Shree Renuka Sugars Ltd Management Discussions

Global Economy

In 2023, the global economy demonstrated remarkable resilience, in response to recovering from Covid-19 pandemic, ongoing geopolitical disturbance due to Russia-Ukraine conflict resulting in supply chain disruptions and global shortage of food. This happened due to numerous countries concurrently tightening their monetary policies. Despite these challenges, the global economy managed to successfully evade recession. Financial institutions remained sturdy, and major emerging economies sidestepped abrupt economic downturns. Employment and incomes rose steadily, supported by heightened government spending and consumer outlays. Notably, there was an influx of new participants into the workforce, contributing to overall stability. By the end of 2023, global growth rebounded to 3.2% following a period of decline in 2022.1

Outlook

The baseline forecast for the global economy suggests that it will maintain a growth rate of 3.2% throughout 2024 and 2025, mirroring the performance seen in 2023. This reflects upgrades for economic powerhouses such as China, the United States of America and large emerging market economies. Advanced economies are expected to experience a slight acceleration, with growth expected to rise from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025. Emerging markets and developing economies are projected to experience a modest slowdown from 4.3% in 2023 to 4.2% in both 2024 and 2025.

Global headline inflation is anticipated to decrease from an annual average of 6.8% in 2023 to 5.9% in 2024 and further to 4.5% in 2025. Notably, advanced economies are expected to return to their inflation targets sooner than emerging markets and developing economies. Central banks are now tasked with ensuring a smooth landing for inflation, avoiding premature policy easing or prolonged delays that could lead to undershooting targets. As central banks adopt a less restrictive approach, there is a renewed emphasis on implementing medium-term fiscal consolidation to rebuild fiscal space for strategic investments, prioritising spending and ensure debt sustainability.

Indian Economy

Despite the global economic downturn, Indias economy maintains a solid growth rate compared to many other nations, driven by strong domestic consumption and reduced dependence on global demand. Government initiatives such as the Prime Ministers Gati Shakti, focusing on infrastructure development, logistics enhancement and industrial corridor creation are expected to boost industrial competitiveness and fuel future growth. Anticipated improvements in the labour market and rising consumer confidence are anticipated to further drive private consumption growth.

While aiming for a lower fiscal deficit of 4.9% of GDP, Government of Indias emphasis on capital expenditure is a strategic move to stimulate economic activity without compromising fiscal prudence. A lower fiscal deficit should mean reduction in fiscal push to growth. The nature of spending should provide support to the investment cycle and rural incomes. It should help in improvement of borrowing cost by improving credit rating and attracting both domestic and international investment specially in infrastructure development. Moreover, efforts to enhance business environment includings treamlined labour regulations and production linked incentive schemes are expected to contribute to an improvement in export of goods going forward.

Several factors such as the transmission of rate hikes by the Reserve Bank of India, regulatory actions to manage unsecured lending and fiscal deficit adjustments will influence Indias growth trajectory. The country is projected to surpass the $5 trillion GDP mark and approach $7 trillion, positioning it as the third-largest economy globally and elevating its per capita income to the upper-middle-income category by 2031.

Quarterly estimates of the percentage change in GDP over the values of the previous year

Indias GDP grew by 7.6% in the second quarter of FY 24 compared to 6.2% growth in Q2 FY 23

Outlook

India achieved GDP growth of 8.2% during FY 2024. As per S&P Global Ratings, this growth rate is expected to moderate to 7% in FY 2025. Indian inflation stood at 5.4% in 2023–24 as compared to 6.7% in 2022–23, and the Reserve Bank of India aims to bring inflation further down to 4.5% in 2024–2025. The food commodity inflation was at 8.7% in May 2024 and continues to be a challenge. The interest rates hovered around 6.5% throughout the year. The economic outlook remains positive, with a focus on agriculture, manufacturing and infrastructure, though high interest rates and lower fiscal stimulus may temper demand.

