Directors' Report
|
|
Your Directors present their 14th
Annual Report and the audited statement of accounts
for the year ended 31st March 2010
|
Year ended |
Year ended |
| 31.03.2010 |
31.03.2009 |
| Physical Performance (tonnes)
|
| Cane
Crushed |
808612 |
680238 |
| Sugar
produced |
90920 |
71820 |
| Financial Performance(Rs.
crores) |
| Turnover(Net) |
244.64 |
137.27 |
| Profit / (Loss) Before
Tax |
55.41 |
18.72 |
| Profit / (Loss) After
Tax |
36.85 |
12.26 |
| Surplus From
Previous Year |
6.88 |
3.13 |
| Amount
available for appropriation |
43.73 |
15.39 |
| Appropriations:
|
| Transfer to General
Reserve |
25.00 |
6.00 |
| Proposed
dividend |
3.44 |
2.15 |
| Dividend Tax
|
0.57 |
0.37 |
|
Balance carried forward |
14.72 |
6.88 |
Performance Pinnacle
Your Company has had a spectacular financial performance
that reached a crescendo during 2009-10. Its gross turnover
crossed the Rs.250 crores mark. Its PBIDT and PAT figures
displayed a dream run, scoring a scorching three-fold increase
over the last year. Two successive years of strong profit
performance has helped to significantly strengthen its
financial position, providing the right platform to launch its
diversification plans.
|
Dividend
|
|
Your Directors are pleased to recommend a dividend of Rs.4/- per Equity
Share of Rs.10 each for the financial year ended 31st March
2010. |
|
Sugar Industry Overview
|
Sugar business has been intrinsically cyclical in
India but the swings in recent times have turned rather
too sharp and swift. Sugar production discernibly
doubled between 2005 and 2007 that hurriedly halved just
within the next two years. From this low base, it is now
well poised to nearly double again in the near term.
No other major sugar producing country is witness to
such galloping gyrations in year on year production.
Price volatility is but a necessary outcome of such
production volatility. This has rather made the diverse
stakeholders by turn taciturn and dis-spirited towards
taking a long term commitment for the orderly
functioning and growth of this core industry.
The causes for such intermittent and intimidating
upsurge and downswing in sugar production are too well
known. It is axiomatic to recognize and pave way for
price parity between sugar and sugarcane on the one hand
as well as sugarcane and other competing cash crops on
the other. A cohesive and comprehensive action plan is
imperative and its need immediate to meaningfully
moderate, if not totally eliminate, the adversity of
sugar cycles occurring in our country at frequent
intervals with ferocious intensity.
Indian production figures have their domino
effect both on the direction and degree of world sugar
balance. It is thus no wonder that world sugar balance
suffered a deficit during 2008-10 that is now heading
towards surplus in 2010-11. As a corollary, Indian
exports are invariably during glut at the bottom of
global prices while imports are during deficits at the
peak of prices. On both counts, the huge financial
burden befalls on producers, consumers and the exchequer
though in varying degree.
With two successive sugar years of low production,
Indian sugar prices have been continuously on their
climb up to reach robust levels. This in turn empowered
and prompted the industry to offer high and remunerative
cane price so as to lure the farmer back to cane corp.
Sugar mills have voluntarily paid a whopping Rs.20,000
crores over and above the Central Government’s mandatory
cane price in this process. As a result, there has been
a swift and strident recovery in Indian sugar production
to narrow down the deficit during 2009-10 and turn
surplus during 2010-11. There is no arguing that this
remarkable rebound could and in fact has come only on
the strength of buoyant sugar prices and consequent
benevolent cane prices. |
|
|
Goverment Measures
|
|
The year
under review witnessed aggressive Government
intervention in sugar
business to rein in
rising sugar prices fuelled by the galloping
deficit in production and stock estimates.
Some of these measures were
well justified to augment domestic sugar availability
and cool-off the overheated market. But
several others proved too harsh and outlandish that
created panic in the minds of Trade
and Industry, quelling demand and disrupting off-take.
