Shree Renuka Sugars Ltd Management Discussions.

ECONOMIC ENVIRONMENT

WORLD

Global economy grew by 3.8% in 2017 (CY17) on the back_of accelerated pace of output in the developed nations of_ western Europe, Japan and the US, among others. This_ improvement in economic growth was also fuelled by recovery in commodity exporting countries, coupled with revival in investment spends across the emerging markets of India and China.

Going forward, the broad-based progress is expected to continue to gain momentum. Global gross domestic product (GDP) growth in both CY18 and CY19 is pegged at 3.9%, on the back of improving commodity prices, favourable market sentiments and greater trade and investment (Source: International Monetary Fund).

Global growth (GDP) trend (%)

CY16 (E) CY17 (E) CY18 (P) CY19 (P)
3.2 3.8 3.9 3.9

Source: International Monetary Fund : E: Estimate : P: Projection : CY: Calendar Year

INDIA

Registering an overall growth rate of 6.7% in financial year 2017-18 (FY18), India regained its status as the fastest-growing economy in the world. With a $2.597 Trillion GDP, it has outpaced France to become the sixth largest economy globally.

During the year, the Government of India executed several broad structural reforms. The landmark Goods and Services Tax (GST) was enforced from 1st July, 2017. Introduced on the heels of demonetisation in 2016, GST sought to further formalise the economy. This unified tax regime eliminates the cascading e_ects of a multi-layered tax structure. The Government also pursued recapitalisation of public sector banks, the Insolvency and Bankruptcy Code/bill (IBC) and the Ujwal DISCOM Assurance Yojana (UDAY).

The agriculture sector grew by 2.1%, industries by 4.4% and services by 8.3% in FY18 (Source: Economic Survey of India 2017-18). Averaging at 3.3%, Consumer Price Index (CPI) based headline inflation, in FY18, continued to be benign for the fourth year in a row (Source: Economic Survey of India 2017-18). This was due to adequate monsoons, decline in core commodity prices (with the broad exception of housing, fuel and electricity) and consistent price regulation by the Central and State Governments.

Cognisant of the evolving Indian economy, renowned credit rating agency Moodys, in November 2017, upgraded the nations investment outlook from stable to positive. This was the first revision in 14 years in the Governments bond rating. Concurrently, India rose up 30 positions to enter the top 100 countries in the Ease of Doing Business index prepared by the World Bank.

Indias GDP growth (%)

FY15 FY16 FY17 FY18
7.3 7.6 7.1 6.7

Source: Central Statistics Office

Sectoral growth (%)

Sectors FY16 FY17 FY18
Agriculture 0.7 4.9 2.1
Industry 8.8 5.6 4.4
Services 9.7 7.7 8.3

Source: Central Statistics Office and Economic Survey of India 2017-18

SUGAR INDUSTRY OVERVIEW KEY HIGHLIGHTS OF GLOBAL SUGAR INDUSTRY

World sugar production is estimated at 191.8 MMT, up 10.3% from the previous season

Top five sugar producers, namely Brazil, India, European Union, Thailand and China, account for ~61% of global sugar production

Production continued to increase in the top 10 sugar producing countries

Sugar mills in Centre-South Brazil increased their allocation of sucrose towards sugar vis--vis ethanol with ~46.4% of sugarcane in 2017-18 season resulted in higher sugar production, the sugar mix was highest ever achieved in previous seasons

EU sugar markets decontrolled regime started in 2017-18 with record production and exports in this year

Global sugar consumption is estimated at 174.1 MMT

GLOBAL SUGAR INDUSTRY

Globally sugar is produced both from beet and sugarcane. However, major portion is contributed by sugarcane, which is cyclical in nature; it is dependent on the weather and availability of adequate water. Being supply-driven, sugar is one of the most price-volatile commodities across the globe. Unprecedented fluctuations in production, combined with improving agricultural and industrial productivity and higher_government interventions, contribute to the cyclicality in the sector.

The production of sugar in 2017-18 grew by 10.3% to reach 191.8 MMT from 174 MMT in the previous year due to increase in production in India, Thailand, EU and Pakistan. However, sugar consumption in 2017-18 was recorded at 174.1 MMT, representing a growth of 2% over 170.8 MMT in the previous year. Global sugar imports remained relatively flat at 53.7 MMT in 2017-18. Due to production surpassing the consumption, ending stocks of sugar increased to 49.5 MMT in 2017-18, growing by 18% over 41.9MMT in the previous year. India was a major contributor in the world stocks where end stock rose by 6.7 MMT to reach 10.5 MMT, owing to an unprecedented improvement in production.