Industry Overview

Global sugar industry overview

According to the United States Department of Agriculture ("USDA") – Foreign Agricultural Services, the global sugar market is expected to experience higher surplus in 2024–25 than 2023–24, estimated at 7.2 Mn. tons (raw value), an increase of 1 Mn. tons over 6.2 Mn. tons in the previous year.

Sugar production is expected to expand in key sugarcane producing countries except Brazil and India. Brazils sugarcane acreage increased and diversion to sugar is also expected to be higher, however the production is expected to decline due to lower field and industrial yield, a result of below normal rainfall during rainy season. The marginal decline in Brazil production is offset by an increase expected in Thailand. Thailand is expected to witness productivity gains, along with higher acreage projections due to better returns than casava. Indian production in 2023 saw a marginal decline which prompted the Government to cap diversion of sugar to ethanol at 1.7 Mn. tonnes. During 2024, it is expected that production will bounce back due to good monsoon spread in key growing areas. The overall cane acreage may also witness marginal improvement. Production in China is expected to increase by 5% on account of expansion in area and production in Mexico is also expected to increase by 12% due to favourable weather conditions leading to increase in productivity. Productivity is down in Indonesia due to unfavourable weather conditions resulting in lower production projections.

As per USDA, exports are projected to reduce from Brazil and Thailand. However, the Government of India may prefer excess sugar diversion to ethanol next year. However, if monsoon season is as per Indian Meteorological Departments prediction, India may participate in exporting sugar in 2025–26.

Indias sugar industry overview

India has been the largest consumer and second largest producer of sugar in the world, commanding about 18% share of the global sugar consumption and contributing about 19% to global sugar production, and is structurally surplus. Consequently, Indian sugar trends exert a profound impact on the global markets. Indias sugar market is expected to register a CAGR of 5.2% over the next five years.

India has 761 installed sugar mills of which 535 are working. Private sector has a big share in sugarcane milling with 333 mills belonging to private sector out of total 535 working mills. Sugarcane mills are distributed in 14 Indian states, but majority is concentrated in 3 states i.e. Uttar Pradesh, Maharashtra and Karnataka. 406 (76%) mills out of the 535 working mills are in these states. With average running capacity, India has a crushing capacity of more than 400 Mn. tons in 160 working days.

It is expected that India, followed by China and Indonesia, will provide the largest contribution to the overall rise in sugar consumption. In India, population growth (although slower than in the past decade) coupled with income growth (which is associated with stronger demand for processed food and beverage products) is expected to sustain the upward trajectory in overall sugar consumption over the next decade.

Growth drivers for the sugar industry

Indian sugar industry is the biggest organized sector in agriculture in India. It supports about 6 Mn. farmers and their families. Therefore, farmers become the biggest growth driver for the sugar industry. Farmers have responded positively to better returns from sugarcane and have increased sugarcane production, leading to a 30% increase in crushing from 240 MMT in 2010–11 to 315 MMT in 2023–24. This resulted in H 1,088 billion (approx.) being paid to farmers in 2023–24, as compared to H 447 billion paid to farmers in 2010–11. However, in the year 2023–24 while the sugarcane area increased, due to bad monsoon, yields were lower and gross sugar production reduced to 34 MMT compared to 37.1 MMT in 2022–23. The spill over of deficit rains in 2023 will have some impact on the crop area for 2024–25, depending on the monsoons.

However, Indias sugarcane growth trajectory is promising due to following reasons:

Varietal improvements: With reducing cultivable area, need of the hour is to increase productivity per unit area and varietal improvement plays a major role. This is true especially in North India where growing period is small due to extreme weather conditions twice in a year. The impact is very well visible with advent of early variety Co-0238 in North India which got widely adopted in 2014–15 and improved cane availability, farmer remuneration and millers return due to better field and industrial yield. However, varietal sustainability for a longer time is a problem in North India leading to continuous improvement and bringing resistant varieties to insect pest while maintaining/improving the yields. For example, new resistant varieties like Co-0118, Co-15023 and COLK–14201 etc. are replacing Co-0238 in North India. Moreover, biotechnology and genetic engineering are being explored to enhance sugarcane varieties. Efforts are focused on developing genetically modified sugarcane with traits such as increased sugar content, resistance to pests and diseases and tolerance to drought or salinity. These initiatives hold promise for driving further advancements within the industry.

