KM Sugar Mills Management Discussions


SWOT Analysis:

KM Sugar Mills consists of manufacturing and trading facilities of sugar, alcohol and power. Each of its business segments has its own strengths and weaknesses and exposures to a variety of opportunities and threats. The Company has the following SWOT attributes broadly: Strengths

• Managing Regulations and Business Environment

• High Margins

• First Mover Advantage

• Diverse Product Portfolio of Sugar Industry

Weakness

• Lack of critical talent

• Implementation of Technology in Processes

• Track record on environment consideration is not very encouraging Opportunities

• Reducing Cost of Market Entry and Marketing into International Markets

• Developments in Artificial Intelligence

• Lucrative Opportunities in International Markets Threats

• Culture of sticky prices in the industry

• Increasing costs component for working in developed market

Segment-wise or product-wise performance

Particulars Sugar Distillery Co-generation Unallocable Total
Revenue
Gross sales 55,537.51 5,391.36 2,900.64 - 63,829.51
(52,769.82) (4,501.94) (3,179.02) (-) (60,450.78)
Less: Inter segment sales 4,259.06 - 2,017.90 - 6,276.96
(3,783.60) (1.57) (1,831.51) (-) (5,616.68)
External sales 51,278.45 5,391.36 882.74 - 57,552.55
(48,986.22) (4,500.37) (1,347.51) (-) (54,834.10)
Add: Other income 953.92 182.13 0.45 - 1,136.50
(811.23) (175.96) (3.84) (-) (991.03)
Total revenue 52,232.37 5,573.49 883.19 - 58,689.05
(49,797.45) (4,676.33) (1,351.35) (-) (55,825.13)
Segment results 4,082.33 181.33 254.69 - 4,518.35
(6,052.03) (215.54) (505.05) (-) (6,772.62)
Less: Finance cost 1,366.61 18.55 - - 1,385.16
(1,165.90) (13.32) (-) (-) (1,179.22)
Profit before tax 2,715.72 162.78 254.69 - 3,133.19
(4,886.13) (202.22) (505.05) (-) (5,593.40)
Current tax 722.16
(1,393.48)
Deferred tax 89.65
(53.12)
Profit after tax 2,321.38
(4,146.80)
Other information
Segment assets 61,817.04 6,799.99 1,715.71 - 70,332.74
(54,708.46) (6,854.77) (2,688.22) (-) (64,251.45)
Segment liabilities 40,595.80 1,434.94 42.30 733.29 42,806.33
(36,829.23) (1,495.73) (40.00) (655.49) (39,020.45)
Capital Expenditure 7,065.53 527.24 - - 7,592.77
(453.92) (358.80) (-) (-) (812.72)
Depreciation and 983.41 466.68 137.25 - 1587.34
amortisation (830.28) (534.78) (152.56) (-) (1,517.62)

Risks and concerns.

The Company has a robust risk management framework to identify and evaluate business risksand opportunities. It seeks to create transparency, minimize adverse impact on the business objective and enhance the Companys competitive advantage. It aims at ensuring that the executive management controls the risk through means of a properly defined framework.

The Company has laid down appropriate procedures to inform the Board about the risk assessment and minimization procedures. The Board periodically revisits and reviews the overall risk management plan for making desired changes in response to the dynamics of the business.

Key areas of risks identified and mitigation plans are covered in the Management Discussion and Analysis Report. The Company is not currently required to constitute a Risk Management Committee.

internal control systems and their adequacy.

The Company has in place adequate internal financial controls with reference to financial statements. During the year, such controls were tested and no reportable material weakness in the design or operation were observed.

Material developments in human resources / industrial relations front, including number of people employed.

Your Companys approach to talent development is founded on the belief that learning initiatives must remain synergistic and aligned to business outcomes, emphasise experiential learning, provide an Details of significant changes of 25% or morein key financial ratios:

enabling and supportive environment and promote learning agility. Deep functional expertise is fostered through immersion in solving complex customer problems by the application of domain expertise early in managerial careers. Key talent is provided critical experiences in high impact roles and mentored by senior managers. Managers are assessed on your Companys behavioural competency framework and provided with learning and development support to address any areas identified for improvement. As part of your Companys managerial development and capability building strategy, various programmes have been designed and customised to your Companys requirements under these platforms. Your Company has further strengthened its performance management system and its culture of accountability through renewed emphasis on Management byobjectives which includes clearly defined goals and outcomes based assessment.