Levy
obligation was doubled from 10% to 20% to protect
PDS supply while levy sugar prices now remain
unrevised for over six years. Duty-free raw sugar
import facility was extended till end of 2010
besides opening duty-free white sugar imports for
all. Indeed, white imports are presently placed at
a premium over domestically produced sugar with
total exemption from levy obligation and full
freedom from release mechanism. Further, bulk
users of sugar were subjected to unrealistic
inventory norms for holding domestic sugar that
has forcibly moved them to imported
sugar offering greater flexibility.
Inventory and turnover norms were rigidly enforced
on sugar traders followed by frequent
raids. The reversal of market
sentiments and concomitant price decline from the
peak was taken in the normal
stride by the industry. But persistence with these
moves have plummeted prices to below breakeven
levels that cries for instant policy correction.
The
Government promulgated an Ordinance, later made as
Law, to retrospectively amend the Essential
Commodities Act, 1955. By this, the Government has
endeavoured to undo a favourable Supreme Court
ruling and deny higher
levy sugar price based on State Advised
Price or actual price for cane.
The new Law seeks to
restrict and confine the levy sugar price
by considering only Statutory Minimum Price
for cane from 1974 to 2009. Sugar industry
has challenged the retrospective amendment by filing
a Writ Petition in Delhi High Court.
The
concept of Statutory Minimum Price (SMP) has been
changed to Fair and Remunerative Price (FRP) for
sugarcane from 2009-10 season. Such FRP takes
certain additional factors into consideration over
SMP, namely, reasonable margins for the growers of
sugarcane on account of risk
and profits. FRP was
conceptually intended to be total compensation and
hence the sole mandatory price for
cane, restraining States from announcing
higher SAP. However, the Centre bowing to
political pressures had to make a
quick retreat and remove the ban on SAP.
Dual cane priceing would thus continue to
daunt the industry with its deleterious impact.
Indian
sugar production for 2009-10 was initially
estimated around 140 lakh tonnes that now stands
uprevised to 185 lakh tonnes. Further, the
production outlook for the next year is also
highly promising. Simultaneously, world sugar
deficit is moving towards a surplus. All these
have brought about a strident shift in market
sentiment and consequent crash in sugar prices.
Raw sugar prices after recording a 29 year high at
30.40 c/lb on 1st February 2010 now trades at less
than 50% of that level. Concurrently, Indian sugar
prices have also
fallen from Rs.4200/ qtl
to below Rs.2800/ qtl. Accordingly, the industry
has made fervent appeal to the
Government to roll back the
harsh measures initiated during times of high
sugar prices that are no longer
relevant. Sugar prices now need to recover from
the bottom for the farmer to be
able to get a remunerative cane price.
Excessive
Government controls on sugar, though well meant to
balance the interest of diverse stakeholders, have
hardly helped to serve the intended objectives.
Still worse, they have
repeatedly failed to meaningfully respond to market
dynamics and in reality resulted in
the opposite by only aggravating
the crisis. It is hence high time
the Government decontrols the sugar industry
to unleash its innate potential, help meet the
growing demands of sugar in our fast
developing economy and be a credible exporter.
|
Company
Performance
|
|
As stated, the Company had a trailblazing financial
performance during the year. This was on the strength of
higher production and robust sugar prices during most
part of the year.
Cane volumes improved by 19% despite drought like
conditions prevailing in some parts of the operational
area. Sugar recovery however slipped to 10.11% from
10.55% due to adverse cane quality. Sugar production was
supplemented with 9608 tonnes of imported raw sugar.