Irrigation potential: Sugarcane in India is grown in 100% irrigated conditions so increasing irrigation can expand sugarcane areas in regions like Maharashtra and Karnataka. Under Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) – since 2015, the area covered under micro-irrigation systems has increased at a compound annual growth rate (CAGR) of 10%. As per the Governments data, maximum number of projects (22) are going on in Maharashtra. The Government plans to cover 140 Mn Ha of net irrigated area, from current net irrigated area of 73 Mn Ha.

Technological advancements: Sugarcane bagasse for instance, is being repurposed into bioenergy, bio-fertilizers and bioplastics, thereby contributing to market growth. Innovations in energy-efficient sugar processing are also underway, with the introduction of high efficiency boilers, turbo generators and heat recovery systems in sugar mills. These advancements are aimed at reducing energy consumption and enhancing overall sustainability.

Ethanol – the Game changer: Along with above growth drivers, ethanol blending programme, the road map of Government of India is the biggest game changer and growth driver in Indian sugar industry. It helped in surplus sugar utilization for ethanol at a remunerative rate, which helped in two ways – firstly by reducing the carrying cost of sugar and secondly, by eliminating the distress sale of sugar. The Government has a mandate of 20% ethanol blending by 2025. The ethanol blending percentage achieved in 2022–23 was 12% out of which 73% ethanol has been provided by sugar industry and in 2023–24, the blending percentage is expected to be 15%.

Global Ethanol industry

The global ethanol market was valued at USD 85.8 billion in 2023 and is anticipated to register a CAGR of 6.8% from 2023 to 2032 and expected to reach USD 145.6 billion by 2032. This growth is primarily fuelled by the growing usage of ethanol as a biofuel along with the rising consumption of alcoholic beverages. Ethanol can be produced from both natural and petrochemical feedstocks. North America dominates the ethanol market share and US stands out as a major market in North America, benefiting from a robust petrochemical manufacturing base and extensive cultivation of corn and sugar which favour ethanol production.

The application of ethanol as a biofuel emerges as a key market driver, particularly as the automotive industry grapples with air pollution concerns and to reduce gasoline imports. Many countries view the ethanol program favourably. In Brazil, the ethanol blending rate is 27% and India is planning to reach to 20% by 2025. This shall be a major driving factor for growth of ethanol & sugar industry.

Indias ethanol industry

Ethanol has now become a crucial component of the countrys fuel demand. India currently has an ethanol distillation capacity for sugar-based ethanol at 8.89 billion litres vs 5.12 billion litres grain-based ethanol production, thus totalling 14 billion litres. Sugar industry is the major contributor to the ethanol blending mandate with contributions reaching as high as 75% to 80% of total supply. However, sugarcane availability and priority focus on domestic sugar availability and retail prices by Government impact industry due to sudden changes in policy. In 2023–24, the Government of India put a temporary restriction on ethanol production from cane juice and B-heavy by fixing the diversion of sugar towards ethanol in anticipation of lower sugar production due to deficit rainfall in Maharashtra and Karnataka. However, the silver lining was that the Government justified this as a temporary solution and showed their intent behind ethanol blending mandate by increasing the price of fuel ethanol supply from C-Molasses by 14% on year over year basis. The Government also increased Maize ethanol price by 9% over last year and also pushed NAFED and NCCF into procuring the maize at MSP from farmers and providing to distillers at a fixed price of 22910/Mt. This led to significant increase in supply from Maize ethanol at 956 Mn. litres till end of May 2024 vis a vis 315 Mn. litres for the whole season last year. The contract and allocation together account for total 2.45 billion litres of maize ethanol, which if performed, will take care of reduction due to sugar ethanol.

