Directors' Report
|
|
Your Directors present their
15th Annual Report and the audited statement of
accounts for the year ended 31st March 2011
|
Year ended |
Year ended |
| 31.03.2011 |
31.03.2010 |
| Physical Performance (tonnes)
|
| Cane
Crushed |
628613 |
808612 |
| Sugar
produced |
76870 |
90920 |
| Financial Performance(Rs.
crores) |
| Turnover |
269.48 |
244.64 |
| Profit before Exceptional
Items |
13.53 |
69.52 |
| Profit Before
Tax |
27.64 |
55.41 |
| Profit After
Tax |
18.61 |
36.85 |
| Surplus From
Previous Year |
14.72 |
6.88 |
| Amount
available for appropriation |
33.33 |
43.73 |
| Appropriations:
|
| Transfer to General
Reserve |
10.00 |
25.00 |
| Proposed
dividend |
1.72 |
3.44 |
| Dividend Tax
|
0.28 |
0.57 |
|
Balance carried forward |
21.33 |
14.72 |
|
Dividend
|
|
Your
Directors
are pleased to recommend a dividend of Rs. 2 /- per Equity
Share of Rs.10 each for the financial year ended 31st March
2011. |
|
Sugar Industry Overview
|
After two years of deficit, Indian sugar production
is well poised to rebound during 2010-11 season with a moderate surplus. As a
welcome departure, India was enviably placed this year to cash on the physical
tightness in global market with ready surplus sugar stock on hand further
bolstered by a positive production outlook for the season. Indian producers
were however denied the golden opportunity to ride on buoyant global prices by
reason of prolonged delay and repeated deferral of the decision to reopen OGL
exports that has remained closed for two years.
With its overwhelming concern over inflation, the
Government predictably preferred to play it safe and persisted with its policy
of total liberalization on imports and convoluted controls on exports. It
flooded the local market by choking exports during rising production and
announcing huge releases with unfailing extensions month after month. All this
deplorably dented market sentiments, demoralized trade and decisively
destabilized domestic sugar prices. Finally OGL export of a measly 5 lakh
tonnes, first announced in January 2011 and then put on back burner, was
confirmed during April 2011. By then, global prices have considerably corrected
and noticeably nosedived by about 40% on the arrival of fresh crop from Brazil
and changes in market dynamics.
The rebound and resurgence of Indian sugar production
was unarguably triggered and convincingly catalysed by lucrative cane prices
voluntarily paid by sugar mills over and above Government fixed prices during
the last two years on the strength of viable sugar prices. This helped to bring
the farmer back to cane crop, improve the drawal rate for sugar mills (in
preference to other competing users) and further motivate and empower the
farmer to take better care of the cane crop that has turned valuable. In turn,
the resultant higher sugar production helped in significant price correction
(that rose to dizzy heights in the previous year on perceived shortage) to
benefit the consumer.
It is however imperative that the fine and delicate
balance between sugar and sugarcane price is not stretched beyond the point of
elasticity. Regretfully, sugar prices have suffered a factitious fall below
breakeven due exclusively to excessive Government intervention in the past one
year. Sugar cycles in India, of late,
would seem to be the bizarre outcome of unhelpful Government policies than by
the vagaries of nature.
The current mismatch between input and output prices
has come to inflict losses even on most efficient producers of sugar. It cries
for early correction lest it leads to mounting cane arrears and moribund sugar
production.
|
|
|
Goverment Measures
|
Levy obligation was restored to 10% on the strength
of higher sugar production to meet PDS supply. Levy sugar price after several
years of hibernation was revised for 2009-10 on 21.06.2010 and for 2010-11 on
18.01.2011. With retrospective amendment to the Essential Commodities Act, levy
sugar price computation continues to ignore well settled legal and commercial
principles that does not cover even the cane cost. The industry is again before
the Apex Court for relief.
Duty-free raw sugar import facility was repetitively
extended and is now in force till end of June 2011. Restrictions on bulk users
brought under inventory norms is also similarly getting undue extensions though
the ceiling has been moderately hiked. While these measures were introduced
during domestic deficit, repeated extensions unmindful of market realities have
only helped to accentuate the bearish undertone of the market.
Fair and remunerative price for 2010-11 was fixed at
139.12 per qtl linked to 9.5% recovery. Government of Tamil Nadu announced a
steep hike in SAP from Rs.143.74 per qtl to Rs.190 per qtl. Advance FRP
announcement for 2011-12 has now been made by the Centre at Rs.145 per qtl.
Sugar decontrol looks presciently off the radar of
the Central Government. Despite several of the Expert Committees unanimously
recommending decontrol, there appears little political will to push this
forward at the current juncture.
Sugar has been taken out of
the purview of additional excise duty to pave way
for States imposing VAT on sugar under the
proposed GST regime. Tax holiday under Sec.80(1A)
of the Income Tax Act for Power Projects has been
extended for one more year that should
incidentally benefit your Company.
|
Company
Performance
|
|
As feared in last year’s Report, cane volume
contracted by over 20% despite a decent hike in cane price. Significantly and
most stressfully, sugar recovery suffered a steep setback recording the lowest
in a decade. Sugar production was supplemented with outsourced cane and
imported raw sugar.
Agriculture has become increasingly unviable in
States like Tamil Nadu displaced by higher growth in industrial and service
sectors. Despite a whopping 100% increase in sugarcane price within a short
span of 5 years, there appears little and ever diminishing enthusiasm for cane
crop. As a result, Tamil Nadu sugar industry is now ordained to operate
owefully at one- half of its optimal capacity. Harvesting labour has become the
major challenge with harvesting rates trebling in just two years. Despite
mobilizing and moving farm labour from far away locations, lower productivity
and lackadaisical work culture have come to cause a disastrous spell on the
timing and regularity of sugarcane flow from field to factory.