World Sugar Supply-Demand Balance

(In Million Tonnes)

Beginning stocks Total production Total consumption Total imports Total supply Total exports Ending stocks
2014-15 45 178 169 50 273 55 49
2015-16 49 165 170 55 268 54 44
2016-17 44 174 172 54 272 59 42
2017-18 42 192 175 54 288 63 50
2018-19 (P) 50 188 178 53 290 63 49

Source: United States Department of Agriculture : P: Projected

PRICE TRENDS

As of March 2018, international sugar price stood at ~$351.2 a tonne – the lowest in two and half years. This can be attributed to the supply glut experienced across the world market, driven by the sugar surplus in Brazil, India, European Union and Thailand, an increase in Europes sugar output after the reform of abolishing the production quotas in September 2017 and the decline in import demand from one of the leading sugar importers, China, after the nation increased tari_s on out-of-quota imports from 50% to 95%.

Sugar mills in Centre-South Brazil increased their allocation of sucrose towards sugar vis--vis ethanol with ~46.4% of sugarcane in 2017-18 season resulted in higher sugar production, the sugar mix was highest ever achieved in previous seasons

International Sugar Price

Sugar 2017-18 2016-17 2015-16 2014-15
NY#11-Raw Sugar – c/lb 13.1 17.4 16.6 13.4
London 5 – White Sugar – USD/mt 357.7 476.3 461.3 376.6

Note: For 2017-18 price are average for October 2017 to July 2018 period

INDIAN SUGAR INDUSTRY

__ f_ _ KEY HIGHLIGHTS

32 Million sugarcane farmers in the country 525-530 sugar mills operate through the season 0.5 Million workers are employed by mills

Sugarcane output is expected to be 353.22 MMT from 4.95_Million hectares of land Consumption is estimated at 25-26 MMT, with per capita annual consumption of 19.5 -20.1 kg Annual sugar output is valued at ~Rs800-935 Billion Uttar Pradesh is the largest sugar producer in India, followed by Maharashtra; both states combined contribute up to 70% of Indias total sugar production The Government of India announced several policy measures such as Minimum Indicative Export Quotas (MIEQ) export quota, export incentive of Rs55 per MT of sugarcane crushed Ethanol price is revised higher for the ethanol sold for Ethanol Blending Programme Minimum selling price of sugar, Rs29 per kg has been announced and mechanism of domestic sales quota has been reinstated to support and stabilise the falling sugar prices in domestic market

SUGAR INDUSTRY IN INDIA

Sugar production is expected to be 32.2 MMT as compared to 20.2 MMT last year. This is due to a bumper production increase in the state of Maharashtra, Uttar Pradesh and Karnataka, which together produced 26.5 MMT vis--vis 15.1 MMT the previous year, a sharp rise of 11.4 MMT.

Indias sugar consumption for 2017-18, is pegged at 25.0 MMT, up 1.6% from the previous year as per estimates of Indian Sugar Mills Association (ISMA). This demand is led by bulk users, quick-service restaurants, sweet shops, rural households and livestock feed use.

OUTLOOK

A good monsoon in 2016 and 2017 had resulted in 45-50% increase in acreage in Maharashtra, while Uttar Pradesh witnessed an early start to the crushing season. With adequate rainfall, more planting and increased sugarcane acreage, the same_ trend is expected to repeat in 2018-19 season. According to initial industry estimate, sugar production is forecasted to be 35.0 MMT vis--vis last years production of 32.2_ MMT whereas the consumption is estimated at 25.7 MMT. Therefore, ending stocks of sugar shall continue to increase even in the_year 2018-19 to 19.8 MMT, against 10.5 MMT of previous year unless India exports in large quantities to ease the extra stock burden.

