Directors' Report
|
|
Your Directors
present their 16th Annual Report and the audited statement of
accounts for the year ended 31st March 2012. In accordance
with the changes brought about by the revised Schedule VI
to the Companies Act, 1956, the financial statements
have been presented in the new format.
|
Year ended |
Year ended |
|
2011-12 |
2010-11 |
| Physical Performance (tonnes)
|
| Cane
Crushed |
745644 |
628613 |
| Sugar
produced |
76464 |
76870 |
| Financial Performance(Rs.
crores) |
| Turnover |
265.62 |
269.48 |
| Profit before Exceptional
Items |
28.24 |
13.53 |
| Profit Before
Tax |
26.12 |
27.64 |
| Profit After
Tax |
17.79 |
18.61 |
| Surplus From
Previous Year |
21.33 |
14.72 |
| Amount
available for appropriation |
39.12 |
33.33 |
| Appropriations:
|
| Transfer to General
Reserve |
15.00 |
10.00 |
| Proposed
dividend |
2.15 |
1.72 |
| Dividend Tax
|
0.35 |
0.28 |
|
Balance carried forward |
21.62 |
21.33 |
|
Dividend
|
|
Your Directors recommend a dividend of `2.50 per Equity
Share of `10 each for the financial year ended 31st March
2012. |
|
Sugar Industry Overview
|
In
line with the infamous cyclicality, Indian sugar production scorecard recorded its second successive
year of surplus production. Significantly, the surplus was so sizeable as to
pose a serious threat to destabilize and decimate domestic price equilibrium.
Fortuitously for us, Brazilian sugar production fell for the first time in a
decade that provided a ready platform and presented a premium pricing for India
to export and stay clear off its surplus.
World sugar markets were highly volatile during
2011. ISA Daily price for raw sugar peaked to 32.57 c/lb at the
beginning of February 2011, the highest daily quote for more than 30
years. It then dreadfully drifted to a low of 20.89 c/lb
in May but commenced its second bullish upward move during July and August
to nearly breach 30 c/lb. It later lost all the gains and current
prices are just a tad over 20 c/lb.
The underlying volatility unarguably
underscores the importance and imperative for real-time response by swiftly timing our
exports in tune with market dynamics. However the vacillating policy stance
of the Government in permitting piecemeal quotas in trickles and tranches decisively dented
the prospects of Indian exporters and deplorably deprived them of the rare opportunity
to optimally ride on buoyant world sugar prices.
For
the first time, the Government introduced during the year mill-wise quota for OGL
sugar exports. While this system could work during times of huge price
differential between the world and domestic markets, it soon turned out
to be a damp squib delaying and discouraging exports. Only by May 2012,
Government finally bit the bullet and decided to dismantle the quota system to
place sugar on OGL in its true sense.
Curiously, no sooner did the Food Ministry lift the quota restrictions on sugar exports,
the Commerce Ministry hurried to impose the ceiling. Similarly export releases were dispensed
with by Sugar Directorate but Registration Certificate was mandated by DGFT. OGL
Sugar thus remains an oxymoron. Meantime, global prices have considerably corrected
and contracted, resulting in steady erosion and near extinction of the premium on
exports. Still there is little escape from India exporting its surplus in the
interest of instant liquidity and domestic price stability.
Supply
overhang was feared at the start of the year to disrupt and derail
domestic prices considerably. Exports came in handy to soften and stem the down-slide
and help sustain local prices at reasonable levels.
Reliable database is the
touchstone for sound decision making. Sugar production
and stock estimates had often times suffered wild
variance in the past, distorting and debilitating the
decision making process. Increasing recourse to
state-of-the-art technology can considerably
help address this deficiency. In this endeavour, sugar industry has for the first time
engaged a professional agency to undertake Satellite mapping of cane area for sugar
season 2011-12 and early results are highly promising. Similarly the Government has
put in place an SMS based weekly reporting followed by a
web-based system for monthly reporting by each sugar mill. These measures must help
in real time and reliable data flow and facilitate swift policy response towards
addressing emerging surplus or shortage in sugar supply.