Details of significant changes of 25% or morein key financial ratios:

* Higher profit earned during the year ** Increased turnover and reduction in trade receivable A Led by higher operating margin Note 1: Debt includes lease liabilities

Note 2: Debt service = Interest and Lease payments and Principal Repayments

Note 3: EBIT = Profit before exceptional items + Finance Costs Note 4: Capital Employed = Tangible Net Worth + Total Debt + Deferred Tax Liabilities

Particulars Numerator Denominator 31st March, 2023 31st March, 2022 Change
Current Ratio Current assets Current liabilities 1.04 1.19 -12.61%
Debt-Equity Ratio Total Debt (Note 1) Total Equity 0.97 0.89 8.99%
Debt Service Coverage Ratio Earnings available for debt service Debt Service (Note 2) 1.92 2.07 -7.25%
Return on Equity Ratio Profit for the year Average Total Equity 8.80 17.81 50.59%*
Inventory turnover ratio Revenue from Operations Average Inventory 1.62 1.51 7.28%
Trade Receivables turnover ratio Revenue from Operations Average Trade Receivable 54.93 31.80 72.74%**
Trade payables turnover ratio Purchases and Other Services Average Trade Payables 3.25 2.82 15.25%
Net capital turnover ratio Revenue from Operations Working Capital 35.46 8.39 322.65%a
Net profit ratio Profit for the year Revenue from Operations 4.03% 7.56% -353bps*
Return on Capital employed EBIT (Note 3) Capital Employed (Note 4) 8.21% 14.02% -581bps*
Return on investment Profit for the year Average Total Assets 3.45% 6.55% -310bps*

* Lower profit earned during the year

** Early realisation of trade receivable

a Lower operating margin and increase in current liability of new term loans Note 1: Debt includes lease liabilities

Note 2: Debt service = Interest and Lease payments and Principal Repayments

Note 3: EBIT = Profit before exceptional items + Finance Costs

Note 4: Capital Employed = Tangible Net Worth + Total Debt + Deferred Tax Liabilities

Global economy: -

The global economy remains in a precarious state amid the protracted effects of the overlapping negative shocks of the pandemic, the Russian Federations invasion of Ukraine, and the sharp tightening of monetary policy to contain high inflation. Global growth is projected to slow significantly in the second half of this year, with weakness continuing in 2024. Inflation pressures persist, and tight monetary policy is expected to weigh substantially on activity. Recent banking sector stress in advanced economies will also likely dampen activity through more restrictive credit conditions. The possibility of more widespread bank turmoil and tighter monetary policy could result in even weaker global growth. Rising borrowing costs in advanced economies could lead to financial dislocations in the more vulnerable emerging market and developing economies (EMDEs). In low-income countries, in particular, fiscal positions are increasingly precarious. Comprehensive policy action is needed at the global and national levels to foster macroeconomic and financial stability.

Global Sugar Production and Consumption

Among many EMDEs, and especially in low-income countries, bolstering fiscal sustainability will require generating higher revenues, making spending more efficient, and improving debt management practices. Continued international cooperation is also necessary to tackle climate change, support populations affected by crises and hunger, and provide debt relief where needed. In the longer term, reversing a projected decline in EMDE potential growth will require reforms to bolster physical and human capital and labor-supply growth.

Global sugar prices: -

As global sugar prices continue to remain firm, Indian sugar industry body Indian Sugar Mills Association (ISMA) has requested the central government to announce permission for export of 80 lakh tonnes of sugar in 2022-23.

ISMA has requested the government to review the current sugar export policy and allow export of at least 80 lakh tonnes of sugar under Open General License (OGL) during the next sugar season starting October 1,2022.

Brazil Sugar

Brazil is likely to regain its crown as the worlds largest producer in 2023/24 and still supplies over 60 % of the worlds raw sugar. 2023 Raw Sugar Supply by Origin (in MT)

The crop in 22/23 reached 33.7m tonnes and in the coming season we expect the crop reach 36.3m tonnes. This is off the back of a max sugar production in the country as ethanol returns do not match the current price of sugar. Any downside in the crop however would also impact sugar supply directly.

Sugar Production

m tonnes

Thailand: Crush Similar to Last Season

Thailand is another producing country of note, as it continues to rebound from a poor season in 2020/21. We expect yields and cane availability to match that of last seasons pegs sugar output lower by 3.41 pc at 316.80 lakh tons in 2023-24 season

Thailand cumulative cane crush

The countrys sugar production is pegged lower by 3.41 per cent to 316.80 lakh tonnes in the new season that will begin from October 2023, due to more diversion of cane for ethanol production, according to the industry body ISMA. In the ongoing 2022-23 season (October-September), sugar production is estimated at 328 lakh tonnes.

