Venus Sugar Ltd Management Discussions

VENUS SUGAR LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS 1. Industry Structure & Development: India has been known as the original home of sugar and sugarcane. In global sugar economy, the Indian Sugar industry has achieved a number of milestones. The Indian sugar industry is the second largest agro-processing industry in the country. Sugarcane (Saccharum or ficinarum) is the main source and key raw material for production of sugar in India. Sugar production in India is concentrated in six states viz., Maharashtra, Uttar Pradesh, Gujrat, Tamilnadu, Karnataka and Andhra Pradesh which together account for 85-90% of sugar production in India. The industry directly employs 0.5 million people while it indirectly provides gainful employment to another about 4.0 million people engaged in sugarcane cultivation. Indian sugar production estimates often times remain suspect and prove vulnerable. Sugar production for 2009- 10 season was estimated at 140 lakh tones as recently as in January 2010 while trade guessed it even lower at 130 lakh tones. This led to a virtual spiral in sugar prices to reach dizzy heights. The concurrent story on larger Indian import demand propelled world sugar prices to a 29 year high level. Within couple of months, sugar production for 2009 - 10 estimates scaled to 185 lakh tones. Further, the production outlook for 2010-11 is overly optimistic to reach self sufficiency and re-emerge as net exporter. This in turn brought an immediate collapse in sugar price. Though the Government mandated price for sugarcane was only moderately moved up, sugar mills volunteered to pay much higher cane prices by almost 50% over last year in their chase for available scarce cane supply and to lure the farmer back to cane crop. This had its instantaneous impact with the farmer readily responding to the price signal, tending the cane crop better to get higher yield and switching over from other crops to plant more cane. This has doubtless been possible only on the strength of vibrant sugar prices. According to nationwide survey conducted by AC Nielsen and adopted in KPMG Analysis, nearly 75% of the non levy sugar is consumed by industrial, business and high income household segments. Further, even for a low income household, 10% increase in sugar price would hardly have a dent of less than 1% impact in monthly food bill. 2. Outlook: ISO has predicted a smaller deficit for 2009-10 at 8.5 mln tonnes than 9.4 mln tonnes predicted in February 2010. The cumulative deficit of the two years is near about the two preceding surpluses in 2006-07 and 2007-08. Consequently it has drawn down most of the excess stock pile. World sugar production in 2010-11 is now set to strongly recover with Brazil and India alone producing an extra 10 to 12 mln. tonnes. Many other countries have also enlarged their cane planting. A marginally higher sugar ethanol mix in Brazil should also help boost overall sugar output. World sugar balance in 2010-11 will have a surplus varyingly estimated at 2 mln tones by ISO and 6 mln tonnes by Sucden. There has been a redoubtful resurgence in Indian sugar production during 2009-10 despite a deficit monsoon. With normal monsoon prediction, sugarcane and sugar output during 2010-11 season should comfortably exceed domestic consumption levels after two years. Sugar prices have been on bearish trend though the degree of decline is unintelligible viewed from a fairly well balanced demand supply parity. Sugar markets, both global and local, would remain significantly bearish in the near term. Sugar millers will have to brave themselves to combat higher input cost and lower output prices. Value addition through downstream projects is now preferred option of sugar mills to mitigate the risks of the sugar industry. The concept of the Integrated Sugar Plant (ISP) is now the corner-stone on which the industry growth will be driven. 3. Risks, Threats and Opportunities: Risks: Sugar Industry in India primarily faces the following risks: a. Raw Material risk b. Sugar Price risk c. Regulatory risk * Being an agro based industry, the Companys business is inextricably linked to the availability of raw material and its costs. The raw material of the company is sugarcane. The company has risk of Govt. policies in respect of cane availability, SAP & Cane area allocation. Sugarcane availability is primarily determined by the cultivable area under cane, the cane yield and the proportion of cane that is crushed by the mill out of the total cane available (drawl). Area under cane is determined primarily by the relative attractiveness of cane vis a vis other crops and timely payments. These factors are largely not within the control of the company. The company has sought to mitigate raw material availability risk by timely payment to farmers. * Sugar prices exhibit volatility and are mainly dependent upon the demand and supply as well as business cycle conditions and are not controlled by any single player due to the fragmented nature of the industry. Prices are also affected by the sales allocations made by the Government on a monthly basis as well as stocks held by the mills. The company has a detailed system of monitoring prices and the booking of orders in order to mitigate price volatility and optimize returns. * Uncertainties in Government policies and regulations governing sugar industry in India continue to pose a serious risk to the sugar industry. This risk arises out of factors such as those pertaining to cane fixation i.e. State Advised Price (SAP) and Statutory Minimum Price (SMP) for sugarcane; Control on sale of Molasses; Imposition of Levy Obligation (presently 10%) at very low price which is not subsidized by the Union Government; Imposition of stock limits on sugar dealers; Monthly release mechanism of Central Government which has an adverse impact on the free sugar trade; Introduction