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Goverment Measures
|
Government has constituted
an expert committee in January 2012 under the
chairmanship of Dr C Rangarajan for sugar sector
reforms. Indian Sugar Mills Association and the Regional Associations have given their representations urging
upon (i) levy sugar abolition (ii) dismantling release mechanism (iii) liberated Exim policy
with occasional intervention only through tariff recalibration as opposed to physical embargo (iv)
abolition of mandatory jute packing. Above all, it has underpinned
the economic rationale and global models to have in place a
long term cane pricing formula devoid of political intervention, with due linkage to realization
from sugar and its by-products.
Levy obligation continues at
10% for 2011-12 season. Quarterly release mechanism has been introduced in place of
monthly releases from April 2012. Duty-free raw sugar import facility
is being extended periodically and is currently in force till end
of June 2012. Stock holding norms on trade and restrictions on bulk users have
been withdrawn during the year.
Fair and Remunerative price for sugarcane
has been fixed at `145 / qtl for 2011-12. Government of Tamil Nadu
has fixed the SAP for this year at `200/ qtl
plus transport cost to be fully borne by sugar mills. CACP
has recommended an FRP of `170 / qtl for 2012-13. All these base prices
are linked to 9.5% recovery.
Levy of Service tax is being made comprehensive on
all services except those under a small Negative List or that
are specifically exempted. Services rendered by sugar industry for harvest or agri extension is
protected under the Negative List.
|
Company
Performance
|
|
Cane crushing improved by 19 %
despite little recourse to outsourced cane. More
significantly, sugar recovery showed a swift rebound
during
the year. In fact, our sugar recovery touched
an all time high of 11.9% on two days in March 2012. On
the strength of higher cane volume and improved recovery, sugar production
could be maintained close to last year level despite discontinuance of
raw sugar import.
Your Company
continues to lay stress on sugarcane productivity and its long term sustainability. Our
initiatives on this outlined in last year’s report have been well
received by the sugarcane farmers and field level results tend to
show good promise.
Sugar price rise was muted and
fell strikingly short of the rising cost of cane, fuel
and overheads. Higher realization on sugar exports
however came to our rescue to protect and prop up
operating margin. Molasses price has been on a
devastating downward
spiral for 8 successive quarters. Other income fell
sharply in the absence of exchange gains and interest earnings on surplus funds.
Despite these cost adversaries, our Company could protect its net margin
on the strength of increased cane volume, improved sugar recovery and
higher export realization.
In sum, our
PBT and PAT figures compare quite favourably with
the previous year, more so when the previous year had the benefit of
booster-dose from exceptional income. The overall performance of the company for
the year is commendable and highly satisfactory under the adversity of
extant external constraints.
A Decade after Demerger
Ten years is a short period in
the life of a Company but marks an occasion to trigger
tracking its accomplishments. Your Company took the
reigns of the Erode Sugar Mill through a Demerger Scheme
sanctioned by the High Court of Madras in
September 2001. It had to take a disproportionately high share of debt to
win the support of lending Institutions and was faced with the
formidable task to service same out of a single unit producing
a single product.
Soon after Demerger, the Company
restructured its debts with deft recourse to lower cost
options under a benevolent financial market with benign
interest rates. With enhanced earnings on the strength
of improved cane volumes and higher sugar recovery, it
accelerated debt servicing and
completed same well ahead of original schedule. It
then implemented an energy conservation plan followed by modernization scheme to optimize operational
costs without recourse to external debts. Its share prices in turn
shot up in the stock market responding to its strong fundamentals
and improved financials.
Thus the Company has delivered in
every sphere
on its promise to stakeholders made in the
Demerger Scheme. It is now diversifying into power with its Cogeneration slated to
start producing green energy from the second quarter of FY 2012-13.
It will continue to remain steadfastly focused in adding value to
all its stakeholders.
Finance
RBI in dealing with the dichotomy
between growth and inflation has embraced a hawkish
monetary policy stance by hiking rates 12 times in a
row. Commercial Banks on each occasion showed an instant response by realigning their base rate and correspondingly hiking
the effective lending rates to corporates. Paying heed to the dismal industrial
growth, RBI relented and rolled back repo rates by 50 bps in
April 2012. Commercial Banks have however passed on the benefit to borrowers only
in part.