Cane price for 2009-10 season was fixed at higher
levels upon negotiation with cane growers at
Rs.1725/tonne besides subsidizing the full transport
cost from field to factory. This is considerably higher
than the FRP of Rs.1298.40/tonne and SAP of
Rs.1440/tonne. In addition, the Company opted to
voluntarily settle the old disputed SMP for 2002-03
season involving an outlay of Rs.4 crores. With these,
we have succeeded in strengthening the bond and
motivating our cane farmers, thereby achieving higher
volume of cane supply during buoyancy in sugar
prices.
Sugar prices recorded perceptible increase during the
year till January 2010 but receded ruefully thereafter
by reason of decisive change in production outlook. Your
Company has been aggressive in its sales, including
large volumes sold in upcountry markets, in its
endeavour to push volumes during good times. This has
largely helped us achieve record high results for the
year.
Pursuant to industry-wide negotiations, the Company
entered into a long term wage settlement enuring upto
March 2013. Employee relations have been cordial all
along.
Contrary to the steep increase in sugar production in
other States, Tamil Nadu has to remain content with
muted growth in cane volumes due to deficient monsoon,
high cost and unavailability of farm labour and
lucrative return from competing crops. As a result,
private sector mills in Tamil Nadu have had to
increasingly rely on raw sugar imports to supplement
their sugar production. In this endeavour we too
contracted additional import of 20000 tonnes in January
2010 for shipment during July 2010. The unprecedented
fall in raw sugar prices by more than 50% within just
the next couple of months coupled with deep decline in
domestic sugar prices has however dealt a severe blow to
the economics of this import. The ban on Sugar Futures
balefully pre-empted the scope for hedging our sugar
price risk. It is good comfort that with the help of
profit accruals from earlier imports and all round
improvement in our profit performance, we have been able
to put this adversity behind us. Following prudence and
relevant Accounting Standard, due provision for the
decline in the value of raw sugar import has been
recognized in the financial statements of the year.
Diversification Plan
The Distillery Project of the Company has suffered a
setback with a small group of local villagers protesting
against the project being located in their vicinity.
While our project is so configured as to strictly adhere
to the environment norms, the protesters continued to
remain apprehensive and obstinate. It was therefore
considered prudent to keep this project in abeyance and
consider alternative location.
The Company is now pursuing Cogeneration Project on a
capital outlay of Rs.95 crores to produce 19 MW of power
through the installation of 112 ata high pressure
boiler. This should help us export power to the extent
of 13 MW during season and 16 MW during off-season. It
is intended to fund the project out of internal accruals
for Rs.30 crores and the rest from term debts.
|
|
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 2010-11
|
|
Indian
Meteorological Department has predicted a normal monsoon that
should help sustain the increased sugarcane production
outlook for the country. However, we have been witnessing severe water
stress in our area with failed monsoon for the
third year in a row in certain major
sections of our command area. As
such there is reduced cane planting in our
region despite high cane price. We fear
our cane volumes could shrink by more
than 30% in the coming year by reason of
drought.
Tamil Nadu Government has already announced SAP
for 2010-11 season at Rs.2000/t inclusive of
transport charges. This is bound to catapult our cane
cost.
Sugar prices should however remain subdued consequent
upon the upsurge in Indian production. Having regard
to the high cane prices currently
paid in major sugar producing States and limited
scope for its roll back to too
lower levels, sugar prices might tend to
remain stable around current levels or move only marginally
lower.
Your Company has
thus an unenviable task
to reckon with reduced output, higher input
cost and lower product realization. With the help of carry over
inventory and tight leash on costs, we would combat
these challenges. It would of course be unrealistic
and unreasonable to expect an encore
of current year performance that by all count
was exceptional. There is hence bound to
be a formidable fall in our profit
figures in 2010-11 gravitating towards normative levels, barring unforeseen
circumstances.
|
Directors
|
|
Mr N Gopala Ratnam and Mr Arun G
Bijur, Directors of your Company, retire by rotation at
this meeting and being eligible offer themselves for
reappointment.
Mr N Ravindranathan, Director
also retires by rotation at this meeting. Considering
his advanced age, he has opted not to seek re-election
at this meeting. Mr N Ravindranathan has been associated
with the Company since 2001 and had played an active
role in the initial setting up of our Erode Sugar mill.
