Ugar Sugar Works Ltd Management Discussions

Global Development:

Over the last 5 years, India has established as an efficient and consistent exporter of sugar to global market.

During 2022-23, the country could export just 6.4 million MT and could have exported more but could not because of Government restrictions on exports. These restrictions on exports continued for the year 2023-24 as well and therefore countrys export numbers during the year are almost nil barring small exports to Nepal, Bhutan, Maldives.

International Sugar prices for both raw and white sugar have touched high of last 11 years due to lower crop not only in India but also Thailand in the year 2023-24. It has been seen that whenever Indian Sugar is not in global market, International Sugar prices takes apprehension of it and remains bullish. Brazil has achieved record sugar production during the year and most of global sugar requirement is fed by Brazil.

Industrial Structure and Development:

During the year 2023-24, All India sugar production likely to dip to 34 million MT. During the year 2024-25, as per estimates Sugar production will further take a dip. While all these years sugar production continues to be higher than consumption, declining sugar production is certainly affecting the diversion of sugar towards Ethanol.

The year 2023-24 will be the first year when diversion of Sugar towards Ethanol will decline. Diversion of Sugar towards ethanol has increased significantly from the level of meager 0.5 million MT during year 2018-19 to 3.8 million MT during 2022-23. During 2023-24, this diversion figure will take a dip to an estimated level of 2. 0 million MT.

Year 2023-24 has been very interesting, where initial estimates of gross Sugar production were low at level of 32 million MT on estimates of lower crop in state of Maharashtra and Karnataka. Such lower production estimates for the year raised inflation worries for the Government and provoked the Government to put restrictions on diversion of sugar towards Ethanol.

During mid-December, the Government reduced allocated quantity of B Heavy Ethanol / Syrup Ethanol orders issued by OMCs such that total diversion of sugar towards Ethanol is capped at level of 1. 7 million MT.

However, situation did not turn out to be so bad as initially estimated and actual crop position in Maharashtra and Karnataka turned out to be better because of which estimates of gross All India sugar production is 34.0 million MT now. With improved crop position in state of Maharashtra and Karnataka, as per media reports, Government considering allowing additional diversion of sugar towards Ethanol which will take total diversion to estimated level of 2.0 million MT.

During last 5 years, both Central and State Governments have aggressively promoted Ethanol manufacturing capacities across the country. Central Government had allowed Interest subvention scheme which is coupled with various subsidy schemes floated by various State governments. As a result, current Ethanol manufacturing capacity stands at almost 900 Crore litres from Sugar route and 500 Crore litres from grain route which is in line with Governments roadmap.

Ethanol production, which till 5-6 years back was considered a by-product of Sugar Industry has now become an important product of Industry and time not far when is going to become the major / main product for the sector.

But restrictions imposed on Ethanol through sugar route during year 2023-24 has not only affected the Distillation capacity utilization of Industry but also the overall spirit of the sector. As per various statements from Government authorities, the said regulation on sugar diversion towards ethanol is temporary in nature and Government to allow additional diversion soon.

Government policies for the sector has been very supportive and pro-active because of which all the stakeholders of Sugar Industry are in win-win situation starting with farmers benefiting in form of better yields/ Sugar recovery (barring weather related volatility), fast payments, good cane price, Sugar Mills benefiting from good Sugar recovery, diversion of excess sugar towards ethanol with better cash flow position, Trade benefiting from less price volatility and domestic consumer benefitting from easy availability of Sugar at much affordable prices as compared to other commodities and for economy by new investments in sector, increased collection of taxes / creation of new jobs, etc.

Having achieved the 12% blend in quick time, Govt is concurrently concentrating on ethanol from multiple feed stocks to achieve 20% blend target soon. Grain based ethanol is fast emerging as a sustainable alternative, more appropriately additional, source of supply.

Opportunities and Threats:

Opportunities:

To control falling prices, the government has introduced release mechanism and has also declared minimum selling price which is likely to go up to Rs.3300 per quintal.

Environmental friendly power generation from co-generation units equipped with high-pressure boilers and turbines is getting maximum energy output.

Bio-composting processes and conversion of organic and inorganic matter into bio-manure to ensure zero liquid discharge from the distillery.

The Government of India is promoting Ethanol blending as per the National Biofuel Policy. There have set a target of achieving 20% blending of Ethanol with petrol by the year 2025. Currently, we are close to 10% blending in this financial year.

Maize Ethanol is hailed as a renewable, clean, and cost-effective alternative to traditional fuels like gasoline and cooking LPG, holds immense potential for India.

India stands at a critical juncture in its quest for energy security and sustainable development. The countrys growing energy demand, coupled with concerns over environmental degradation and climate change, necessitates a transition towards cleaner and more sustainable energy sources. Corn Ethanol, derived primarily from agricultural feedstock such as sugarcane, rice, corn, and dented corn, offers a viable solution to these pressing challenges. Significant is the substantial support extended to farmers, underscoring the socio-economic dividends of corn ethanol production.

Looking ahead, the trajectory for corn ethanols growth appears promising. Projections indicate a substantial increase in bio-fuel demand, with renewable diesel and corn ethanol expected to drive a near 30% growth, reaching 38 billion liters over 2023-2028. India, positioned as a key player in this global transition, has the potential to make significant strides in corn ethanol production, thereby strengthening its energy resilience while mitigating environmental impact. Global trends indicate a surge in bio-fuel demand, with corn ethanol emerging as a key player in the transition towards renewable energy sources. Projections suggest a substantial increase in biofuel consumption, driven primarily by renewable diesel and corn ethanol.