Your Company views the current sugarcane scenario in
its operational area to pose the severest of challenge for its sustainability.
Realising this, it has taken steps to play a direct and decisive role to
improve the quality of seed material, enhance soil productivity through
committed supply of bio-manures, intensify drip irrigation, all with a view to
improve both yield and recovery. Besides reinvigorating the efforts to bring in
labour from other States through advance tie-up arrangements, it plans to
shortly introduce tools and gadgets to mechanise cane harvesting operations.
Sugar prices that suffered a precipitous fall since
January 2010 mercifully did not decline to deplorable levels as earlier feared.
Molasses price suffered the most with a formidable fall of 50%. The Company
however was largely helped by opening inventories produced at lower cost,
higher sale volume and near extinction of debt to remain profitable. Further,
its prudent provisioning for the drastic decline in the value of raw sugar
import contract made last year helped to mitigate and neutralize the adversity
of its impact for the current year.
The Company’s turnover scaled to a new high for the
year with the peaking of domestic sugar sale volume. Its PBIDT has declined by
75% while PBT is lower by 50% compared to the last year that was rather
exceptional on all counts. In sum, the overall performance of the Company
should be regarded reasonable and satisfactory under extant external
environment.
Legal cases
The Hon’ble High Court of Madras has upheld the stand
of the Company that Sugar Development Fund (SDF) Loans extended to the
erstwhile Ponni Sugars and Chemicals Ltd cannot be recovered from the Company.
The High Court by its order dt.09.11.2010 further directed SDF to disburse the
withheld subsidies.
The Company did make a compromise proposal to SDF to
voluntarily settle part of the dues per consensus. This was borne out of
business prudence and commercial expediency with the sole objective to swiftly
bring the curtains down on a long pending legal issue and restore relationship
in long term interest. There has however been no response both before and after
the High Court ruling from SDF authorities in the matter. The Company will
doubtless pursue all available options for early resolution of this issue.
The High Court of Madras by its order dt.28.02.2011 held that ESI provisions are
not applicable to the Company having a seasonal factory and quashed the demand
notice of ESI authorities.
Cogeneration Project
The Company has kick-started its
Cogeneration Project on a capital outlay of Rs.110
crores. Term loan of Rs.65 crores has been tied up with
Canara Bank for this Project. Further, Canara Bank has been inducted into our consortium in place
of United Bank of India. Your Directors convey their appreciation for the support
and assistance received from United Bank of India all along.
Orders have already been placed for Boiler, TG set
and other auxiliary equipment. The Project is targeted
to get commissioned and export power before end of March
2012.
investment
Seshasayee Paper and Boards Ltd (SPB) is the promoter of
your Company. As a flagship company of the Group, SPB has extended timely support
and assistance for all the Group companies, including your Company. SPB has
now embraced a major growth option by way of acquiring 90000 tpd paper mill,
namely, Subburaj Papers Ltd (SPL) in south Tamil Nadu. For this, SPB would need
to buy 100% of the equity from Subburaj Group at a fair value of Rs.20 per
equity share of Rs.10 involving Rs.30 crores.
SPB has since taken full charge of SPL’s operations.
Your Company has extended support for this venture by
investing Rs.10 crores representing one-third of the
equity of SPL.
|
|
Management Discussion
and Analysis Report
|
|
A detailed
discussion on the industry structure (dealing with
World sugar and Indian sugar) as well as on the
financial and operational performance is contained
in the ‘Management Discussion and Analysis Report’
enclosed hereto that forms an integral part of
this Report. |
Outlook
for 2011-12
|
Indian Meteorological Department has predicted yet
another year of normal monsoon. Despite the rollback in cane prices in certain
major sugar producing regions, cane area may not see any discernible decline.
As such, Indian sugar production could remain in surplus for one more year.
There are however greater challenges on the global
front where sugar stocks are at historically low levels. Hence even minor
corrections in production numbers could trigger turbulent changes in global
prices. Indian producers would need and largely depend on a pro-active and
supportive policy environment to be able to get viable prices for their produce
both in the local and overseas market.
Sugar mills in Tamil Nadu, unlike their counterparts
in other major producing regions, did not have the luxury last year to
down-revise cane prices compatible with the downfall in sugar prices. Unchecked
rise in farm labour cost and lack of mechanization have come to hamper cane
cultivation and erode profit margins for the cane crop despite higher prices.
With fresh sugar capacities, there is increased competition for available cane
and labour supply. There are thus systemic constraints inflicting higher costs
and impeding cane supplies for sugar mills in the State.
Your Company therefore looks to a challenging time
during 2011-12 on both availability of cane and affordability of its cost
besides the ever escalating shortage for harvesting labour. It will further be
faced with higher interest costs with the disappearance of surplus funds having
been deployed in projects and hard money policy stance of RBI by continually
hiking interest rates. It would of course steadfastly focus on increasing
efficiencies and cutting costs towards sustaining reasonable levels of
operating and financial performance.
|
Directors
|
|
The present term of Mr N
Ramanathan, Managing Director concluded on 31st March
2011. Your Directors, in recognition of his committed
role and valued contribution have reappointed him as
Managing Director of the Company for a period of 3 years from 1st April
2011. Consent of the Members is being sought both
for his appointment and terms thereof at this
meeting.
Mr N Ravindranathan retired at the Annual General
Meeting held on 21st July 2010 and did not opt for
re-election. Dr (Mrs) Nanditha Krishna was appointed as
Additional Director on 24th December 2010. She will
retire at this meeting in accordance with Section 260 of
the Companies Act, 1956. Notice under Section 257 of the
Companies Act has been received for appointment as
Director, for which approval of Members is sought at
this meeting.
