Sri Chamundeswari Sugars Ltd Management Discussions

World Sugar-Sugar is produced from two sources namely sugar beet and sugarcane. Sugar beet is mainly grown in moderate climatic regions, whereas sugarcane is grown in the tropical regions. Sugar from sugarcane has steadily increased and constitutes more than 75% of the total sugar produced in the world today.

Brazil is the single largest producer and exporter of sugar, India is the second highest producer of sugar in the world and also largest consumerof sugar.

Indian Sugar

Indian sugar industry consists of players from co-operative, private and public sector. The industries are located in rural areas and play very important role in the socio economic development of the rural areas. Uttar Pradesh and Maharastra are the major producers of sugar, followed by Karnataka. In Karnataka, continuous drought is prevailingforthe last two years and even in the current year 2017. The south monsoon has been very weak till end of July2017 and as per reports the monsoon is expected to pick up in the months of August and September¹2017,

The following table indicates the annual production and consumption figures of sugar in India

(Source: ISMA)

Govt, of India has allowed duty free import of five lakh tons of raw sugar during the year 2016-17 in order to address the acute fall in production. This quota has been divided across different regions and allotted to the units which have applied for the same.

Sugar prices which were ruling much below the cost of production in the last year has increased and is now commensurate with the cost of production and stable between Rs.3600 to 3800 per qtl. Our companys average quarterly ex-factory sugar price is ? 3663.21 for the quarter ending June¹ 2017. The same was ? 3292.31 for the corresponding quarter of 2016-17.

The domestic sales details are provided below:

Present environment and Govt, policies

Government has put in place the amendment of The Industries (Development and Regulation) Act, introduction of revenue sharing formula based on the recommendation of Dr. C. Rangarajan Committee, imposition of import duty to curtail import and allowing import of raw sugar when there is a shortage in domestic production.

The introduction of GST which is a "One Country One Tax" policy from 01.07,2017, has also changed the environment for the sugar industry. The initial teething problems are being addressed by the GST governing council and the system is expected to stabilize in few months.

Cane Price

The FRP for the year 2017-18 has been increased to Rs.2550 per MT from Rs.2300 per MT fixed for the previous year linked to a recovery of 9.5% The Karnataka State follows the Revenue Sharing Formula with the FRP being the base price payable at the beginning of the season and the actual final price to be fixed by the revenue sharing formula recommended by Dr. Rangarajan Committee which has been adopted by the State.

Alcohol

Consequent to the amendment of IDR Act, State Govt, has taken steps from 1st August 2017 to bifurcate the control on the primary distillery. The alcohol meant for potable sector i.e. for IMFL purpose would only be controlled by the State Govt, and applicable Excise duties would be collected only from these sales. The non potable sale would be outside the purview of the State Govt, and would be a GST transaction.

Power

The Karnataka State Govt, has allowed the sugar co-generators to enter into five years PPA as per the rates approved by the KERC. Our company has also executed this PPA and would be eligible for tariff ranging from? 4.01 to? 4.79 per unit for five years i.e. for the financial years 2017 to 2021.

The company has also entered into PPA with CESCOM for the new cogeneration unit being established in the Flemavathy unit and this would have a tenure of twenty years with rates being revised every three years.

Goods & Service Tax (GST)

In a Historic achievement, the Central Govt, has introduced GST on all India basis effective from 1st July which combines the VAT, Excise Duty, Service Tax into a single tax which is common across the whole country. This is expected to ease the movement of goods and services within the country removing the bottle necks that now exist. Introduction of one tax regime is expected to benefit the local industries in the long run. The GST rates applicable for our industry are given below.

Opportunities & Threats

India has a very low per capita consumption of sugar and it is expected to grow in the future. The domestic market will remain as the primary consumer of the Indian Sugar production. However, the sugar business is highly cyclical depending upon the rain fall and the market prices of sugar. The Govt, of India & Govt, of Karnataka have taken adequate steps to maintain the health of the sugar industry and farmers by introducing the Revenue Sharing Formula as suggested by the CACP. The industry is also requesting the Govt, of India to introduce Sugar Price Stabilization fund. If this is created it would also be of great help in protecting both the industry and farmers by timely payment of cane price even in distress years.

The South of India has been facing severe drought for the last 2-3 years drastically reducing all agricultural activities to very low levels. Monsoon for the year 2017 is also inadequate till end of July and is expected to regain vigor in the months of August and September2017. The deficit of monsoon is furnished below.

1. Risks and Concerns

The risk concerning our operations is as detailed.

a. Non availability of adequate sugarcane - Both our units are located in well irrigated areas and will have adequate sugarcane in a normal year. The company has taken adequate fall back options for irrigation by supporting number of borewells which will supplement the irrigation water, but if the monsoon failure continuous for successive years this will lead to shortage of cane as ground water would also dry up.

b. Parity between sugarcane price and sugar price - The State Govt, of Karnataka where we have our operations, has very wisely introduced Revenue Sharing Formula as a State policy and therefore the cane price would be fixed as per the Revenue Sharing Formula. However, if the sugar price were to fall to very low levels which makes even FRP unaffordable, then it would lead to uneconomical operations. The industry has been representing to the Govt, of India to establish the Sugar Price Stabilization fund as recommended by the CACP to address this eventuality.

2. Govt. Policy

The operations of the co-generation unit and the Distillery is highly dependent on the policies adopted by the State Govt. We are in constant touch with the State Govt, through our association in order to keep them updated about the industrial scenario for ensuring economical operations.

3. Risk Mitigation

The risk management involves identification of risks and its importance, finding suitable solution with collective discussion and decision and continuously monitoring the status of the risk. The management periodically reviews the risk management framework to identify the major business risk as applicable to the company and works out their mitigation strategy.

4. Product and Segment-wise performance Product wise performance

Segment wise results are given in the notes forming part of financial statements.

5. Outlook: .

Consequent to the inadequate monsoon in 2016 there is shortage of cane for the season 2017-18 and the company is taking steps to draw whatever cane is available and supplement the income by processing raw sugar and molasses. We hope that monsoon will regain strength in the month of August and September 2017 which will increase the planting of sugarcane for the next year.

6. Internal Control systems and their adequacy

The company has well established, robust internal control systems and processes, commensurate with its nature of business and size of operations, to ensure smooth functioning. This safeguards assets against unauthorized use, as well as correct recording and reporting of transactions. Such controls, subject to periodical review and monitoring by audit committee and also ensures efficiency of operations, accuracy and promptness of financial reporting, besides complying with applicable laws and regulations.

The company has internal audit system to ensure that all activities are monitored and controlled. Adequate internal checks are built in to cover all monetary transactions. These checks and controls are reviewed periodically for improvement.

7. Financial performance

This year has ended with a loss before tax of ? 2219.48 Lakhs after providing for interest of? 2504.63 lakhs and depreciation amountingto ? 1498.93 lakhs.

8. Human Resources / Industrial Relations

The company recognizes its employees to be the primary source of its inherent strength. The company is committed to equal employment opportunities to attract the best available talent and to ensure a competitive work force. It pursues management practices designed to enrich the quality of life to its employees, develop their potential and maximize their productivity. The companys total employee strength was 1026 as on 31st March2017.

The relationship between the management and employees is cordial.

During the year under review, no case was filed under Sexual Harassment of women at workplace (Prevention, Prohibition and Redressal) Act, 2013.

9. Cautionary Statement

Statements made in this report describing industry outlook as well as the Companys plans, policies and expectations may constitute "forward-looking statements" within the meaning of applicable laws and regulation. Actual results may differ materially from those either expressed or implied.