RBI after 9 years hiked the Bank
rate from 6% to 9.5% in February 2012 to realign same
with prevailing rates. Loans from Sugar Development Fund are lent at concessional
rates linked to Bank rate and hence have gone up pro tanto.
There has been a swift reduction by 50 bps on this also in
April 2012.
Interest cost for our company
remained rather insignificant in the last couple of
years due to limited recourse to borrowings and temporary surplus funds in
our hand. We have since deployed the surplus fully in Cogen Project
and are exposed to higher borrowings on drawal of term loans for
Cogen Project. The rate hikes will hence have a direct bearing on our
company henceforth.
Legal cases
Our Company has been the hapless
victim of a long standing dispute with the Sugar
Development Fund (SDF) for the loans extended by them to the
erstwhile Ponni Sugars and Chemicals Ltd. Its efforts to settle the issue
on compromise on commercial expediency did not bear fruit. Finally, the Company
obtained a favourable ruling on this from the High Court of Madras in
November 2010.
The Government after long delay
has since appealed against the above decision in October
2011 before the Division Bench and obtained stay of the
order of Single Judge. As a result, our company is
caught again between a rock and a hard place. Subsidies to
the tune of `6.90 crores remain undisbursed. Levy sugar price differential of
`2.20 crores remains unrealized. Eligible concessional loan for Cogen Project remains unsanctioned.
We have filed our Counter and fervently hope for early resolution of this
contentious issue.
Cogeneration Project
Cogeneration Project undertaken
on a capital outlay of `110 crores is now in its final
leg. We have encountered time overrun due to delay
on the part of major equipment suppliers and
persistent shortage of field labour stifling erection work. We now plan
to complete the Cogen Project in all respects before end of June 2012. The delay however
put paid to our tax-planning and escalated current tax outgo. On the positive,
the Project cost could be contained within the original estimate.
We have spent `84 crores as
of 31st March 2012 on the Project. We have utilized `35 crores out
of the sanctioned loan of `65 crores by Canara Bank.
We have signed Power Purchase
Agreement with TNEB and are now seeking to modify same to
export 4 MW of power to our associate company, namely, SPB Papers Ltd. With the extension
in deadline conceded by Finance Bill 2012, our Cogen Project would qualify for
tax holiday u/s 80(IA) of the Income Tax Act, 1961.
investment
Your Company has invested `10 crores in Subburaj Papers Ltd
as reported last year to support its acquisition by Seshasayee Paper &
Boards Ltd (SPB). The name of the company has since been changed to SPB
Papers Ltd. This company is planned to be merged with SPB effective 1st April
2012. Share exchange ratio has been fixed at one Equity share of SPB for every Eleven
Equity shares held in SPB Papers Ltd.
Your Company has made an additional investment of `2.50 crores during March 2012
in SPB Papers Ltd and now cumulatively holds 62.50 lakh Equity shares constituting 41.67%. It would
upon merger receive pro-rata shares in SPB.
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|
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 2012-13
|
Indian Meteorological Department
has predicted yet another year of normal monsoon. Cane planting as of 29.02.2012 has
shown parity to pointer to yet another year of surplus sugar production for
India. World market would also move into third year of surplus in
succession. Accordingly sugar prices would largely remain under bearish pressures barring intermittent volatility.
Sugar production in Tamil Nadu
has been steadily on the rise after the setback suffered
in 2009-10. By reason of remunerative cane price,
insignificant cane arrears and relative unattractiveness
of competing crops, cane area has further surged in the
State by 21% in current year. Power shortage
poses a severe threat and serious constraint on irrigation schedules during summer. Sugar
production in our region is however certain to pose a large surplus
that requires a conducive export policy and commensurate viable prices for its liquidation.
Registered cane area has remained
stable but yields may be under threat in our command area
due to difficulties in drawal of water from available sources. Interest cost would
significantly go up for the Company. Revenues from the new Cogen facility
should help the company combat cost escalations and overall maintain reasonable profit performance.