Efforts to diversify feedstocks, expand capacity, and explore alternatives such as used cooking oil (UCO) for biodiesel production are underway. Additionally, there is a focus on Advanced Biofuels such as Second Generation (2G) Ethanol and BioCNG, derived from abundant waste materials such as crop residues, biomass and industrial waste, which could alter ethanol consumption patterns.

Several initiatives, spearheaded by the Government of India and several states, have garnered huge interest from investors looking to establish ethanol production capacities. Approximately 800 projects have been registered with the Government. Some sugar companies have also ventured into dual feed ethanol plants, enabling the use of corn and grains in addition to sugarcane and molasses.

Leading companies like IOCL, HPCL and Bharat Petroleum have forged partnerships to promote the adoption of ethanol blending and advanced biofuels from various feedstocks, including agricultural residues and waste materials.2

By 2025, it is projected that sufficient capacities will be in place to produce and supply 10 billion litres of ethanol.

Company overview

Shree Renuka Sugars Limited is a leading sugar producer in India with a global reputation as one of the largest sugar refiners. Based in Belagavi in the state of Karnataka, the Company operates eight mills (including 2 belonging to its subsidiary companies) equipped with the capacity for power co-generation and ethanol production capabilities in 3 mills. Additionally, it also operates 2 sugar refineries in the state of Gujarat and West Bengal, making it one of the biggest refiners of sugar in Asia.

Operational highlights

Milling

In the period under review, the Companys cane crushing volume totalled 4.6 Mn. metric tonnes (MT) as compared to the previous year volume of 5.25 Mn. MT due to low availability of cane in view of the adverse weather conditions. Consequently, sugar production for the year reduced to 5,01,293 MT, in contrast to the preceding years production of 6,16,896 MT.

Refinery

During the fiscal year, the Company effectively refined a total of 15,13,247 metric tonnes (MT) of raw sugar, marking an increase of 9.02% compared to the preceding year. Most of the raw sugar utilized for the refining process was imported.

Ethanol

During the fiscal year, there was no change in the ethanol production capacity, at 1,250 kilolitres per day. The ethanol production during the year stood at 156.36 Mn. litres vis a vis 196.2 Mn litres, due to restrictions on production of ethanol from cane juice and B- Heavy Molasses.

Power

The Company utilizes bagasse, a by-product of sugarcane processing, and coal, for both internal energy generation and sale to Indian state grids. Bagasse as a renewable energy source can be burned to produce bioenergy, leading to significant reductions in greenhouse gas emissions. In the fiscal year 2023-24, the company produced 594 Mn KwH of power of which 441 Mn. KwH was generated from bagasse, with around 177 Mn. units sold to the grid out of the power generated from bagasse. This was lesser as compared to the previous year due to lower availability of sugarcane for crushing.

Madhur

Madhur Sugar stands as Indias top-selling sugar brand, renowned for its commitment to delivering pure and hygienic products to consumers nationwide. With a robust presence spanning traditional local stores to modern retail outlets, Madhur has solidified its reputation for offering quality products across diverse markets.

Throughout this year, Madhur maintained its growth trajectory, achieving remarkable sales figures amounting to 160K metric tonnes (MT), clocking an impressive growth rate of 5.4%.

Financial overview

Profit and Loss statement

The Companys operating revenue stood at _108,327 Mn., compared to Rs. 85,781 Mn. in FY 2022–23 (the previous year). The Company generated EBITDA (excluding forex gain or loss) of Rs. 7,195 Mn. as compared to Rs. 7,197 Mn. last year. The Company recorded a loss (after tax) of Rs. 5,595 Mn. as compared to loss (after tax) of Rs. 1,357 Mn. for the previous year. This was mainly due to

a) 53% increase in finance costs to B 8,276 Mn.