Dr L M Ramakrishnan and Mr Bimal Poddar, Directors of
your Company, retire by rotation at this meeting and
being eligible offer themselves for reappointment.
Mr S K Ramasamy also retires by rotation at this
meeting. Considering his advanced age, he has opted not
to seek re-election at this meeting. Mr S.K.Ramasamy has
been a Director of the Company since 2001and has played
an effective role through his interaction with sugarcane
growers. Your Directors wish to place on record the
valued contribution made by Mr S.K.Ramasamy to the
Company during his long association. |
Directors’ Responsibility Statement
|
|
Your Directors,
in terms of Section 217(2AA) of the Companies Act 1956, confirm that:
(i) all applicable accounting standards have been
followed in the preparation of the annual accounts;
(ii) your Directors have selected such accounting
policies and applied them consistently and made
judgements and estimates that are reasonable and prudent
so as to give a true and fair view of the state of
affairs of the Company as of 31st March 2011 and of the
Profit of the Company for the year ended that date;
(iii) proper and sufficient care has been taken for
the maintenance of adequate accounting records in
accordance with the provisions of the Act for
safeguarding the assets of the Company and for
preventing and detecting fraud and other irregularities;
and
(iv) the annual accounts have been prepared on
a going concern basis. |
|
|
|
|
Employees
|
|
No employee of
the Company was in receipt of remuneration during the
financial year 2010-11 in excess of the sum prescribed
under Section 217(2A) of the Companies Act, 1956 read
with the Companies (Particulars of Employees) Rules,
1975. |
Corporate
Governance
|
|
A separate
section on Corporate Governance is included in the
Annual Report and the certificate from the Company’s
Auditors confirming the compliance of conditions on
Corporate Governance as stipulated under Clause 49 of
the Listing Agreement of the Stock Exchanges is annexed
thereto. |
Conservation of Energy etc
|
|
Information
relating to conservation of energy, technology
absorption and foreign exchange earnings and outgo, as
required under Section 217(1)(e) read with the Companies
(Disclosure of Particulars in the Report of Board of
Directors) Rules, 1988 is given in the Annexure
hereto. |
Auditors
|
| M/s Maharaj N R
Suresh & Co and M/s R Subramanian and Company retire
at this meeting and are eligible for reappointment
pursuant to Section 224 of the Companies Act,
1956. |
Cost Audit
|
|
Cost Audit
Report for the year would be filed with the Central
Government in due course. M/s S Mahadevan & Co have
been reappointed as Cost Auditors for
2011-12. |
Appreciation
|
|
Your Board conveys its appreciation to the
cane cultivators, customers, suppliers and Banks for
their continued support and cooperation. Your Directors
commend the committed performance of employees at all
levels in steering the Company through a difficult year. Your
Directors wish to thank the shareholders for their
understanding and support to the management. |
| |
For Board of
Directors |
| Chennai |
N Gopala Ratnam |
| 27th
May 2011 |
Chairman | |
|
Information as required under
section 217(1)(e) of the Companies Act, 1956 read with
the Companies (Disclosure of Particulars in the Report
of Board of Directors) Rules, 1988
A.
Conservation of Energy:
a) Energy Conservation measures
taken:
(i) Installation
of VFD in the cane carrier.
(ii) Installation of
Electrical Melting System for melting of sulphur.
(iii) Relocating the syrup buffer
tank to ensure gravity flow of syrup to syrup
clarification system thereby avoiding one stage of
pumping.
(iv) Installation of plate type heat
exchanger for superheated wash water system.
(v) Installation of four nos. of
planetary gear boxes in crystallizers.
b) Additional Investment
Proposals, if any, being implemented for reduction of
steam and energy:
(i) Installation of 1000 m2 H.S Evaporator body
(ii) Fine tuning of automation in all possible areas.
(iii) Installation of two nos. of 1250 kg capacity batch
centrifugal machines instead of four nos. of 650 kg
capacity machines.
c) Impact of measures at (a)
and (b) above for reduction of energy consumption and
consequent impact on the cost of production of goods:
(i) Steam consumption is reduced by 1.25 % on cane.
(ii) Power consumption is reduced by 500 units per
day.
d) Total energy consumption
and energy per unit of production are given in Form A.B.
Technology Absorption
e) Efforts made in Technology
absorption are given in Form B.
C. Foreign Exchange earnings and
outgo
f) Activities relating to
exports, initiatives taken to increase
exports,development of new export markets for products
and services and export plans:
Sugar exports are driven
by Government policy and the cyclicality of sugar
business. The Company is a regular player whenever India
is a sugar exporter. Currently, there is considerable
domestic shortage in sugar and hence no export.
g) Total foreign exchange used
and earned.