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Directors
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|
Mr S K Ramasamy, retired at the AGM held
on 15th July 2011. Mr.K.Bharathan was appointed
as an additional director on 28.12.2011. He will
retire at this meeting in accordance with Sec.260
of the Companies Act, 1956. Notice u/s 257 has been received for his appointment
as director liable to retire by rotation. Approval of
members has been sought for same at this
meeting.
Mr V Sridar and Mr N R
Krishnan, directors of your Company retire by rotation at
this meeting and being eligible offer themselves for
reappointment.
Mr C K Pithawalla also retires by
rotation at this meeting. Considering his advanced age, he has opted not
to seek re-election at this meeting. Mr
C K Pithawalla has been a director of
the Company since 26.10.2001. The Company was richly
benefitted by his global business experience and commercial acumen. Your directors wish to place
on record the valuable contribution made by Mr C
K Pithawalla to the Company during his long
association. |
Directors’ Responsibility Statement
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|
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
2012 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.
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Employees
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No employee of
the Company was in receipt of remuneration during the
financial year 2011-12 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
2012-13. |
Appreciation
|
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Your Board is greatly appreciative of
the cane cultivators, customers, suppliers and Banks
for their continued support and cooperation. Your Directors
commend the committed performance of employees at all levels.
Your Directors wish to thank the shareholders for
their continual support to the management. |
| |
For Board of
Directors |
| Chennai |
N Gopala Ratnam |
| 30th May 2012 |
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 VFDs in massecuite and magma pump
(ii)
Installation of 1000 m2 M.S. Evaporator body
(iii) Installation of two nos. of 1250 kg capacity batch
centrifugal machines instead of four nos. of 650 kg
capacity machine
(iv) Installation of fanless cooling towers for hot
water and gravity arrangement for imbibition to mills
instead of pumping
(v) Installation of five nos. of planetary gear boxes
for crystallizer drive
b) Additional Investment Proposals, if any, being implemented
for reduction of steam and energy:
Installation of planetary gear boxes
for the remaining 8 Nos. crystallizers.
c) Impact of measures at
(a) and (b) above for reduction of energy consumption
and consequent impact on the cost of production of
goods:
Power consumption is reduced by 700 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 production cycle of sugar
business. The Company is
a regular player
whenever India is a sugar exporter.
During the year
under review, the
company exported 11956 tonnes of sugar.
g)
Total foreign exchange used and earned
|
|
(Rupees in Lakhs)
|
|
|
2011-2012 |
2010-2011
|
|
Earnings |
3457
|
815 |
|
Outgo |
--
|
5554 | |
|
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) |
2.16 |
2.70 |
|
Total amount (Rs lakhs) |
24.74 |
26.78 |
|
Rate/Unit (Rs/kwh) |
11.45 |
9.92 |
|
b)
Own generation |
|
|
|
i) Through Diesel Generator |
- |
- |
|
ii) Through steam turbine/Generator |
|
|
|
Units(kwh lakhs) |
218.23 |
206.53 |
|
Units per tonne of fuel (kwh) |
- |
- |
|
Cost/Unit (Rs/kwh) |
2.92 |
2.62 |
|
2 Coal |
|
|
|
Quantity (tonnes) |
39424 |
33295 |
|
Total Cost (Rs lakhs) |
2104 |
1638 |
|
Average Rate (Rs/t) |
5336 |
4920 |
|
3 Bio Fuels |
|
|
|
Quantity
(tonnes) |
- |
18 |
|
Total Cost (Rs lakhs) |
- |
0.49 |
|
Average Rate (Rs/t) |
- |
2722 |
|
4 Bagasse |
|
|
|
Quantity
(tonnes) |
89283 |
81048 |
|
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 |
30 |
|
Fuel
(t)* |
0.10 |
0.09 |
|
Product-Raw
Sugar (t) |
|
|
|
Electricity(kwh) |
- |
103 |
|
Fuel
(t)* |
- |
0.36 | |
|
*(Bio
Fuels/Baggase calculated on Coal equivalent weight basis)
Note:
1.