Your Directors wish to place on record the valued
contribution made by Mr N Ravindranathan 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 2010 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 2009-10 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
2010-11. |
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
achieving a new record performance for the year. Your
Directors wish to thank the shareholders for their
understanding and support to the management. |
| |
For Board of
Directors |
| Chennai |
N Gopala Ratnam |
| 28th
May 2010 |
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 linear controlled automation in place of
stepwise controlled automation for cane carrier
(ii)
Replacement of pressure imbibition system by trough
imbibition system.
(iii)
Connection of IBIL Boiler FD fan to WIL SA fan duct.
(iv)
Installation of energy efficient screw compressor in
place of old type compressor.
(v)
Replacement of two graders and four elevators by one
elevator and one sizer for handling and grading of
sugar.
(vi)
Modification of sugar dust collector lines to eliminate
one dust collector.
b) Additional Investment
Proposals, if any, being implemented for reduction of
steam and energy:
(i)
Installation of film type sulphur burner - Rs.45 lacs
(ii)
Fine tuning in automation of mill house and boiling
house - Rs.11 lacs
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 0.75 tons per hour.
(ii)
Power consumption is reduced by 1820 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)
|
|
|
2009-2010 |
2008-2009
|
|
Earnings |
- |
300 |
|
Outgo |
1703 |
2 | |
|
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) |
0.55 |
3.52 |
|
Total amount (Rs lakhs) |
14.71 |
27.28 |
|
Rate/Unit (Rs/kwh) |
26.72 |
7.75 |
|
b)
Own generation |
|
|
|
i) Through Diesel Generator |
- |
- |
|
ii) Through steam turbine/Generator |
|
|
|
Units(kwh lakhs) |
230.64 |
174.08 |
|
Units per tonne of fuel (kwh) |
- |
- |
|
Cost/Unit (Rs/kwh) |
2.02 |
2.62 |
|
2 Coal |
|
|
|
Quantity (tonnes) |
36224 |
18481 |
|
Total Cost (Rs lakhs) |
1436.35 |
954.53 |
|
Average Rate (Rs/t) |
3965 |
5165 |
|
3 Coconut shell |
|
|
|
Quantity
(tonnes) |
25 |
2985 |
|
Total Cost (Rs lakhs) |
1.04 |
94.91 |
|
Average Rate (Rs/t) |
4032 |
3180 |
|
4 Bagasse |
|
|
|
Quantity
(tonnes) |
101576 |
86786 |
|
Total Cost (Rs lakhs) |
Nil |
Nil |
|
Average Rate (Rs/t) |
Nil |
Nil |
|
(B)
Consumption per unit of
production: |
|
|
|
Product-Sugar
cane (t) |
|
|
|
Electricity
(kwh) |
27 |
26 |
|
Fuel
(t)* |
0.09 |
0.08 |
|
Product-Raw
Sugar (t) |
|
|
|
Electricity(kwh) |
106 |
- |
|
Fuel
(t)* |
0.35 |
- | |
|
*(Coconut
shell/Bagasse calculated on Coal equivalent weight basis)
Note:
1.
Electricity purchase has reduced due to longer crushing
operations with attendent self - generation. Unit rate is
higher due to the fixed impact of maximum demand charges.
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
Nil
(B) Technology absorption,adaptation
& innovation:
|
(i) Provision of an
independent new design flash tank for the SRT clarifier as
also the provision of automatic flocculent closing
system.
(ii) Provision of mogensen
sizer for sugar grading and elevator to avoid multiple
handling of sugar along with conveyors.This will facilitate
trouble free operation and good size seperation of grains
(small and medium). |
| |
For Board of
Directors |
| Chennai |
N Gopala Ratnam |
| 28th May 2010 |
Chairman
| |
|
MANAGEMENT DISCUSSION AND ANALYSIS REPORT
|
|
Industry structure and
development
World Sugar
|
|
Brazil has steadfastly
retained its numero uno status with its irrepressible
dominance over sugar production and trade. India remains the
second largest producer but is poignantly plagued with wild
swings in year on year production. Despite low per capita
consumption, India continues to be the top sugar consumer.