|
|
(Rupees in Lakhs)
|
|
|
2010-2011 |
2009-2010
|
|
Earnings |
815
|
- |
|
Outgo |
5554
|
1703 | |
|
FORM
A(RULE 2) |
|
Form for disclosures of
particulars with respect to Conservation of Energy
|
Current
Year |
Previous
Year |
|
(A) Power and fuel Consumption
|
|
|
|
1 Electricity |
|
|
|
a)
Purchased Units (kwh lakhs) |
2.70 |
0.55 |
|
Total amount (Rs lakhs) |
26.78 |
14.71 |
|
Rate/Unit (Rs/kwh) |
9.92 |
26.72 |
|
b)
Own generation |
|
|
|
i) Through Diesel Generator |
- |
- |
|
ii) Through steam turbine/Generator |
|
|
|
Units(kwh lakhs) |
206.53 |
230.64 |
|
Units per tonne of fuel (kwh) |
- |
- |
|
Cost/Unit (Rs/kwh) |
2.62 |
2.02 |
|
2 Coal |
|
|
|
Quantity (tonnes) |
33295 |
36224 |
|
Total Cost (Rs lakhs) |
1638.13 |
1436.35 |
|
Average Rate (Rs/t) |
4920 |
3965 |
|
3
Coconut shell |
|
|
|
Quantity
(tonnes) |
18 |
25 |
|
Total Cost (Rs lakhs) |
0.49 |
1.04 |
|
Average Rate (Rs/t) |
27.22 |
4032 |
|
4
Bagasse |
|
|
|
Quantity
(tonnes) |
81048 |
101576 |
|
Total Cost (Rs lakhs) |
Nil |
Nil |
|
Average Rate (Rs/t) |
Nil |
Nil |
|
(B)
Consumption per unit of
production: |
|
|
|
Product-Sugar
cane (t) |
|
|
|
Electricity
(kwh) |
30 |
27 |
|
Fuel
(t)* |
0.09 |
0.09 |
|
Product-Raw
Sugar (t) |
|
|
|
Electricity(kwh) |
103 |
106 |
|
Fuel
(t)* |
0.36 |
0.35 | |
|
*(Bio
Fuels/Baggase calculated on Coal equivalent weight basis)
Note:
1. Increased power consumption due to reduced rate of
crushing.
2. Figures for
the previous year have been regrouped, whereever
necessary. |
|
|
|
Form B
(Rule 2)
|
|
Form for disclosure of particulars with
respect to Technology Absorption.
(A) Research &
Development (R&D) (Rs.
Lakhs) Nil
(B) Technology
absorption,adaptation & innovation: Nil
|
|
| |
For Board of
Directors |
| Chennai |
N Gopala Ratnam |
| 27th
May 2011 |
Chairman
| |
|
MANAGEMENT DISCUSSION AND ANALYSIS REPORT
|
|
Industry structure and
development
World Sugar
|
|
Sugar is produced in
over 120 countries from beet or cane. Overtime, the relevant
share of cane sugar has galloped from 56% during 1960s to 82%
during 2010/11 by reason of growing sugar production out of
cane in tropical countries.
Source: ISO & ISMA
India produced 50% more
sugar than Brazil in 1990. During the decade 1991-2000, India
and Brazil alternated the top producer’s slot. However, ever
since the start of current millennium, Brazil has steadfastly
risen to occupy the numero uno status and has the potential to
become still more dominant in the future. In 2009-10, Brazil’s
production was twice that of India. In contrast to the
consistent growth in Brazil, Indian production is plagued by
wild year on year swing.
Source: ISO - QMO Feb. 2011
India continues to be
the top sugar consumer despite low per capita consumption.
Other major consumption centers are China and EU. Consumption
growth is near static in developed countries and is driven
mostly by Asian demand. It could be slower for 2010- 11 at
2.01% against 10 year average of 2.6% due to historical high
prices in both world and domestic markets. After two years of
deficit, world sugar production is set to reemerge with a
moderate surplus for 2010-11, though the size of surplus has
been successively scaled down in revised estimates. World
sugar stocks at 35.01% by end September 2011 would be at
historic low levels.
About 70% of world
sugar production is consumed in the country of origin while
the balance is traded in world market. Brazil is the dominant
sugar exporter with its ever escalating export share that
currently meets more than half of world demand. |
|
(Source:Kingsman) |
World Sugar
prices
|
|
World market prices
continued their roller coaster run with short term swings in
both directions. After a severe price collapse in early
November from 30 to 24 c/lb, a midterm bearish trend
re-asserted. Thereupon, a new upward wave started in January
and by 2nd February the price touched 32.57 c/lb, the highest
daily quote for more than 30 years since 28.11.1980. White
sugar price followed a similar scenario touching a new high at
US$ 832.40 on 2nd February.
Months of March
and April witnessed an avalanche of price fall reflecting a
record harvest in Thailand, the second largest exporter and
fast approaching fresh crops from Brazil. It may not however
replicate the dynamics of disastrous downfall seen in the last
year.
In terms of monthly
averages, the prices kept up for eight consecutive months
since May 2010. Market had factored in bearish factors,
namely, lower than expected CS Brazil export, lower EU
exports, anaemic 2010-11 Australian exports, higher Russian
imports due to disastrous 2010-11 crop and lower stocks in
importing countries.
Wholesale domestic
sugar prices have reached fresh records in Russia, China and
Brazil. When expressed in USD, the price rise is 20%, 40% and
20% respectively for these countries since last February. Over
the long term, there seems to be a somewhat stronger link in
dynamics between world and domestic markets. While world sugar
prices have increased by 66% since Feb.2006, domestic prices
have increased in all major consuming markets (excluding the
EU), with individual country price rises ranging from 43% to
70%.
(Source:ISO -QMO Feb
2011) |
|
|
|
|
|
|
|
Indian
Sugar |
|
The Indian sugar
industry is characterized by the coexistence of private,
cooperative and public sector. It is inherently inclusive,
supporting over 50 million farmers and their families. It is
rural centric and hence a key driver of village level wealth
creation. Sugar is India’s second largest agro-based industry
after Textiles. It has tremendous transformational
opportunities to meet food, fuel and power needs and earn
carbon credit.
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.
Source: Indian Sugar
Journal-Dec.2010
Sugarcane and sugar
production are seasonal with more than 90% happening in the
winter months of November to March. Crushing season lasts an
average for 100-150 days in a year depending on the region,
weather, irrigation, cultivation practices as well as cane
availability. Sugarcane use for sugar has steadfastly
increased in preference to alternative sweeteners.
Sugar is mostly
produced in UP of north, Maharashtra and Gujarat of west and
the three southern States of AP, Karnataka and Tamil Nadu. The
cyclicality of Indian sugar is less driven by nature and more
accentuated by radical change in Government
policies.