Figures for the previous year have been regrouped, whereever
necessary. |
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|
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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 |
| 30th May 2012 |
Chairman
| |
|
MANAGEMENT DISCUSSION AND ANALYSIS REPORT
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Industry structure and
development
World Sugar
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|
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 80%
during 2010/11 by reason of growing sugar production out of
cane in tropical countries. In a rare reversal of this trend,
beet sugar share would marginally go up by 2.5% in 2011/12 due
to a massive 6.1 mlt increase in EU and Eastern Europe.
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. Its share
has catapulted from 7% to 25% in world production and from 6%
to 50% in exports in two decades. In contrast to the
consistent growth in Brazil, Indian production is punctuated
and plagued by wild swings YoY.
A new record world
output is expected at 174 mtrv for 2011-12 that marks a
significant 6.4 mtrv increase over the previous record in
2007-08.
Source: ISO - QMO May 2012
India continues to be
the top sugar consumer despite low per capita consumption.
Other major consumption centers are China and EU. Consumption
growth is flat in developed countries and driven mostly by
Asian demand. It is expected to rise by a healthy 2.26% for
2011/12 in line with the 10 year average of 2.14%. Such a
rebound from subdued growth rate hovering around 1% in the
preceding two years can be attributed to easing sugar prices
in the world, and more importantly, in several key domestic
markets. Continuing strong economic growth in emerging and
developing economies has strengthened the demand base
overall.
After two years of
deficit, world sugar production neatly balanced with
consumption in 2010/11. For the first time in 3 years, there
would now be a decent surplus build up of 6.5 mlt for 2011/12,
despite a significant production drop in Brazil. Stock/
consumption ratio would remain flat at 35%.
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 half the world demand. The decline in export
availability from Brazil during 2011-12 is counterbalanced by
higher deliveries from key players including the EU, India,
Thailand and Australia. |
|
(Source:Kingsman)
|
World Sugar
prices
|
|
During the first half
of 2011/12, low stocks seemingly remained a supportive factor
for sugar price despite lackluster fundamentals. ISA daily
price for raw sugar drifted from a high of 32.57 c/lb in Feb
2011 to an 8 month low of 20.89 in May 2011. Second bullish
wave moving up prices close to 30 c/lb during July/Aug 2011
proved ephemeral. The world market values lost all the gains
and pierce the psychological 20 c/lb mark. White sugar spot
prices (the ISO white sugar price index) staged a similar
somersault in the second half of 2011. After touching US$ 769
/t in July,it currently hovers around US$ 555/t. World markets
are unequivocally underpinned by bearish sentiments that are
further reinforced by the massive withdrawal of speculators
from sugar futures.
 Periods of optimism
and pessimism over the ability of policymakers to solve the EU
crisis have been taking the turns. Sugar has been under the
influence of this volatile macro environment. This ongoing
crisis has impacted the investor appetite for risk assets that
include commodities. Crisis has strengthened the US$ and
conversely weakened emerging market currencies. EU crisis has
an impact on sugar prices through different channels –
exchange rates, financial investors’ net position and credit
availability from banking sector. US dollar has greatly
benefited from the EU crisis because of its global reserve
currency status. Sugar prices discernibly demonstrated close
co-relation with currency trend.
(Source:ISO -QMO Feb 2011)
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Domestic prices remain
at high levels in the world’s top three importers: the EU,
China and the US. Brazil witnessed a sharp slowdown in
consumption and expectations of a higher sugar output receded
domestic market values. |
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World
trade |
|
In a welcome
departure, India could benefit by higher global prices
over local levels for most part of the year. In lieu of
seeking subsidies, Indian exporters were pursuing a
premium.
(Source:OECD -FAO Secretarial)
Over the last
decade, there is increasing concentration in sugar
export trade with a smaller number of global exporters
and a decline in the volume of white sugar traded
internationally. OECD-FAO Agricultural Outlook 2011-20
projects no major change in the existing world order for
sugar exports.
In contrast to
concentrated exports, sugar importers make up a broader,
more diversified group of countries. Of these, China is
emerging the largest importer exceeding that of EU, US
and the Russian Federation. India is predicted to play
only a minor role.
(Source:OECD -FAO Secretarial)
The limited
white premium and the prevailing inverse structure of
sugar prices have led refineries at destination to slow
down their processing of late. Early 2012, stronger
competition from EU and Central America should further
decrease the potential outlet for stand-alone refineries
outside of their domestic
market |
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Indian Sugar
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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 hastremendous 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.