Hence its surplus or deficit has a domino effect on world
trade in sugar to decisively influence prices.
Cane sugar has
steadily displaced beet with strident climb up in its share
from 56.5% in 1960s to 78% in 2010.
Source: ISO & ISMA
World sugar production
displayed negative growth and failed to catch up with growing
demand with two successive years of deficit during 2008-09 and
2009-10 virtually drying up the surplus inventory built during
the preceding surplus period. The deficit phase is the direct
outcome of drastic decline in Indian production, while
Brazilian increase could otherwise attenuate the adverse fall
in the production of other countries. Sugar consumption growth
remains positive, though a tad subdued, during the recent
global economic downturn.
Sugar production
during 2010-11 should register a smart recovery with both
Brazil and India contributing significantly with stepped up
production. Brazil’s share in world sugar export now hovers
around 50% as against 29% a decade ago. |
|
|
|
|
India's influence
|
|
India has come
to increasingly influence the contours of world sugar
balance. In the past six years, world surplus/ deficit
has manifestly moved in tandem with the trend in Indian
production.
Source ISO & ISMA
| |
World Sugar
prices
|
|
The world sugar market
changed fundamentally over just two months February and March
2010. Sugar balance recovered 4-5 mln tonnes in a very short
period of time, wiping out the trade flow deficit and quickly
turning it into a surplus. The situation was unprecedented,
underscoring how historically high prices could force the
market to find swift solutions.
Sentiment in the
market has certainly turned from a bullish euphoria to a
bearish outlook. Raw sugar prices in NY11 market of ICE after
touching a peak of 30.40 c/lb on 1st February 2010 is hovering
around 13.55 c/lb and woefully the bottom appears not yet
reached. With the expected re-emergence of sugar surplus after
two years of discernible deficit, world sugar prices are
certain to remain under bearish pressures. Source: ISO
In a similar vein
white sugar spot prices touched a peak of USD 743 per tonne in
January 2010 that later collapsed to Industry structure and
developmentUSD 487 in March 2010. White sugar premium (the
differential between the ISO white sugar price index and ISA
daily price for raw sugar) has softened but still remains at a
historically high level. It is presumably due to the wider
trade deficit for white sugar as against that for raw
sugar.
(Source:ISO) |
|
|
|
|
|
|
|
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 Mills Association)
Indian sugar
production estimates often times remain suspect and prove
vulnerable. Sugar production for 2009- 10 season was estimated
at 140 lakh tonnes as recently asin January 2010 while trade
guessed it even lower at 130 lakh tonnes. 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 just a couple
of months, sugar production for 2009- 10 is now scaling to 185
lakh tonnes. Further, the production outlook for 2010-11 is
overtly optimistic to reach selfsufficiency and re-emerge as
net exporter. This in turn brought an immediate collapse in
sugar price. It is no wonder that Indian demand, or the lack
of it, drives and determines both spot and futures prices in
NY11 ICE market.
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.
With all round
increase in the price of food products, it would seem
ill-advised to insulate and suppress only sugar price with
aggressive Government intervention. Recent history has proved
that Indian deficits could double or even triple world sugar
prices in the shortest of term to make imports prohibitively
expensive to the ultimate detriment of Indian consumer. While
sugar production is directly dependent on cane crop, the
farmer is now endowed with choices on crop. It is but
imperative that he gets commensurate price for cane to sustain
his interest in cane cultivation. There is hence compelling
need to take a holistic view of sugar prices and take a
balanced decision from long term
perspective.
|
Indian Sugar
Prices |
|
Sugar prices remained buoyant
during most part of the year. They however scaled to
unexceptionally high level for too short a period during
January 2010 in the backdrop of galloping deficit
estimates and hardening world prices. It has always been
the case that sugar prices respond only in part to
business fundamentals but more to market perceptions.