(Source
:Indian Sugar Mills Association)
Both sugar and
sugarcane are treated as ‘essential commodity’. The
Government’s focus to give high cane price to farmer and
concomitantly maintain low sugar price for the consumer is
socially unexceptionable but economically unsustainable. Low
sugar price leads to unremunerative cane price and its delayed
payment forcing the cultivator to switch to other crops. This
kick-starts sugar shortage and high sugar price, in turn
prompting higher cane price to lure the farmer back to cane.
This cycle gets repeated ad infinitum with resultant spike in
sugar production causing demand-supply disequilibrium and
driving sugar prices on a roller-coaster ride.
The steep increase
between original estimate and final production of sugar for
2009-10 coupled with higher sugar production over domestic
off-take during 2010-11 have come to significantly strengthen
the local supply position. By reason of Government policy to
checkmate exports and choke trade flow with extended controls,
sugar prices have turned balefully bearish throughout
financial year 2010-11.
The Fair and
Remunerative Price announced by Centre is a far cry from being
a fair and remunerative price. Sugar mills are forced to offer
much higher prices to enthuse farmer undertake cane
cultivation. With all round increase in the cost of inputs and
more so with labour, farmer is only lukewarm to cane crop in
States like Tamil Nadu despite a near 100% increase in cane
price within 5 years. Food inflation is indeed global and
sugar prices must be allowed to be market driven for stability
in supply and sustainability of operations in the long
run.
India’s influence over
world sugar prices was decisively demonstrated during 2009-10.
Whenever there is huge shortfall in domestic production, the
Indian consumer ends up paying hefty price on imports. It is
hence imperative that sugar prices are monitored with long
term objectives than to score a few brownie points in the
short haul to win the war but loose the
battle.
|
Indian Sugar
Prices |
|
Indian sugar prices displayed a
bearish undertone all through the year. This is in
contrast to much wider swing and volatility in the
global prices. Indian prices were virtually insulated
from world prices due to the backdoor ban on exports and
bountiful releases.
Source: ISMA
There is presently a fine balance
between production and off-take and stock levels haven’t
reached alarming level. Still the prices have plummeted
to below breakeven level more out of negative market
sentiments brought about by aggressive Government
intervention than warranted by the fundamentals.
Despite losses, sugar mills have
managed with little cane arrears till date, thanks to
the surplus cash generated in the previous year and
precious little investment on expansions made during
this boom. This luxury is no longer available and hence
there must be the desired price correction, that too
immediate, to protect farmer’s interest as well as to
prevent future production shocks and
setback. |
|
|
|
Government Policies
|
|
Sugar business
continues to remain highly regulated. The Centre fixes levy
percentage to meet PDS requirement for the benefit of BPL
families. Levy obligation was temporarily hiked to 20% for
2009-10 due to extremely lower production. This has since been
restored to 10% from 2010-11. The balance, though termed as
free sale sugar, is monitored through monthly release
mechanism.
Levy sugar prices
remained unrevised for 6 years from 2004. Finally the
Government came to revise the levy sugar price for 2009-10 on
21.06.2010 and 2010-11 on 18.01.2011. Levy sugar price
computation continues to ignore cane price over and above
Centre’s price despite the Supreme Court ruling in favour of
the industry through a retrospective amendment to law. Sugar
industry has again challenged this and the issue is before the
Supreme Court.
Fair and Remunerative
Price (FRP) for 2010-11 season was fixed by Central Government
at Rs.139.12 per qtl linked to 9.5% recovery with a premium of
Rs.1.46 for every 0.1% increase in the recovery. The Centre
has also announced advance FRP for 2011-12 at Rs.145 per qtl
for 9.5% recovery with a premium of Rs.1.53 for every 0.1%
increase in the recovery.
Government of Tamil
Nadu effected a steep hike in SAP for 2010-11 to Rs.1900 per
tonne (previous year Rs.1437.40 per tonne) linked to 9.5%
recovery. In addition, transport charges from field to factory
have to be fully borne by sugar mills.
ISMA and National
Federation of Cooperative Sugar Factories have submitted a
joint memorandum to the Central Government for early decontrol
of the sugar industry. The Centre reportedly desired to enlist
the views of State Government on the subject and there is
little tangible progress on decontrol.
The Central Government
also introduced, extended or enforced a slew of regulatory
measures during the year to keep continual check on sugar
prices and rein in food inflation. Some of them are:-
-
Duty-free raw sugar
import facility repeatedly rolled over – Present validity
upto 30.06.2011.
-
Export releases
commenced from November 2010 but were confined only to ALS/
AAS outstanding obligations - Deadline set for completing
old obligations before 31.03.2011.
-
OGL export of 5 lakh
tonnes announced in January but put on hold – Finally
confirmed in April 2011 - Quantity pro-rated to all sugar
mills on the basis of past 3 years’ production.
-
Re-export of
previously imported raw sugar lying at ports allowed on
condition that equivalent quantity shall be re-imported when
dictated by Government.
-
Daily reporting of
sugar production and dispatch data through SMS introduced
from 31.08.2010. This was changed to weekly basis of
reporting from 02.12.2010.
-
Stock holding limit
for bulk consumers was extended but the norms were
marginally diluted.
-
Hundred percent
compulsory packaging of sugar in jute bags reconfirmed for
2010-11. Further, the packing has to be 50kg bags as against
100kg hitherto used to conform to WTO norms.
-
Ban on sugar futures
imposed since 26.05.2009 was lifted from 01.10.2010. Trading
commenced from 27.12.2010.
-
Ethanol blending
programme for 5% reaffirmed - Provisional price fixed at
Rs.27 per ltr - Expert Committee to recommend pricing
formula - Final decision of Government awaited.