Market Dynamics: Changing Production Trends in the World

However, as we look at 2023 it is important to look at how dynamics are changing across the market. Whilst things may appear to be somewhat balanced and almost "as usual" we believe that there are some significant changes that will mould the market prices and dynamics.

Going back to Thailand, even though we saw the crop rebound after a very difficult year in 2021, the market remains incredibly tight for Thai sugar. This is including the regional supply coming from India. We have seen in the past certain Thai crops lead to a regional surplus and it would be easy to assume we are headed back there, but with the competing crop not allowing for acreage growth, this will not be the case.

Refined Sugar Trade flows

Sugar production Forecast

According to ISMA, the area under sugarcane plantation for 2022-23 is expected to be higher by 2% than the ongoing sugar season. As the IMD has forecast a normal monsoon in 2022, ISMA thinks that it will augur well for the sugarcane crop during its growth phase.

The sugar production in 2022-23 will not be less than the sugar production of the current year, which is 394 tonnes without considering diversion for ethanol. The cane that was diverted for ethanol in the current year was equivalent to 34 lakh tonnes of sugar, the letter said.

"However, it appears that the sugar production in the next year could be on the higher side. Therefore, even after an expected higher diversion of sugar towards production of ethanol next year, there will be sufficient surplus sugar available for exports" said ISMA.

Releasing a preliminary estimate, Indian Sugar Mills Association (ISMA) said about 45 lakh tonnes of sugar will be diverted towards production of ethanol in the next season 2023-24, as compared to about 41 lakh tonnes in current season. Sugar production in the 2023-24 season is, however, estimated to be higher than the domestic consumption of 275 lakh tonnes, leaving a surplus of 42 lakh tonnes at the end of the season, it added. Total sugarcane acreage remains slightly higher at 59.81 lakh hectare in 2023-24, as against 59.07 lakh hectare in the previous year.

Cane acreage in Karnataka and Tamil Nadu remains lower, ISMA said.

Ethanol

Ethanol has been a game changer for the sugar industry

The government announced an incentive to encourage sugar companies to divert excess sugar cane stock in producing ethanol, which can be blended with petrol and used as fuel in vehicles.

Besides, this is also a good solution to address the problem of excess sugar production in the country.

• For the 10% ethanol blending target in 2022, there is need of around 4.5 billion litres

• Supplies in first 5 months has been about 1.7 billion litres

• Have achieved 9.8% average blending with gasoline across the country as of 25th April, 2022

• In some places, the blending has touched 11% too

• To achieve the target of 20% ethanol blending with gasoline in 2025

• 10.2 billion litres of ethanol is estimated to be required Diversion of sugar equivalent into ethanol

Encouragement to divert sugarcane juice/syrup and B-heavy molasses to ethanol, instead of more sugar

Ethanol procured /targeted (in billion litres) 2019-20 2020-21 2021-22 (P) 2022-23 (E)
1.73 2.96 4.5 5.50
All-India average blending 5% 8.1% 10% 12%
Sugar equivalent diverted (in million tons) 0.8 2.1 3.4 5.0

The target is to create enough capacities to divert all the surplus sugarcane into ethanol

Benefits from rising demand for fuel-grade ethanol

Oil marketing companies (OMCs) will use fuel-grade ethanol for manufacturing ethanol-blended petrol. The government is targeting to achieve E20 petrol (20% ethanol blended in petrol) by 2025 through the National Policy of Biofuels, 2018. This initiative has created a huge opportunity for fuel-grade ethanol players, given the wide gap between demand and supply. Furthermore, the company has entered into long-term agreement for 10 years with OMCs, which will continue to support the business.

Power Sector

Power is among the most critical components of infrastructure, crucial for the economic growth and welfare of nations. The existence and development of adequate power infrastructure is essential for sustained growth of the Indian economy.

Indias power sector is one of the most diversified in the world. Sources of power generation range from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agricultural and domestic waste. Electricity demand in the country has increased rapidly and is expected to rise further in the years to come. In order to meet the increasing demand for electricity in the country, massive addition to the installed generating capacity is required.

India was ranked fourth in wind power, fifth in solar power and fourth in renewable power installed capacity, as of 2020. India is the only country among the G20 nations that is on track to achieve the targets under the Paris Agreement.