The decline in sugar prices from
the peak in January 2010 was expected and in fact
warranted. However the degree of decline is rather
despicable. It has now reached unviable levels to pose a
severe threat to the sustainability of remunerative
price for sugarcane.
Despite a deficient
monsoon, Indian sugar production showed robust recovery
during 2009-10 due to steep hike in cane price. While it
is too early to have precise estimate of 2010-11
production, it is bound to increase by 5-6 million
tonnes. Further fall in sugar prices and perceived
rollback of cane price could however trigger a repeat of
production collapse with the Indian farmer now showing
instantaneous response to price signals. Such a
contingency is better averted in larger public interest.
It would seem unique and
enigmatic that despite deficit in sugar balance, sugar
prices have crashed in the current season to below
breakeven level. This is to a large extent attributable
to the preferential treatment for imports and slew of
oppressive measures unleashed on domestic sugar. It
rather remains hazy at the current juncture as to how
the relative sugar and cane price parity would emerge
and eventually settle in the coming year.
Source: ISMA
|
|
|
|
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 lowered at 10% since March 2002
but temporarily hiked to 20% for 2009-10 due to lower sugar
production. The balance, though termed as free sale sugar, is
monitored through monthly release mechanism.
The Central Government
introduced and enforced a slew of regulatory measures during
the year to check sugar prices and address food
inflation.
Some of them
are:-
Duty-free raw sugar import facility extended upto December
2010
Duty-free white sugar import facility opened up for all and
without quantitative ceiling till December 2010
Both raw and white sugar imports are free from levy obligation
till end of 2009-10 season
Sugar
consumers with monthly consumption in excess of one tonne were
classified as bulk users and brought
under stockholding norms for the first time.
Weekly sugar sale quota re-enforced from February 2010. This
was diluted to fortnightly in April 2010 and restored to
monthly basis from May 2010.
Inventory norms for bulk users fixed at 15 days’ consumption
in August 2009 and further reduced to 10 days’ consumption in
February 2010.
State Governments were advised to remove VAT on imported white
sugar. Tamil Nadu government notified same for the period 1st
April 2010 to 31st March 2011.
Temporary ban by Forward Market Commission of fresh contracts
in Futures Market extended upto September 2010.
100%
compulsory packing of sugar in jute bags reiterated in
September 2009. Partial relaxation upto 10%
granted in February 2010.
Time
limit for completing the Export Obligation under Advance
Licence Scheme extended upto 31-03- 2011.
No
export release was issued for sugar barring small quantity
under Preferential Quota.
The Central Government
promulgated the Essential Commodities (Amendment and
Validation) Ordinance, 2009 during October 2009. This was
later enacted into Law. By this, the Centre substituted the
Statutory Minimum Price for sugarcane with Fair and
Remunerative Price (FRP). Such FRP will have additional regard
to risks and returns on sugarcane crop for the farmer.
Simultaneously Additional Sugarcane Price in terms of Clause
5A of the Sugarcane (Control) Order, 1966 has been dispensed
with.
The Centre had also
proposed FRP as holistic price towards total compensation for
sugarcane crop. Accordingly, it had restrained State
Governments from announcing higher State Advised Prices (SAP)
and if they so announce, it must be borne by the respective
State Governments. Heeding to political outcry, the Centre
made a quick retreat and restored the scope for higher SAP
announcement by State Governments.
FRP for 2009-10 season
was fixed at Rs.129.84 per quintal linked to 9.5% of sugar
recovery with a premium of Rs.1.37 for every 0.1% increase in
the recovery. FRP has been hiked to Rs.139.12 for 2010-11
sugar season with premium of Rs.1.46 for every 0.1% increase
for recovery in excess of 9.5%.