-
The Centre has
revised WPI index from September 2010 with 2004-05 as base
year. In this, sugar weightage has been reduced from the
earlier 3.68% to 1.74%. The Centre however has not let lose
its vice like grip on sugar price despite its reducing
effect on WPI.
-
The Centre with a
view to promote green energy has introduced Renewable Energy
Purchase Obligation stipulating minimum percentage of
renewable energy to be purchased by major consumers. It has
also correspondingly introduced Renewable Energy Certificate
mechanism that is tradable in energy exchanges.
-
Union Budget
2011 has removed sugar from the purview of Additional duties
of Excise (Goods of Special Importance Act, 1957). This is
to facilitate States impose VAT on sugar under the proposed
Goods and Services Tax reg |
Opportunities and Threats
|
|
India has low per
capita consumption with growing income. Its farm productivity
has virtually remained stagnant for decades. There is thus
immense scope for hiking production to meet growing demand and
capture export markets.
Energy saved is energy
produced. Age-old sugar industry offers immense scope for
implementing Energy Efficiency Project besides feeding green
power to grid through Cogeneration. Ethanol production
improves oil security and contributes to environmental
protection, while Cogen provides clean and renewable energy.
Sugar business is
intrinsically cyclical. Market sentiments move
disproportionate to demand-supply parity that causes volatile
change in product pricing. Cogeneration and Ethanol bring much
desired value addition to by-products and help soften the
inimical impact of sugar cycles.
Sugar mills have now
become integrated complexes to produce sugar, power and
ethanol. As a result, capital outlay has become huge and the
assets so created need to be exploited for longer duration. On
the contrary, all India crushing duration has come down from
181 days in 1995-96 to 87 days in 2008-09, marginally
improving to 108 days in 2009-10. Reduced cane availability
that lowers season duration is but the direct outcome of
unviable sugar price, forcing the farmer to other crops.
Water has become
increasingly scarce, more so in States like Tamil Nadu. Drip
irrigation is the right answer but it involves huge capital
outlay that is beyond farmer’s financial capability. While the
Government extends upfront capital subsidy, it is linked to a
normative capital cost of Rs.55,000/ ha compared to the
current cost in excess of Rs.one lakh/ ha. Free power on the
contrary is proving to be a clear disincentive to conserve
water.
India is a cost
efficient producer of sugar. It has however failed to be a
credible and consistent exporter due to drastic year on year
changes in domestic production, triggering often times
desperate policy changes. Under the changed dynamics of
business and governance, there is little legitimacy in
treating sugar as an essential commodity leading to periodical
political outcry and attendant policy distortions.
World sugar balance is
considerably influenced by the wild production swings in
India. As a result, India ends up exporting at the bottom of
prices during glut and importing at the peak of prices during
deficit.
Frequent policy
intervention disrupts the orderly functioning and dislodges
the business plans of the industry. While the Government has a
legitimate right and role to protect the interest of poor and
needy, there is no rationale in subverting sugar prices to the
benefit of industrial and high income consumers.
With a well performing
economy and increasing share of service sector, labour is
steadfastly migrating from agriculture. NREGA has arguably
given other soft options to rural labour. Sugarcane harvesting
charges have hence increased manifold due to labour shortage
that further upsets the rhythm in daily rate of crushing.
Mechanisation is yet to take off in any meaningful measure due
to fragmented landholding and undulated land terrain in most
part of Tamil Nadu.
With growing concern on
food security and inflation control, sugar faces the imminent
risk of increasing crop diversion with an over zealous
Government constantly choking sugar prices. There is dire need
for a balanced and integrated policy framework, more
particularly the long term price parity between sugar and
sugarcane, for the orderly growth and long term health of this
core sector.
|
|
|
Segment-wise or product-wise
performance
|
| The company
is engaged in a single segment, namely, sugar and its
by-products. |
|
Outlook
|
|
(Source
:Czarnikow Report)
After several years of
world prices well above historical levels, the much expected
supply response to higher prices today still seems somewhat
elusive. The close correlation between higher prices and crop
recovery is no longer evident. Several factors would seem to
impede the full transmission of world sugar price to the crop
producer, namely, weather effects, production costs, currency
movements, Government regulation as well as the ability to
remain a net sugar exporter on the back of a fast growing
domestic demand, particularly in Asia.
Sugar futures in ICE
market reflects the tight market situation with a high
physical premiums against July NY#11 and a bearish outlook
thereafter. It has moved from a strong backwardation to a flat
to carry structure, reflecting the fundamental change from
deficit to surplus.
World prices started
their downward correction again from March 2011 with the start
of new season by Brazil and higher production turnout by
Thailand. A neutral world balance (neatly balanced world
production and consumption as well as export availability and
import demand) in low stock environment is unlikely to pare
back extreme price volatility till a more detailed picture of
Brazil’s new crop development is available in June-July.
Indian sugar production
looks certain to remain in surplus for a minimum of one more
season, barring weather uncertainties. IMD has predicted a
normal monsoon forecast in its first advance estimate. This
should prompt the bearish trend to persist, albeit with some
moderate recovery to align with higher cane prices.
|
|
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|
Risks and Concerns
|
|
The management cautions
that the risks outlined below are not exhaustive and are for
information purposes only. Investors are requested to exercise
their own judgment in assessing various risks associated with
the industry and the Company.
Sugar industry being
agro based and vulnerable to commodity cycles is fraught with
several risks. The Company is exposed to diverse business
risks and some of the anticipated risks and their mitigation
strategies are outlined below: |
| (a) Raw
Material risk |
|
Sugarcane is the sole raw material. Its
availability, quality, growth and cost are impacted by -
 Availability of
cultivable land and adequacy of irrigation infrastructure
Adoption and
application of sound agronomic practices by the cultivator
Normalcy of monsoon,
flow in river Cauvery and water table in the command area of
cane.