(PY: B 5,413 Mn.) driven by higher working capital requirements of raw sugar, increase in interest costs on ECB coupled with weakening of the Rupee and

b) Deferred tax charge of H 1,659 Mn. on expiry of carry forward losses.

Balance Sheet

Net worth- The Companys net worth as on 31st March 2024 stood at Rs. (1,456) Mn. as compared to Rs. 4,127 Mn. as on 31st March 2023. The reduction in net worth is attributed to increase in losses for the current year mainly due to increase in finance cost and reversal of deferred tax asset due to expiry of carry forward losses.

Working capital management

Current assets as of 31st March 2024, stood at Rs. 50,161 Mn. as compared to Rs. 28,573 Mn. as on 31st March 2023, mainly due to increase in inventories by 87% from Rs. 22,370 Mn. to Rs. 41,860 Mn. The current ratio is 0.77 as of 31st March 2024, as compared to 0.75 as on 31st March 2023.

Risk Management

Shree Renuka Sugars Limited has developed a robust risk management system characterised by a methodical approach to recognizing and evaluating risks. This enables the Company to implement effective strategies aimed at reducing risks and navigating operational challenges that may arise. Oversight of Risk Management Policies is entrusted to the Risk Management Committee, comprising the Chairman of the Audit Committee, the Executive Chairman, the Executive Director and the Chief Financial Officer.

The Risk Management Committee meets on a periodic basis to review the measures taken by the Company to manage the risks and reduce their impact. The Committee also reviews the Risk Management Policies periodically to keep it updated to the changed business environments.

Internal controls and their adequacy

The Company has enforced stringent internal controls to ensure strict compliance with applicable laws and regulations, protect company assets and guarantee the accuracy of financial reporting. Establishing effective internal controls is crucial for any organisation, as it promotes efficient, effective and ethically sound business practices.

The Companys internal control framework encompasses a comprehensive array of policies, procedures and guidelines that offer thorough oversight of financial reporting and other vital aspects of the organisation. The organisational structure is clearly defined, with distinct roles and responsibilities, fostering accountability and transparency in the decision-making processes.

A comprehensive internal control system upholds the integrity of the Companys financial reporting by incorporating measures such as segregation of duties, access restrictions, and routine review procedures as integral components of the control environment. The independent Audit Committee assumes a pivotal role in monitoring internal control procedures and regularly updates the Board of Directors on their efficacy.

Human Resources

Shree Renuka Sugars success is linked to its people, who drive innovation, culture and productivity that fosters a positive workplace promoting engagement, development and progress. Our Employee Retention

Approach prioritizes transparent communication, career advancement, competitive compensation, recognition and supportive leadership.

Leveraging Technology

The Digital Transformation in HR processes have advanced employee engagement and operational efficiency. The Performance Management System (PMS) integration allows real-time goal setting and progress tracking. HRMS has streamlined onboarding, offboarding, leave management and payroll, reducing administrative burden and enhanced the employee experience.

Employee Engagement

Fostering a positive and engaging work environment is crucial for the Company. To achieve this, we focus on Communication, Recognition and Growth & Development.

Transparent Communication: We maintain open dialogue through Leadership communications, our internal magazine Madhurvaani and the Employee Satisfaction Survey (ESS). We encourage transparency through meetings and discussions.

Recognition and Rewards: We value employees contributions, celebrating achievements through company-wide communications, personalized notes and career development opportunities. Peer-to-peer recognition is encouraged.

Growth and Development: We support employee growth with succession planning, personalized development plans, internal promotions, and mentorship programs. Challenging assignments and projects empower employees.

Employee Well-being

We foster a healthy and supportive work environment through multifaceted initiatives to support employees physical and mental health, through various workshops and regular health check-ups. Our annual Wellness Month initiative commencing on International Yoga Day, covers diverse topics such as Healthy Heart, Awareness on liver disorders, Managing Back Pain, Cancer Prevention, Healthy Lifestyle and Work-Life Balance.