Indian power sector is undergoing a significant change that has redefined the industry outlook. Sustained economic growth continues to drive electricity demand in India. The Government of Indias focus on attaining Power for all has accelerated capacity addition in the country. At the same time, the competitive intensity is increasing at both the market and supply sides (fuel, logistics, finances, and manpower).

India is the third-largest producer and second-largest consumer of electricity worldwide, with an installed power capacity of 395.07 GW, as of January 2022.

As of January 2022, Indias installed renewable energy capacity stood at 152.36 GW, representing 38.56% of the overall installed power capacity. Solar energy is estimated to contribute 50.30 GW, followed by 40.1 GW from wind power, 10.17 GW from biomass and 46.51 GW from hydropower.

The renewable energy capacity addition stood at 8.2 GW for the first eight months of FY22 against 3.4 GW for the first eight months of FY21.

For FY21, electricity generation attained from conventional sources was at 1,234.44 BU, comprising 1,032.39 BU of thermal energy; hydro energy (150.30 BU) and nuclear (42.94 BU). Of this, 8.79 BU was imported from Bhutan.

Coal-based power installed capacity in India stood at 203.9 GW in January 2022 and is expected to reach 330-441 GW by 2040.

The peak power demand in the country stood at 203.01 GW in 2021.

GOVERNMENT INITIATIVES

The Government of India has identified power sector as a key sector of focus to promote sustained industrial growth. Some initiatives by the Government to boost the Indian power sector are as below:

- Under the Union Budget 2022-23, the government announced the issuance of sovereign green bonds, as well as conferring infrastructure status to energy storage systems, including grid- scale battery systems.

- In the Union Budget 2022-23, the government allocated Rs. 19,500 crore (US$ 2.57 billion) for a PLI scheme to boost the manufacturing of high-efficiency solar modules.

- Electrification in the country is increasing with support from schemes like Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY), Ujwal DISCOM Assurance Yojana (UDAY), and Integrated Power Development Scheme (IPDS).

- In February 2022, a parliamentary standing committee recommended the government take steps to increase the loan limit for the renewable energy sector under priority sector lending. The current limit stands at Rs. 30 crore (U$ 3.93 million).

- In December 2021, West Bengal received a loan approval for US$ 135 million from the International Bank for Reconstruction and Development (also called the World Bank) to improve the operational efficiency and reliability of electricity supply in select regions in the state.

- In November 2021, the government announced future plans to increase the funding under the PLI scheme for domestic solar cells and module manufacturing to RS. 24,000 crore (US$ 3.17 billion) from the existing Rs. 4,500 crore (US$ 594.68 million) to make India an exporting nation.

- In November 2021, Energy Efficiency Services Limited (EESL) stated that it will partner with private sector energy service companies to scale up its Building Energy Efficiency Programme (BEEP).

- In September 2021, the Government of the United Kingdom announced that it will invest US$ 1.2 billion through public and private investments in green projects and renewable energy in India to support the latters target of 450 GW of renewable energy by 2030.

- In September 2021, Mr. Raj Kumar Singh, Minister of Power, New and Renewable Energy, met with his Danish colleague, Mr. Dan Jrgensen, and announced to expand their cooperation in renewable energy, particularly offshore wind and green hydrogen.

- In July 2021, Ministry of Petroleum and Natural Gas, Government of India owned GAIL lined up Rs. 5,000 crore (US$ 671.14 million) for setting up two plants each for producing ethanol and compressed biogas (CBG) from municipal waste.

In July 2021, India sent its first coal-laden rake (4,000 tonnes) to Bangladeshs Rampal Thermal Power Station. The 1,320 MW power plant is a joint venture between National Thermal Power Corporation (NTPC) and Bangladesh Power Development Board (BPDB).

ETHANOL BLENDING IN INDIA BY 2025

According to the Expert Committee on Roadmap for Ethanol Blending in India by 2025 20% ethanol blending is within reach. The report further lays out an annual plan for the gradual rollout of E20 ethanol in the country. It suggests specific responsibilities of Union Ministries, State Governments and vehicle manufacturers for the production, supply and gradual rollout of 20% ethanol blending in petrol by 2025.

Immense benefits can accrue to the country by 20% ethanol blending by 2025, such as saving Rs 30,000 crore of foreign exchange per year, energy security, lower carbon emissions, better air quality, self-reliance, use of damaged foodgrains, increasing farmers incomes, employment generation, and greater investment opportunities.