of compulsory packing of sugar in Jute bags; Higher weightage of sugar (3.63%) in Wholesale Price Index vis-a-vis with other commodities such as Wheat (1.38%) etc. leading to increased Governmental Intervention to control Inflation; Volatile sugar export- import policy etc. The regulatory risks listed above are Government policy driven and beyond the Companys control. Every effort is made to conform to regulatory requirement while judicial recourse is made when warranted. Opportunities: * By product management particularly blending of ethanol with petrol and co-generation of power from bagasse are the future activities and sugar mills will be able to diversify their earnings and emerge as energy supplier. * Consistent improvement in quality of sugar will lead to wider acceptability of Indian Sugar in the international market. Post implementation of WTO ruling and after the rationalisation of subsidies in agriculture in developed countries, India may emerge as a major sugar exporting country. 4. Segment wise Performance: Your company is having only one business segment i.e Manufacturing of White Crystal Sugar. 5. Internal Control Systems and their adequacy: Your company maintains adequate Internal Control Systems designed to provide reasonable assurance that assets are safeguarded, transaction are executed in accordance with managements authorization and are properly recorded and accounting records are adequate for preparation of financial statements and information. A comprehensive system of internal controls employed by the company ensures optimal use of the resources available at its disposal. Internal Audit and checks are on going process within the Company. The Audit Committee of the Board, headed by an independent non- executive director, is in place to review the internal controls and other financial systems. The internal control system of the Company is monitored and evaluated by independent internal auditors and their reports are periodically reviewed by the Audit Committee. The observations and comments of the Audit Committee are apprised to the Board. The internal auditors look into various areas of the company with following broad objectives a. To ensure critical examination of reasons with a view to trouble shooting of the problems that may arise due to short comings in systems and procedures. b. To review systems and procedures in purchase, capital investments and routine operations, c. To identify shortcomings that may adversely affect the companys operations and profitability, d. To ensure the compliance of Company policies and procedures, e. To identify non-performing assets and suggest the procedure for its disposal f. Any other assignment provided by the management 6. Financial and Operational Performance: During the year under review, your Company crushed 10.68 Lacs Qtls. of sugar cane and produced 0.84 Lac bags of sugar. The recovery of your company was 8.07% Further, during the year under review, gross turnover was of Rs. 2223.48 Lacs. Due to lower crushing, a loss of Rs. 674.01 Lacs has been incurred. The Companys financial statements are prepared in compliance of the requirements of the Companies Act, 1956 and Generally Accepted Accounting Principles in India. The management of the company accepts responsibility tor the integrity and objectivity of these financial statements, as well as for various estimates/ judgements used in preparation of these statements. The estimates and/ or judgments have been made on a consistent, reasonable and prudent basis to reflect true and fair picture of the state of the affairs of the company. 7. Human Resources and No. of Employees employed: The Company believes that its experienced and skilled manpower is the biggest strength for meeting the challenges of changing business environment. Organisations differ in their ability to harness the full potential of their employees to the creative pursuit of attaining excellence. To attract, retain and motivate the best talent, the company believes in empowering its employees. The company continues to enjoy a cordial and harmonious relationship with its employees. We believe, it is our people alone who provide us with the greatest sustainable and competitive advantage. The basic HR philosophy of the company revolves around commitment to create an organization that nurtures talents and enterprise of its people. Your Companys employees fully identify with your Companys vision and business goals. Training needs are identified in a systematic manner and regular training programmes are being organised to develop the knowledge and skill levels of the employees. Since the industry is of seasonal nature, hence during season time (from November to April) skilled contractual labour is also hired. Total number of employees (including contractual labour) as on 30th June 2010 was 258. 8. Industrial Relations: The management and the workers in Venus Sugar Limited maintain cordial and harmonious relations - unanimous in their belief that they have one common objective- Sustainable Success of the Company. All areas concerning employees involvement, safety, health and training development elicits their unqualified participation. Cautionary Statement: Statement in the Management Discussion and Analysis report describing the companys objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations and futuristic in nature.,However actual results might differ from those earlier expressed or implied. Such statements represent intentions of the management and the efforts put in to realise certain goals. The success in realising these depends on various factors both internal and external. Investors, therefore, are advised to make their own judgements before taking any investment decisions. Data and figures relating to industry and future expected developments in the industry have been taken from industry and industry related publications and web-sites.