To foster physical activity and team spirit, we organize sports weeks at our factories, featuring popular sports like Cricket, Volleyball, Badminton, Tug of

War and various track events. Company-sponsored team-building activities, social events and cultural celebrations foster camaraderie and create a sense of community among employees. Our employees are covered under major insurance and health benefits to prioritize employee well-being.

Great Place to Work:

We have been recently awarded, the prestigious Great Place to Work? Certification, this reflects the positive experiences of our employees. High scores in areas like credibility of management, respect for people, fairness and camaraderie demonstrate a positive and inclusive workplace. The exceptional pride score further emphasizes that employees feel valued and proud to be part of our team. These results affirm our successful efforts in fostering a positive company culture where employees are engaged and empowered.

Learning and Development

At Shree Renuka Sugars Limited, our commitment to continuous learning and development is designed to enhance employees capabilities and drive organizational growth. We begin with needs assessment and skill gap analysis, working with line managers to identify key developmental areas for their teams. This allows us to create personalized learning paths that align with individual career goals. Our blended learning approach combines classroom sessions, e-learning modules, and on-the-job training. Experienced employees provide mentorship and coaching, helping colleagues excel. Leadership development programs prepare future leaders with essential skills, while technical training keeps employees updated on the latest technologies. Soft skills development focuses on personal effectiveness, leadership, and teamwork. Importantly, safety training includes regular drills and workshops to ensure adherence to safety protocols.

Health and safety

The Company holds a deep regard for its employees, recognizing them as its most valuable assets, with a steadfast commitment to their health and safety. Demonstrating this commitment, tailored programs are implemented, beginning with an annual health check-up for all employees. This is complemented by comprehensive health insurance coverage, including Mediclaim, Personal Accident Insurance, Term

Insurance and Workmens Compensation policies, all aimed at ensuring their well-being.

To further support their health journey, regular health Checkup Camps and webinars are conducted, providing employees with information and resources to make informed, healthier choices and empowering them to prioritize their well-being. Safety remains a top priority, with ongoing safety training programs organized and regular safety audits conducted to uphold a secure working environment.

Environment, Social and Governance (ESG)

Environment

The Company has introduced several measures and protocols to reduce its environmental footprint and propel sustainable development practices forward. Embracing eco-friendly manufacturing methods, the Company has adopted a zero-liquid discharge policy. This involves treating, reusing and recycling wastewater produced during sugar manufacturing, thereby promoting responsible water stewardship. Additionally, the Company promotes the adoption of renewable energy sources to mitigate its carbon emissions. Through the utilisation of bagasse, a sugar production by-product, the Company generates its own electricity, thus playing a part in fostering a more environmentally friendly future. Ethanol produced by the Company helps in reducing Indias carbon footprint, in addition to saving the countrys precious foreign exchange.

Social

The Company is dedicated to community support and recognises its responsibility as a conscientious corporate entity. With this in mind, it aims to actively engage in social welfare initiatives, striving to elevate the quality of life for people through targeted community development programmes in the areas of healthcare, education, skill development, water conservation and clean drinking water projects for local communities, aiming to support the holistic growth of local communities and the society at large. Through its collaboration with Solidaridad, it also continues to engage with the farmers to guide them on improving cultivation techniques for better yields.

Governance

The Company is dedicated to upholding the highest standards of business ethics and conduct. To ensure transparency, accountability and fairness in its operations, the Company has established a strong framework of governance policies and procedures, which include the Code of Conduct and Ethics, Internal Controls and Risk Management Systems, all while ensuring compliance with applicable laws and regulations. The Companys Board of Directors comprises individuals with extensive expertise across diverse areas, such as business, finance, accounts, law and agri-marketing. The Board and its Committees meet multiple times a year to oversee and guide the Companys strategic direction and governance practices.