Electricity
connection and uninterrupted grid supply to pump water
Competition from
other crops influencing farmers’ crop preference
Pest attacks and crop
disease
Diversion of cane to
jaggery and neighbouring sugar mills in defiance of
contractual obligation
Availability and
adequacy of harvesting labour
Cane price control by
Centre and State, known as Fair and Remuneration
Price (FRP) and State Advisory Price (SAP).
Higher tax on
sugarcane in Tamil Nadu
Price
volatility risk and currency risk in the case of raw sugar
importsvolatility risk and currency risk.
|
Risk mitigation
|
|
 Promotion of Lift
Irrigation and Drip Irrigation
Cane development schemes
Improved road
infrastructure utilizing sugarcane cess funds
Incentives to mitigate
hardship and promote right cane variety
Remunerative cane price
and prompt payment
Networking through
divisional cane offices to disseminate knowledge and inculcate
discipline and enforce compliance.
Fair and transparent
dealings with farmers to build goodwill
Arranging crop loan
through Banks under tie-up arrangement
Centralized procurement
and distribution of fertilizer and pesticides
Recourse to raw sugar
import to tide over transient cane shortage
|
(b) Product price risk
|
|
 Sugar prices are
susceptible to commodity cycle. Marginal price change
might materially impact profitability.
Levy
sugar price is determined by Government. Revisions are neither
prompt nor adequate.
Sugar is an essential
commodity. Free sugar prices are also kept in check by
Government to control food inflation.
Sugar Export window
is closed at Government discretion.
Sugar Futures to
hedge price risks are susceptible to temporary bans.
Molasses is controlled by
State. Restrictions on inter State movement considerably
impact prices.
Global sugar prices
influence and impact domestic prices. |
Risk
mitigation
|
|
Impact of global and local market
forces and regulatory regime are beyond the control of the
Company. Within extant constraints, risk mitigation measures
focus on:
Introduction of ISO
9001:2000 for quality system
Production of higher
grain size and lower ICUMSA (brighter) sugar
Targeting sugar
markets in deficient regions
Taping export markets
Increased cane volume and
sugar production for improved economies of scale
Measured hedging in
Futures Market
By-products value
addition |
(c) Regulatory risk
|
| Sugar industry despite
much liberalization in the country continues to suffer under
catena of controls: |
|
Cane area reservation by
State
Cane
price fixation by Centre and State (SMP & SAP)
Control on molasses by
State including inter State movement restriction
Levy obligation at
unviable price
Monthly release
mechanism to regulate free sugar trade - Ocassional
tightenning to weekly quota.
Restrictions on Trade
and Bulk Users distorting market sentiments
Compulsory packing
of sugar in jute bags
Adhoc
intervention in Exim Policy
Political
sensitivityand attendant adhoc aggressive State
intervention.
|
Risk
mitigation
|
|
Much of the regulatory
risks being Government policy driven are beyond Company’s
control. Every effort is made to conform to regulatory
requirement while judicial recourse is made when warranted.
Redressal is sought through industry
associations |
(d) Finance
risk
|
Availability of working
capital to meet cane dues Interest rate risk Currency risk
including derivative risk Financing New
Projects The Company enjoys sound reputation and
good rating with Banks. Interest rate increase is inevitable.
Rising rupee erodes export competitiveness. To address these,
the Company constantly looks for lower cost debt options,
while currency risks are mostly hedged and uncovered exposures
kept minimal. Derivative exposures, occasionally undertaken,
are ensured to remain within prudential norms. |
(e) Risk specific to the
Company
|
|
Erode Sugar Mill is
squeezed for land in its factory area to accommodate any major
expansion or diversification plans. It is also surrounded by
other sugar mills that limits scope for major cane area
expansion.
Ethanol licensing is
subject to State discretion. Standalone Distillery faces local
resistance on perceived threat of pollution.
The Company is
pursuing Cogen Project on a capital outlay of Rs.110 crores.
Its implementation without time or cost overrun and successful
operations are crucial to future cash flows.
Though the transfer of
Erode Sugar Mill Undertaking was made to the Company in terms
of Scheme of Arrangement sanctioned by the Hon’ble High Court
of Madras, the Company is confronted with certain claims
towards tax disallowances and recovery of Sugar Development
Fund Loans owed by erstwhile Ponni Sugars and Chemicals Ltd.
The Company is legally advised that these have only a remote
probability of crystallization. Appropriate defence by filing
Writ Petition is already initiated to protect Company’s
interest in the matter. Of this, the SDF issue is decided in
Company’s favour by the High Court of Madras. |
Internal Control
System and their adequacy
|
|
The Company has proper
and effective internal control systems commensurate with its
nature of business and size of operations to ensure that all
controls and procedures function satisfactorily at all times
and all policies are duly complied with as required. These are
considered adequate to reasonably safeguard its assets against
loss or misappropriation through unauthorized or unintended
use.
There is
adequate and effective internal audit system that employs
periodic checks on on-going process. The Audit Committee of
the Board of Directors regularly reviews the effectiveness of
internal control system in order to ensure due and proper
implementation and due compliance with applicable laws,
accounting standards and regulatory
guidelines. |
Human
Resources
|
|
The Company employs 102 seasonal and
248 non-seasonal employees. Industrial relations remained
cordial throughout the year. Its HR initiatives include:
Introduction of ‘Code of
Conduct’ and ‘Statement of Values’.
Instituting a Vision and
Mission statement.
Compensation
structure comparable with industry standards comprising both
tangible and intangible benefits.
Regular training and
motivation for skill upgradation
Merit-led challenging
work environment with desired level of delegation of powers
and decentralization of decision making.
Well maintained
housing colony with education and recreation facility.