Indian Sugar – Supply and Demand

(In Million Tonnes)

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 (P) 2017-18 (F) 2018-19 (F)
Opening stock (as on 1st October) 5.0 5.9 6.6 9.3 7.5 9.7 7.7 3.8 10.5
Production during the season 24.4 26.3 25.1 24.4 28.3 25.1 20.2 32.2 35.0
Imports 0 0 0.7 0.1 0 0 0.4 0.3 0
Total availability 29.4 32.2 32.4 33.8 35.8 34.2 28.4 36.2 45.5
O_-take
Internal consumption (A) 20.8 22.6 22.8 24.2 25.6 24.9 24.6 25.0 25.7
Exports (B) 2.6 3.0 0.3 2.1 1.1 1.7 0 0.8 0
Total o_-take (A + B) 23.4 25.6 23.1 26.3 26.7 26.5 24.6 25.8 25.7
Closing stocks (as on 30th September) 6.0 6.6 9.3 7.5 9.1 7.7 3.8 10.5 19.8
Months of inventory 3.5 3.5 4.9 3.7 4.3 3.7 1.8 5.0 9.2

Source: * ISMA, Industry Analysis – 2018-19, Preliminary estimates from ISMA

PRICE TRENDS

Indian sugar prices have responded to higher surplus of 2017-18 and also expected bigger surplus in the year 2018-19. Sugar prices went down from Rs3,500-Rs 3,550 per quintal to Rs2,900 per quintal in Karnataka (Source: NCDEX spot price data), a fall of 20%. The price trends continue to be soft due to surplus.

Domestic Sugar Price

Benchmark Markets 2017-18 2016-17 2015-16 2014-15
Kolhapur Market – Maharashtra State 3,158 3,765 3,316 2,584
Muza_arnagar Market – Uttar Pradesh 3,242 3,836 3,393 2,736

Note: NCDEX spot price Rs Quintal, for 2017-18 average prices for October-June period

Due to lower sugar prices, sugar mills have not been able to pay the Government of India mandated Fair Renumeraive Price (FRP) of Rs2,550 per MT to farmers. According to ISMA, outstanding ‘sugarcane payment at all India level are Rs120 Billion as of 15th July, 2018, which were around Rs180-190 Billion at their peak in March 2018.

GOVERNMENT POLICY INITIATIVES

The Government of India took several steps in the current year to encourage the sugar industry and exports. In order to stabilise the domestic prices, the Government of India introduced policies to balance the supply and demand of sugar in domestic market. It introduced a reverse quota system for two-months in February-March 2018. The Government of India later in the month of June 2018 reintroduced a monthly release mechnanism for sale in domestic market. It also declared a minimum sale price of Rs29 per kg of sugar for the sugar mills.

The Government of India allowed the exports of sugar under Duty Free Import Authorisation Scheme. It also announced a Minimum Indicative Export Quota (MIEQ) of 2 MMT across the industry. Import duty on sugar was increased to 100% and export duty of 20% was removed.

ETHANOL

National Policy on Biofuels was launched by Ministry of New and Renewable Energy in 2009 to address the need of biofuel production. The Government, in May 2018, approved a new bio-ethanol policy to incentivise Rs5,000 Crore investments for setting up projects with a total production capacity (using lignocellulosic biomass and other renewable feedstock) of at least 1 Billion litres of ethanol per annum. It expands the scope of raw material for ethanol production by allowing the use of sugarcane juice, sugar-containing materials like sugar beet and sweet sorghum, starch-containing materials like corn and cassava, and damaged food grains unfit for human consumption for ethanol production. The policy also eases the use of surplus foodgrains for producing ethanol that is blended with petrol.

Under the Ethanol Blended Petrol (EBP) Programme, the Government states that 10% of sugarcane-based ethanol should be mixed with petrol. The programme aspires for 20% ethanol blending in petrol by 2030. With a 139.5 Crore litre supply of ethanol in 2017-18, a 4% blending likely to be achieved

(Source: Press Trust of India).

The Government of India gave a major focus to increase fuel ethanol programme in the country. In June 2018, the Union Cabinet approved a revision in the prices of ethanol supplied to the public sector oil-marketing companies, fixing it at Rs43.8_per litre for ethanol from C-molasses and Rs47.5 per litre for ethanol from B-heavy molasses. The ex-mill ethanol price earlier was fixed at Rs40.85 per litre. This revision is intended to facilitate continued policy support, ensuring price stability and delivering remunerative prices for ethanol suppliers. This_step will help divert more sucrose to ethanol and reduce sugar surplus and also decrease dependence on crude oil, save precious foreign exchange and benefit the environment.

The Government of India also encouraged ethanol production and its supply under Ethanol Blended Petrol (EBP) Programme by giving an interest subvention on bank loans, limited to investment of Rs20 Crore in new incineration boilers and Rs 80_Crore in setting up new distilleries.