Growth in sugar demand
is driven by the rising consumption in sectors such as
confectionaries, sweets and soft-drinks. CRISIL research
expects industrial demand to grow at a CAGR of around 4% while
household demand increase is felt lower at 2.5% over the next
5 years. Accordingly the share of indirect demand in overall
sugar consumption is projected to go upto 62% by 2015-16 from
the current level of 60%.
Source: CRISIL
Research
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.
Source: Indian Sugar
Journal-May 2012
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.
(Source
:Indian Sugar Mills Association)
By reason of wild
production swings YoY, India is the only big sugar producer to
be exporting sugar in some years, soon followed by importing
sugar. Unlike this, Brazil, Thailand and Australia are steady
exporters. Removal of vexatious State controls on sugar sector
should help rein-in the cyclicality and facilitate India to be
a regular exporter.
Indian millers pay a
high price for sugarcane and realize a low price for sugar.
The intrinsic imbalance between sugar and cane price
often-times leads to huge build up of cane arrears that
accelerate the infamous Indian sugar cycle. A long term
pricing formula for cane based on global model would bring in
objectivity and deflate the intensity of sugar
cycle.
(Source
:Indian Sugar Mills Association)
(Source
:Indian Sugar Mills
Association)
|
Indian Sugar
Prices |
|
Indian sugar prices remained
range bound and ruled for most part of the year at
unremunerative levels. This is in contrast to much wider
swing and volatility in the global prices. The
Government alternately resorted to shore up sagging
prices with small doses of export quota but soon slash
it down with excessive domestic release.
(Source :Indian Sugar Mills
Association)
Last year sugar mills could
manage with little cane arrears despite unremunerative
sugar prices on the strength of surplus cash generated
in the immediately preceding year. With this luxury no
longer available for 2011-12, sugarcane arrears have
built up threatening to cross ` 7000 crores as of
February 2012. Pressured by such mounting arrears, the
Government has opened up OGL exports without quota
restrictions though belatedly in May
2012. |
|
|
|
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 release mechanism.
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. PDS price for sugar remains unrevised for a
decade at `13.50/ kg since 2002.
Fair and Remunerative
Price (FRP) for sugarcane for 2011-12 was fixed by Central
Government at ` 145 per qtl linked to 9.5% recovery with a
premium of `1.53 for every 0.1% increase in the recovery. CACP
has recommended an FRP of `170 per qtl for 2012-13.
Government of Tamil
Nadu hiked SAP by `100 per tonne for 2011-12 to ` 2000 per
tonne linked to 9.5% recovery. In addition, transport charges
from field to factory have to be fully borne by sugar mills.
The Central Government
has constituted an Expert Committee in January 2012 under the
chairmanship of Dr C Rangarajan to study and recommend
measures for sugar sector reforms. ISMA and Regional
Associations have submitted Memorandum forcefully pleading for
deregulation of the industry.
The Centre/ States
have made Policy or Regulatory changes. Some of them are –
* Duty-free raw
sugar import facility repeatedly rolled over – Present
validity till 30.06.2012.
* Sugar exports
under OGL finally re-opened in April 2011 – Export quota of 5
lakh tonne pro-rated to all sugar mills on the basis of past 3
years production.
* Additional
export quotas announced in June 2011 (5 lt), Aug 2011(5 lt),
Dec 2011 (10 lt), Feb 2012 (10 lt).
* Export releases
dispensed with and free OGL regime restored in May 2012.
* DGFT however by
Notification dt.14.05.2012 mandated prior registration of
export quantity. Conditions and modalities as prescribed by
Policy Circular No.62 dt.14.05.2012.
* DGFT by Policy
Circular No.63 dt.16.05.2012 partially relaxed the rigors of
its earlier Circular.
* DEPB benefit
terminated from 30.09.2011. Sugar is now eligible for duty
draw back at 2%.
* Food Safety
& Standards Act, 2006, brought into force effective
05.08.2011. Sugar is covered.
* Levy sugar
price for 2011-12 announced vide Notification dt.07.03.2012.