The inter-ministerial committee was headed by Dr Rakesh Sarwal, Additional Secretary, NITI Aayog. The committee had representatives from the Ministries of Petroleum; Food and Public Distribution; Road Transport and Highways; Heavy Industry; and Indian Oil Corporation and Automotive Research Association of India.

The E-20 roadmap proposes the following milestones:

Raise pan-India ethanol production capacity from the current 700 to 1500 crore litres

Phased rollout of E10 fuel by April 2022

Phased rollout of E20 from April 2023, its availability by April 2025

Rollout of E20 material-compliant and E10 engine-tuned vehicles from April 2023

Production of E20-tuned engine vehicles from April 2025 Nationwide educational campaign

Encourage use of water-sparing crops, such as maize, to produce ethanol

Promote technology for the production of ethanol from non-food feedstock.

Other recommendations include expediting regulatory clearances for ethanol distilleries through a single-window mechanism, unrestricted movement of denatured ethanol all over the country, tax incentives for blended fuel and petrol vehicles.

Ethanol as a Fuel: An increasing Interest

The use of ethanol as a fuel for internal combustion engines, alone or in conjunction with other fuels, has received a lot of interest, owing to its potential environmental and long-term cost savings over fossil fuels. Ethanol may be mixed with petrol at any percentage up to 100%. (E100). Anhydrous ethanol, or ethanol without water, can be combined with gasoline in various amounts to minimise petroleum fuel use as well as air pollution.

Ethanol is becoming more popular as an oxygenate additive for standard petrol, replacing methyl t-butyl ether (MTBE), which has been linked to significant groundwater and soil pollution. Ethanol may also be used to make biodiesel and power fuel cells.

Ethanol, an alcohol fuel, has a high quality and octane rating, resulting in improved engine performance and lower emissions.

Current status of Ethanol Blending in India

Many countries, like India, are encouraging the use of fuel ethanol to reduce dependency on imported fossil fuels, minimise local pollution and greenhouse gas emissions, and assist sugarcane-based industries that are stagnating. According to ICRA research, Indias ethanol production has to be increased three times its current level to meet the target of 20% ethanol blending by 2025. According to the study, Indias ethanol production in 2021 was roughly 335 crore litres. As a result, roughly 9% ethanol was blended into petrol.

COUNTRY LIQOUR:-

Alcohol market in India - statistics & facts

Even though alcohol such as wine or fermented juice is consumed for medical purposes in Ayurveda, its consumption is controversial, and often a politically sensitive topic among Indians. Because of distinct cultural diversity and varying laws regulating Indian states, alcohol drinking habits vary throughout the country. With the development of reasonably priced premium brands and the changing consumer behavior, particularly among the younger generation, the liquor sector in the Indian subcontinent has undergone rapid transformation. On the one hand, excessive alcohol consumption can lead to chronic health problems, while on the other, alcohol sales are a key source of revenue for most Indian states.

Alcoholic beverage types

The alcohol market in the country comprises of mainly Indian- made Indian liquor (IMIL), Indian-made foreign liquor (IMFL), wine, beer, and imported alcohol. Heavy import duties and taxes make the latter minuscule players in the countrys alcohol market. Most alcoholic imports came from the United Kingdom and the United States. With a market volume of 34 billion U.S. dollars, spirits accounted for the largest segment in the alcoholic drinks market. The most widely consumed indigenous alcoholic beverage is called "Desi Daru". Molasses, a sugarcane by-product, is used to make it. Desi Daru, in addition to wine and other alcoholic beverages made by indigenous tribes, serves as a foundation for a large segment of Indias rural population. However, the most preferred alcoholic beverage among urban Indians was beer.

Alcohol consumption

According to a national survey, approximately 1.3 percent of women regularly consumed alcohol, compared to 18.8 percent of males. In the northeast and east of India, both men and women consumed more alcohol. Additionally, both southern and northern regions of the country had high rates of male alcohol consumption. States with high alcohol consumption among men included Arunachal Pradesh, Telangana, Sikkim, Manipur, Goa, and Jharkhand. All northeast states, as well as Telangana, had high rates of female alcohol consumption as compared to the rest of the country. The legal drinking age varies from state to state, while some states ban alcohol altogether. These included Bihar, Gujarat, Lakshadweep, Nagaland, and some districts in Manipur. Besides, "dry days" occur a few times a year across the country (without exception) during which the sale of alcohol is prohibited. These occurred annually every Republic Day, Independence Day, Gandhi Jayanti, and election days.