ABOUT SHREE RENUKA SUGARS LIMITED

Shree Renuka Sugars Limited (SRSL) is a global agribusiness and bioenergy corporation. It is one of the largest sugar-producing and sugar-refining companies in the world and a leading sugar manufacturer in India. SRSL, with a substantial biofuel manufacturing capacity, is also one of the largest producers of fuel-grade ethanol. It also generates electricity from bagasse (a sugarcane derivative) for captive consumption and sale to the power grids in India and Brazil.

SRSL has manufacturing facilities across the top two sugar producers of the world, India and Brazil.

BUSINESS REVIEW Operational Performance

FY18 India Brazil Total
Capacity crushing (TCD) 42,000 59,520 1,01,520
Annualcrushingcapacity(MMT) 8.4 13.6 22
Ethanol capacity (KLPD) 930 3,230 4,160
Sugar refining capacity (TPD) 10,000 - 10,000
Powergeneratingcapacity(MW)* 256 317 573
Power exportable (MW)* 142 221 363
Own cane plantation (in - 20,000 20,000
hectares)

*w.e.f. 1st July, 2017

Segmental Operational Performance (India)

FY18 FY17 y-o-y (in%)
A. Sugar Mills
Sugarcane crushed (tonnes) 3,574,270 2,152,080 66
Recovery (weighted average) 11.01% 11.28% (2)
Sugar produced from cane (tonnes) (I) 393,524 242,667 62
B. Refining
Raw sugar processed (tonnes) 1,183,950 1,352,421 (12)
Sugar produced from raw sugar (tonnes) (II) 1,150,425 1,323,295 (13)
Total sugar produced (tonnes) (I+II) 1,543,949 1,565,962 (1)
C. Co-generation
Generation of power (Million Kwh) 550 537 2
Captive consumption (Million Kwh) 264 229 15
Power exported (Million Kwh) 287 308 (7)
D. Ethanol plant
Ethanol produced (Million litres) 80 74 8

Consolidated Financial Performance

FY18 FY17 y-o-y (in %)
Total income
78,410 1,23,217 (36)
(Rs in Million)
EBITDA (Rs in Million) (11,093) 10,836 (202)
Profit before Tax (PBT)
(27,176) (11,659) (133)
(Rs in Million)
Profit after Tax (PAT)
(22,038) (11,520) (91)
(Rs in Million)
Basic Earnings per
(21.87) (12.40) (76)
Share (EPS) (Rs)
Net block (Rs in Million) 62,213 76,217 (18)

Standalone Financial Performance

FY18 FY17 y-o-y (in %)
Total income (Rs in Million) 59,031 79,158 (25)
EBITDA (Rs in Million) (1,336) 3,522 (138)
PBT (Rs in Million) (36,098) (3,119) (1,057)
PAT (Rs in Million) (29,821) (2,358) (1,165)
Basic EPS (Rs) (29.63) (2.54) (1,067)
Net block (Rs in Million) 38,882 41,924 (7)

Production: In FY18, sugarcane crushed by the Company increased by 66% from 2,152,080 MT in FY17 to 3,574,270 MT. Total recoverable sugar (yield) per MT of sugarcane declined from 11.28% in FY17 to 11.01% in FY18. The total sugar produced decreased by 1% from 15,65,962 MT in FY17 to 15,43,949 MT in FY18. Reduction in sugar production is due to lower production in refineries. Total power generation and ethanol production increased by 2% and 8%, respectively to 550 Million Kwh and 80 Million litres, respectively in FY18.

Financials Standalone Basis

Revenues: The Companys total turnover (total revenue gross of excise duty and including other income) dropped to Rs59,031 Million in FY18 compared to Rs79,158 Million in FY17.

Revenue (Rs in Million)

Segment FY18 FY17 Change (in %)
Sugar 46,345 60,498 (23%)
Ethanol 2,454 4,686 (48%)
Cogeneration 1,123 1,132 (1%)

Sales volume: Sugar sales volumes declined from 1,719,807 MT in FY17 to 1,452,608 MT in FY18. There was a 9% drop in average sugar price realisation, from Rs34,732/tonne in FY17 to Rs31,755/tonne, leading to decrease in revenues from sugar.

Ethanol sales volume fell by 47%, from 104,113 KL in FY17 to 55,525 KL in FY18. Realisation marginally increased by 1%, from Rs43,274/KL in FY17 to Rs43,816/KL.