Government of Tamil
Nadu fixed SAP for 2009-10 season at Rs.1437.40 per tonne
linked to 9.5% recovery. Private sector sugar mills have paid
cane price much in excess of this towards competing for
available cane supply and to shore up cane planting for the
next year. Later State Government granted additional SAP of
Rs.100 per tonne during March 2010 for 2009-10 sugar season.
Simultaneously, SAP for 2010-11 has been announced at much
higher level of Rs.2000 per tonne inclusive of transport
charges and other incentives.
Levy sugar
prices now remain unrevised for six years from 2004. The
provisional levy price of Rs.1336 per quintal for Tamil Nadu
is far below the cost of production that does not even meet
the cane cost. Further the Central Government has endeavoured
to restrict levy sugar price based on only SMP cost of
sugarcane retrospectively from 1974 and FRP cost of sugarcane
from 2009. Indian Sugar Mills Association (ISMA) has
challenged this arbitrary and unreasonable move by filing a
Writ Petition in the Delhi High Court.
ISMA and National
Federation of Cooperative Sugar Factories Ltd have submitted a
joint Memorandum to the Central Government for early decontrol
of the sugar industry. They have also sought roll back of
sugar price control measures in the changed context of
improved domestic sugar production outlook and drastic decline
in both world and Indian sugar prices.
|
Opportunities and Threats
|
|
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.
Energy saved is energy
produced. Age-old sugar industryoffers 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. Added incentive is the growing market for
Certified Emission Reduction (CER) under the Clean Development
Mechanism (CDM) of the United Nations Framework Convention on
Climate Change (UNFCCC).
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 to warrant 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.
Rationalisation of
cane price was attempted through Fair and Remunerative Price
(FRP) for cane and restraining States from announcing higher
State Advised Price (SAP). However due to political upheaval,
SAP scope was retained to pose continual threat of arbitrary
high cane prices.
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 growing concern
on food security and inflation control, sugar faces the
imminent risk of increasing crop diversion with an over
zealous Government choking sugar prices. Migrating labour and
lack of mechanization pose grave threat to sustainable
sugarcane crop cultivation. 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)
ISO has now 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
sugarethanol 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 tonnes 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 demandsupply 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.
Power sector is
considerably lagging behind Government targets to keep pace
with the galloping economic growth. Oil prices are again on
their upsurge. Power trade is facilitated with independent
exchanges like Indian Energy Exchange for efficient price
discovery. In addition, tradeable Renewable Energy Certificate
has bettered the prospects of bagasse based Cogen. The Centre
has reinforced its commitment for ethanol blend programme and
is close to fixing a remunerative price of Rs.27/ ltr to start
with. There is thus all round optimism for byproduct
development of sugar industry
Source: Sucden
|
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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 Statutory Minimum Price (SMP) and
State Advisory Price (SAP).
Higher tax on
sugarcane in Tamil Nadu
Raw sugar
imports are prone to price volatility 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 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
High weightage
to sugar in WPI and consequent Government intervention for
inflation control.
|
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.
Marginal expansion and
Co-generation can be planned at Erode Mill. Alternative
locations are being evaluated for future expansion and growth.
Standalone Distillery faces local resistance on perceived
threat of pollution.
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. |
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 114 seasonal and
239 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.
Based on industry wide negotiations,fresh
long term wage settlement was reached on 14th April 2009
enuring upto 31st March 2013.
|
|
Discussion on Financial Performance
with respect to Operational Performance
Operating Performance
|
|
Year ended
31-3-2010 |
Year ended
31-3-2009 |
| Number of days |
300 |
229 |
| Average crushing rate (tcd) |
2695 |
2970 |
| Cane crushed (t) |
808612 |
680238 |
| Recovery (%) |
10.11 |
10.55 |
| Raw Sugar Processed (t) |
9608 |
- |
| Sugar Production (t) |
90920 |
71820 | |
|
The Company operated
for a longer duration to handle increased cane volume combined
with supplementary raw sugar processing. Swiftly responding to
the duty free import facility, the Company imported raw sugar
from Brazil and augmented its sugar production. This could
help the Company end the year with its second highest sugar
production ever.