The production of corn ethanol offers significant economic benefits for India, particularly in rural areas. Corn ethanol production creates employment opportunities across the value chain, from crop cultivation to processing and distribution. Moreover, the establishment of corn ethanol bio-refineries can simulate rural industrialization and infrastructure development, contributing to overall economic growth and poverty alleviation. Additionally, corn ethanol production generates valuable by-products such as distillers dried grains with soluble (DOGS), which can be used as high-protein animal feed, further enhancing the economic viability of corn ethanol production.

To fully unlock the potential of corn ethanol and realize its socio-economic and environmental benefits, concerted efforts are required across multiple fronts.

•:• The government should provide financial incentives and subsidies to promote corn ethanol production, including tax breaks, grants for infrastructure development, and price support mechanisms for corn ethanol producers.

•:• Increase the mandatory blending percentage of corn ethanol in petrol to incentivize demand for corn ethanol and simulate investment in corn ethanol production capacity.

•:• Invest in research and development initiatives to improve corn ethanol production technologies, enhance crop yields, and develop sustainable feedstock supply chains.

- Facilitate market access for corn ethanol producers by streamlining regulatory processes, reducing bureaucratic hurdles, and promoting public-private partnerships for corn ethanol distribution and marketing.

- Provide technical assistance, training, and financial support to farmers to encourage the cultivation of corn ethanol feedstock and ensure fair and remunerative prices for their produce.

The concerted efforts in this regards, are crucial. Government intervention, in the form of incentivizing bio-refineries and ensuring duty-free import of corn, will be instrumental in catalyzing the corn ethanol revolution. Moreover, empowering Indian farmers through lucrative incentives and technological support is paramount, fostering a conductive ecosystem for sustainable corn ethanol production.

Threats:

The sugar industry presently is coming across the following threats:

Shortage in the availability of farm labor for harvesting and transportation, loading and unloading of sugar cane.

Continuous increase in FRP for the last 3 to 4 years has increased in cane procurement price, without any increase in the MSP of sugar.

An increase in the number of sugar factories in the surrounding area and also an increase in their crushing capacity, leading to higher competition.

Changes in Regulatory Framework

(i) Sugar Industry:-

- Gol imposed stock holding norms and introduced MSQ for sugar from June 18 that continues to remain in vogue .

- Gol raised the MSP for sugar from Rs.29 to Rs.31 kg in Feb 19 that remains unrevised till date despite significant hike in FRP for sugarcane .

- Gol has discontinued export subsidy from SS 2021 / 22 and virtually banned sugar exports since Oct 22 .

- Compulsory jute packing for sugar continues at 20% for Jute Year 2023-24. Monitoring has become stricter.

(ii) Cane price

- Gol in July 23 announced increase in FRP by Rs.10 qtl to Rs.315 qtl for SS 2023-24 that is linked to base recovery of 10.25% .

- Gol in Feb 24 announced increase in FRP by Rs.25 qtl to Rs.340 qtl for SS 2024-25 that is linked to base recovery of 10.25% .

- GoK introduction of H&T fixed rate chart.

(iii) Ethanol

- GST on sale of molasses reduced from 28% to 5% effective 20/10/2023 .

- GST code amended in Oct 23 to create a separate category for industrial alcohol taxed at 18% .

- Gol in Dec 23 banned ethanol production from sugarcane juice/ sugar syrup and B-heavy molasses - Pursuant to industry appeal, Govt conceded sugar diversion of only 17 lac tonnes (as against the originally envisaged 35 lac tonnes contemplated in Oct 23) .

- Gol in Dec 23 banned production of RS/ ENA from sugarcane juice and B-heavy molasses .

- Gol imposed export duty on molasses at 50% from 18/01/2024 .

- Gol in Dec 23 extended the deadline for interest subvention support for ethanol project up to 30/06/24. Bank loan to be drawn before this date to qualify .

- BPCL on behalf of OMCs announced incentive of Rs. 6.87 / ltr for ethanol sourced from C-heavy molasses for ESY 2023/24 - effective price Rs. 56.28/ ltr - Prices of B-Heavy Molasses ( Rs. 60.73) and Sugarcane juice or syrup (Rs.65.61) remain static .

- Gol in order to meet the blending target, announced hike in price of ethanol produced from other agricultural products - rice (Rs. 64/ ltr) and Corn (Rs. 71.86 / ltr) for ESY 2023/24.

Segment-wise Performance:

Sugar:

During the Current Year the Company has crushed 20.87 Lakh MT of sugar cane from both Ugar and Jewargi unit (as against 23.99 Lakh MT during the previous year) and produced 15.11 Lakh QTLs of sugar (as against 16.49 Lakhs QTLs of sugar during the previous year) at the recovery of 11.05% and 9.00% respectively for Ugar and Jewargi unit.

Industrial and Potable Alcohol:

The company has produced 754.87 Lakh BLS of Industrial and Potable Alcohol during the year (against the last years production of 888.37 Lakh BLS}.

Co-generation (Ugar & Jewargi):

We have generated 1,658.49 Lakh kW power during the year at Ugar and Jewargi Unit (as against 1944.31 Lakh during the previous year) and have exported 748.83 Lakh KW of power during the year (as against 981.39 Lakh KW during the previous year). We have supplied power to the exchange through Electric Supply Companies (ESCOMS).

Adequacy of Internal Control:

The Company has a proper and adequate system of internal control to ensure that all assets are safeguarded and protected. The Internal Auditor submits a report covering almost all the areas of operations.

Human Resources Development:

The Company provides regular training and all-round exposure to the employees and staff. The Company has a well-equipped township with recreational facilities such as a clubhouse, playground, swimming pool, gymnasium, etc. The Company also operates a Cooperative Society, Hospital, School, and College for the benefit of the workers and the general public.

The Company has a dedicated workforce of 905 people (including the Jewargi unit) comprising of permanent, seasonal, and 69 employees in Honorarium.