risk management primarily involves mapping of risks with strategy, assessing the risks on
its importance, identifying de-risking measures and assigning it to risk owners and
continuously monitoring the status of the risks. The risks were categorized into Strategy
& Planning, operations and compliance and the risks associated with each risk category
was further classified and identified as Rs. critical, Rs. major and Rs. moderate
The major risks faced by Sugar business are the availability of cane, regulatory risks,
price of sugar and that of sugar cane. The management periodically reviews the risk
management framework to identify the major business risks as applicable to the Company and
works out their mitigation strategy. Sugarcane is the key raw material for sugar and any
difficulty in getting cane at right time will have impact on the business. The key factors
that influence cane availability are climatic condition, availability of cane harvesting
labour and farmers opting competitive crops. The sugar industry is regulated by the
central and state governments. The Company is in close association with ISMA and SISMA to
understand the development in the sector at the country level and regional level. The
risks of rising prices of sugar cane and volatility in sugar prices are expected to be met
by a number of measures viz. improving the yield, increasing the cane cultivation and
improving the operating efficiency etc. besides effort to increase the revenue from the
byproducts.
Internal control systems and their adequacy.
The Company has well-established processes and clearly-defined roles and
responsibilities for people at various levels. This coupled with adequate internal
information systems in SAP ensures proper information flow for the decision-making
process. The control mechanism also involves well documented policies, authorisation
guidelines commensurate with the level of responsibility and standard operating procedures
specific to the respective businesses. Adherence to these processes is ensured through
frequent internal audits. The internal audits conducted are reviewed by the Audit
Committee and requisite guidelines and procedures augment the internal controls. The
internal control system is designed to ensure that financial and other records are
reliable for preparing financial statements and other information which ensures that all
transactions are properly reported and classified in the financial records.
Financial performance with respect to operational performance.
The Companys Sugar Plant located at Ramdurg in Karnataka, was taken on 25 years lease
from Shri Dhanalakshmi Sahakari Sakkare Karkhane Niyamat (DSSKN). At the time of takeover,
this unit was in a semi-finished condition. The Company made the necessary capital
investment and made the unit operational. The performance of the unit since inception is
as follows:
| Sugar season |
Cane crushed (MT) |
Recovery |
Sugar Produced (Qtls.) |
Power exported (Lakh Units) |
| 2008-2009 |
56,964 |
9.04 |
51,474 |
Nil |
| 2009-2010 |
2,05,071 |
10.12 |
2,07,522 |
Nil |
| 2010-2011 |
4,57,703 |
11.75 |
5,37,803 |
40.28 |
| 2011-2012 |
4,90,047 |
12.10 |
5,92,761 |
6.44 |
| 2012-2013 |
5,61,079 |
11.07 |
6,20,961 |
138.58 |
| 2013-2014 |
5,55,165 |
11.70 |
6,49,550 |
187.39 |
| 2014-2015 |
6,66,234 |
12.12 |
8,07,475 |
236.69 |
| 2015-2016 |
5,82,886 |
11.84 |
6,90,212 |
208.28 |
The initial capacity of the unit was 2500 TCD and 6 MW Co Gen. This unit commenced
commercial operation in December 2008. The Company over the years has enhanced the cane
crushing capacity to 4000 TCD and Co-generation capacity to 13 MW. During the year under
review, the total revenue of the Company from operations was Rs. 29121.44 lakhs, 46.80%
higher than Rs. 19836.63 lakhs in the previous year. The average sales realization was at
Rs. 23784 per MT vs Rs. 27684 last year. Operating profit (EBITDA) was Rs. (328.65) lakhs
as against Rs. 805 lakhs in the previous year. The interest cost was Rs. 1526.85 lakhs as
against Rs. 1666.43 lakhs during the last year. The Company is continuously working on
further improving operational efficiencies and production techniques, benchmarking with
the best in the industry. The efforts of the Company in this direction have resulted in
improvement of recovery, reduction of down time and production of quality sugar inviting
better margin for the Company products.
Sugar
Rs. in Lakh
| Revenue (excluding inter-segmental revenue) |
27,338.36 |
| EBIDTA |
(1,466.45) |
| Cogeneration |
Rs. in Lakh |
| Revenue (excluding inter-segmental revenue) |
1,442.13 |
| EBIDTA |
1,137.80 |
Material developments in Human Resources
In a challenging and competitive environment, the Company believes that people are the
key to success and continues to focus on people capabilities by leveraging technology and
creating a learning environment. The Human Resources function proactively develops
innovative and business focused methods to attract, develop, motivate and retain talent.
Human resources strategy is closely aligned to key business and stems from the
organisation purpose which is - "To build Credible, Reliable & Capable Human
Capital to deliver superior Individual and Business performance". This vision is
delivered by a high level of policy deployment initiatives and contemporary HR practices
focusing key imperatives such as Capability Development, Talent Management, Employee
Engagement, Productivity & Cost and HR excellence.
During the year under review, there were no cases filed pursuant to the Sexual
Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
CAUTIONARY STATEMENT
The management discussion and analysis report containing your Companys objectives,
projections, estimates and expectation may constitute certain statements, which are
forward looking within the meaning of applicable laws and regulations. Actual results may
differ materially from those expressed or implied in the statement. Your Companys
operation may inter-alia be affected by the supply and demand situations, input price and
the availability, changes in the government regulations, tax laws and other factors. The
Company cannot guarantee the accuracy of the assumptions and perceived performance of the
Company in future.
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