Recurrent
shortage in cane harvesting labour and raw sugar processing
for 175 days combined with cane crushing has contributed to
reduced daily crushing rate. Cane quality was affected due to
severe drought prevalent in major parts of the command area
depressing sugar recovery in line with the regional trend. The
recovery for the Company is however well above State
average.
|
|
Turnover |
|
Levy sugar volume
increased with higher levy obligation from 10% to 20% for
2009-10 season. Free sugar sale volume in domestic market was
higher by 16% due to demand buoyancy. Product prices for both
free sugar and molasses registered hefty increase while levy
sugar price remains unrevised. Sugar inventory build up at
year end is due to increased production volume and slower
off-take from February 2010. There were no exports due to
domestic shortage.
|
|
Conversion Cost and
Overheads |
|
Cane prices ruled high
in line with scarce supply and higher sugar prices. Transport
charges hitherto recovered upto 10 kms from the cane growers
are borne by the Company from 2009-10 season resulting further
increase in cane cost.
Packing materials
costs were up by more than 30% due to mandatory jute packing
and shortfall in jute production. Increase in Utilities costs
and Employee costs were nominal. Increase in Repairs and
Maintenance is attributable to increased cane volume and
strengthening road infrastructure in factory area. Variance in
other expenses is principally due to the excise duty provision
on inventory change and assets discarded. Insurance, godown
rent, freight and handling are higher on account of raw sugar
imports. |
|
Operating
margin |
|
Hefty increase in
sugar and molasses prices could more than neutralize higher
cane price and reduction in sugar recovery during the year.
Raw sugar imports helped further strengthen our margins. The
company could register its highest ever operating margin
(PBIDT) for the year.
There is nearly
threefold increase in PBT and PAT over last
year. |
| Interest Cost
|
|
Interest on fixed
loans declined in line with instalment repayments during the
year. Working capital interest reduced considerably with
lesser utilization of cash credit 19 limits on the strength of
cash accruals. Other financing charges were high due to Letter
of Credits opened for raw sugar import. |
| Depreciation
|
|
There is no
change in the method of depreciation. Marginal increase
in the amount of depreciation is attributable to assets
added under Plant & Machinery during the
year. | Exceptional
Item |
|
Provision has been
recognized for the decline in the value of 20000 tonnes of raw
sugar between the contract date and the Balance Sheet
date. |
| Profit
Before Tax (PBT) / Profit After Tax (PAT)
|
|
The company could
achieve record high PBT and PAT margins due to high sugar
production and robust sugar prices. Appropriate provision for
Deferred tax liability and asset have been recognized in
accordance with Accounting Standard 22.
The overall financial
performance for the year is rather enviable, though not
sustainable at these high levels. |
| Debt |
|
Debt servicing is as
per schedule. Interest subsidy for the interest subvention
upto a maximum of 12% for the loan under Special Scheme by the
Government is partly released through the lending Banks during
the year. |
| Fixed
Assets |
|
Land addition
represents the area acquired for the new Distillery. Addition
to plant & machinery is towards replacing obsolete
equipment and to improve operational efficiency. All capital
additions have been funded in full out of internal
accruals. |
|
Investments
|
|
During the year, we
invested in one lakh Equity shares of High energy
batteries(India) Limited, extending support to their Rights
Issues at Rs. 100 Per share. |
|
Working
Capital |
|
Though working capital
requirement increased with the build up of sugar stock owing
to increased production volume, improved cash flow due to
better product pricing helped in lower working capital
borrowings. |
| 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 availment. Further,
investments were made in land and plant additions.and equity
participation in a group company. |
| 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 |
| 28th May 2010 |
Chairman | |
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