Interactive and
responsive top managment.
|
|
Discussion on Financial Performance
with respect to Operational Performance
Operating Performance
|
|
Year ended
31-3-2011 |
Year ended
31-3-2010 |
| Number of days |
278 |
300 |
| Average crushing rate (tcd) |
2555 |
2695 |
| Cane crushed (t) |
628613 |
808612 |
| Recovery (%) |
9.65 |
10.11 |
| Raw Sugar Processed (t) |
17087 |
9608 |
| Sugar Production (t) |
76870 |
90920 | |
|
The Company operated
for lesser duration and handled lower volume of cane and the
highest volume of raw sugar. It had periodic interruptions to
the daily crushing due to fluctuating availability of harvest
labour.
Sugar recovery slipped
by 50bps and touched the lowest in 12 years. This was caused
by poor cane quality, delayed harvest and adverse
weather.
|
|
Turnover |
|
Sale of domestic sugar
volume touched a record high figure. Levy releases were
liberal while accelerated free sale quota out of imported raw
sugar bolstered overall sale volume. Bagasse sale volume
declined commensurate with lower crushing.
The Company
re-exported 2909 tonnes of raw sugar under the one-time
facility with commitment to re-import equivalent quantum as
and when decided by the Government. It had no advance licence
obligation and no OGL export was allowed.
Levy realization
improved by 34% with the Government revising levy sugar price
after a wait of 6 years. Free sale price dipped by 8%. Gross
turnover touched an all time high.
|
|
Other
Income |
|
Other income was
boosted by dividend out of temporary surplus funds invested in
Mutual Funds and exchange gain on Import Trade Credit.
|
|
Raw Material
Cost |
|
Government of Tamil
Nadu hiked the SAP for 2010-11 by 24%. Average cane cost went
up by 17%. High cost of imported raw sugar was however
neutralized by the prudent provisioning made in last
year.
Packing cost was
higher by 9% due to mandatory jute packing. Employee cost was
up by 15% due to higher DA and provisioning for retirement
benefits. Repair cost was significantly pruned with tight
budgeting. Variance in other expenses is principally due to
the excise duty provision on inventory change.
|
|
Operating
margin |
|
Operating margin was
severely dented due to higher raw material cost and lower
realization from sugar and molasses.
|
| Interest Cost
|
|
Interest on fixed
loans declined in line with instalment repayments during the
year. Import trade credit to finance raw sugar import was cost
effective. There was nil availment of cash credit limits for 5
months and the utilization was marginal during other
periods. |
| Depreciation
|
|
There is no
change in the method of depreciation.
| |
|
|
| Profit
Before Tax (PBT) / Profit After Tax (PAT)
|
|
PBIDT is the lowest in
5 years barring the loss suffered in 2007-08. PBT decline was
buttressed by the reversal of prudent provisioning made for
raw sugar last year. The overall financial performance for the
year is considered satisfactory.
|
| Share
Capital |
|
The Company issued
8198418 Equity Shares of Rs.10 each in 2001 in terms of the
Scheme of Arrangement sanctioned by the High Court of
Madras.
The Company
issued and allotted 400000 Equity Shares at a premium of Rs.40
per share in 2008 on conversion of redeemable cumulative
preference shares.
This together
constitutes present outstanding capital of 8598418 Equity
Shares.
|
| Debt |
|
Debt servicing is as
per schedule.
The Company is still
to realize Rs.123 lakhs of interest subsidy under the
subvention scheme. Meanwhile its repayment commenced from
February 2010 and the Company had paid Rs.568 lakhs during the
year.
The Company has drawn
the first instalment of Rs.5 crores from Canara Bank towards
Cogen Project. This was first sanctioned at an interest rate
of 9.50% that has moved up to 11% in tune with RBI
policy.
|
| Fixed
Assets |
|
Addition to Plant
& Machinery is marginal for replacing obsolete equipment.
Normal capital additions have been funded out of internal
accruals.
The Company has
incurred Rs.15 crores of expenditure towards Cogen Project
under construction. All direct and related expenditure for
this would get capitalized in accordance with Accounting
Standard 10.
|
|
Investments
|
|
During the year, the
Company has obtained approval for investment in the Equity
Shares of Subburaj Papers Ltd upto Rs.10 crores. Advance of
Rs.7.5 crores made towards this purchase, pending share
transfer, is shown under Loans & Advances.
|
|
Working
Capital |
|
Sugar inventories have
declined with accelerated sales. Inventory valuation rate for
levy and free sugar has considerably gone up from last year
with a beneficial impact of Rs.11 crores to the bottomline.
Molasses stock volume declined by 92% while its value dipped
by 72%.
|
| Contingent
Liabilities |
|
Contingent liabilities
are assessed and reviewed in accordance with Accounting
Standard 29. Due disclosure and provisioning is made in
compliance of said Standard.
|
| Cash
accruals |
|
Cash accruals were
mainly used to reduce working capital borrowings and meet our
contribution to Cogen Project and investment in Subburaj
Papers Ltd.
|
| Cost-realisation
trend |
|
During the
quinquennium 2006-11 the relative change in CAGR (%) for major
items are as under:
|
| Cost |
Realisation |
| Sugarcane |
12 |
Sugar |
9 |
| Process
& packing |
12 |
Molasses |
8 |
| Employees |
15 |
Bagasse |
8 |
The trend is thus too evident that
output prices haven’t been able to keep pace with galloping
cost escalations. |
| Cautionary Statement |
|
Statements made in
this Report describing industry outlook as well as Company’s
plans, projections and expectations may constitute ‘forward
looking statements’ within the meaning of applicable laws and
regulations. Actual results may differ materially from those
either expressed or implied. |
| |
For
Board of Directors |
| Chennai |
N Gopala Ratnam |
| 27th May 2011 |
Chairman | |
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