Co-generation sales volumes decreased from 301 Kwh in FY17 to 276 Kwh in FY18 and realisation increased from Rs3.64/unit to Rs4/unit.

Expenditure: The total expenditure (excluding provisions for tax, foreign currency gain/loss, interest and depreciation) decreased to Rs60,367 Million in FY18 from Rs75,635 Million in FY17.

Raw material cost: The cumulative raw material consumption decreased to Rs46,403 Million in FY18, from Rs52,535 Million in FY17. Raw material cost, as a percentage to sales, increased to 78.6% compared to 66.36% previous year.

Interest cost: The total interest cost increased by 27% to Rs4,986 Million in FY18 from Rs3,921 Million in FY17.

Profit before Tax: Loss before tax stood at Rs36,098 Million in FY18 compared to Rs3,119 Million in FY17, due to changes in various revenue and cost items discussed above.

RISKS AND CONCERNS

Some of the risks that may impact the Companys operations are: Global fluctuations in demand and supply of sugar Macroeconomic factors that a_ect demand and supply of sugar, ethanol and power, including price fluctuations, interest rate volatility and adverse foreign currency movement (especially in countries where the Company conducts business) Seasonal uncertainties that impact the production of sugarcane Unfavourable shifts in government policies and regulations Increased cost of logistics Work stoppages owing to union strikes and other reasons High rate of attrition among employees

Risk management: The Company ensures timely identification and implementation of e_ective mitigation measures to ensure its smooth functioning. The Companys Risk Management Policy recognises that it is a going concern and strives to minimise the impact of both internal and external risk factors on the business through a thorough and periodic analysis.

INTERNAL CONTROL SYSTEM

The Company has formulated a well-defined and structured internal control system, commensurate to the size and nature of its business. Stringent procedures ensure high accuracy in recording, as well as providing reliable financial and operational information, while meeting statutory compliances and safeguarding assets from unauthorised use. The Companys internal team and an independent internal audit firm monitor the business operations and any deviations are immediately brought to the notice of the Management and Audit Committee for timely correction.

A comprehensive Annual Audit Plan, spanning all factories and locations of the Company, is drafted, updated and approved by the Audit Committee of the Board on a regular basis. This is followed by an audit conducted by Independent Chartered Accountants. These audits also test the e_ectiveness of mitigation actions implemented to defend the Company from various internal and external risks. A host of strategies are devised as a follow up measure to protect the Company from such uncertain events. Special audits are also conducted as directed by the Management. The Companys robust IT architecture safeguards sensitive data and eases the audit process.

AUDIT COMMITTEE

The Audit Committee of the Board of Directors inter alia views the observations made by the internal auditors on the control mechanism and the adequacy of the internal control system, recommendations for corrective actions and implementation thereof, compliance-related matters, operations of the Company and adherence to the laid-down processes and guidelines. The Company has implemented SAP at all its units to ensure e_ective IT security and systems, thus ensuring real-time availability of information at various locations.

HUMAN ASSET_MANAGEMENT

The Companys workforce is its biggest asset and central to its success through the years. People, across tiers, levels_and_functions, drive the Companys profitability through their sense of ownership and purpose. With dedicated human resource policies in place, the Company endeavours to provide a learning-oriented high-performance work culture. In this manner, it not only establishes a transparent and supportive work environment but also nurtures the holistic growth of employees in conjunction with that of the organisation. There are several training and development programmes conducted throughout the year to build capabilities and upskill sta_ members.

The Company attracts a talented set of employees with broad skillsets, as well as unique competencies. This diverse talent pool enables the Company to stay ahead of the curve. As on 31st March, 2018, the Company employed a total of 8,360 people (2,782 in India and 5,578 in Brazil). As a respected member of the corporate community, it continues to uphold fair management practices and maintain harmonious industrial relations.

ENVIRONMENT, HEALTH AND SAFETY

The Company adheres_ to mandatory Environment, Health and Safety (EHS) requirements and is committed to adopting stricter standards wherever suitable. It is fully cognisant of its responsibility towards the environment it operates in and the welfare of the people it employs._Workers safety is paramount and a comprehensive array of measures are implemented across all manufacturing locations to ensure the same.

Given the nature of the sugar industry, investments are consistently made to follow industry-leading e_luent management practices and reduce the carbon footprint of the_ organisation. Besides, the two focus areas of the Companys_sustainability initiatives are community healthcare and education. It also has instituted a culture of awareness across all its facilities to educate employees on key topics of fitness and health.