Price for Tamil Nadu is ` 1937.46/ qtl (PY 1878.54/ qtl).
* Stock holding
limit for bulk consumers rescinded from 30.11.2011.
* 100% compulsory
packing of sugar in jute bags confirmed for 2011-12. Packing
has to be in 50 kg bags.
* Expert
Committee on Ethanol pricing has recommended the pricing
formula – Final decision of Government still awaited.
* Government of
Tamil Nadu has announced policy intent to restart Ethanol
programme in the State.
* Weekly
reporting of sugar data through SMS continues. In addition,
web based monthly reporting has been introduced.
* Service tax
levy would be universal. However agri related services would
remain exempt under the Negative List.
* Bank rate hiked
on 14.02.2012 to 9.5% from 6% and then reduced to 9% from
17.04.2012. SDF interest rates at 2% below bank rate
correspondingly recalibrated. |
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
:Sucden-Czarnikow Report)
Global surplus in
2011-12 has been up-revised periodically and the higher
production would accelerate stock rebuild. ISO expects in
2012-13 higher sugar production in Brazil,the Far East and
Australia but a lower output in Europe and India. While this
may reduce the size of world surplus, world production would
clearly outweigh consumption. The return of a large scale
deficit looks unlikely for the following 2013-14 crop cycle.
World prices would hence largely remain under check and move
in a narrow band.
Hedge funds are now
reducing their net-long position in ICE. Such sharp reduction
can be interpreted as an indication of speculators’
expectation of a further midterm weakening of the world
prices. In the short run, world market volumes can also be
affected by an uncertain macroeconomic environment and “non
sugar” factors. Continued currency weakening makes exporters
contribute to lower world sugar values in dollar terms.
Based on crop area,
Indian sugar production would enter its third year of surplus
during 2012-13. Inventories are fairly at manageable levels
due to periodical exports. With unlikely availability of
premium on export, there would be price pressure for Indian
sugar both in domestic and overseas market. Sugar decontrol if
implemented in time and good spirit would help combat the
negatives and put the industry on a stronger footing.
|
|
|
|
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
imports.
|
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
Promoting and
actively assisting in farm mechanization.
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 and promoting
bio-manures.
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.
Global sugar prices
influence and impact domestic prices.
Sugar Futures to
hedge price risks are susceptible to temporary bans.
Molasses is
controlled by State. Restrictions on inter State movement
considerably impact 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 (FRP & 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 impeding the scope for
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 `110 crores. Its
technical performance and viable operations are crucial to
future cash flows. Principal customer under Power Purchase
Agreement, i.e., State Electricity Board is under tenuous
financial state which could delay realization of bills for
power supply.
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 but is agitated
on Appeal before the Division Bench. |
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
254 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
31-3-2012 |
Year ended
31-3-2011 |
| Number of days |
283 |
278 |
| Average crushing rate (tcd) |
2635 |
2555 |
| Cane crushed (t) |
745644 |
628613 |
| Recovery (%) |
10.21 |
9.65 |
| Raw Sugar Processed (t) |
- |
17087 |
| Sugar Production (t) |
76464 |
76870 | |
|
Though the Company
operated for almost the same duration like last year, cane
crushing improved by 19%. Raw sugar import was unviable and
hence not pursued.
Sugar recovery showed
a swift rebound during the year. On the strength of higher
cane volume and improved recovery, sugar production could be
maintained at last year level despite discontinuance of raw
sugar import.
|
|
Turnover |
|
Levy sugar volume
almost halved due to restricted release given by the
Government. Free sugar volume was also lower by 15% due to
reduced releases. While free sugar prices displayed moderate
rise, molasses prices declined by more than 60% due to State
Government’s restrictions. Bagasse sales volume increase was
commensurate with higher volume of crushing. Overall, top-line
had a marginal dip.
The Company exported
11,956 tonnes of sugar under OGL during the current year at an
average realization higher by 17% over domestic prices.
|
|
Other Operating
Income |
|
Sale of scrap more
than doubled due to replacement of brass tubes with ss tubes
in Evaporator and Pans during the year. Higher exports fetched
increased duty draw back benefits. Further, the Company
realized premium on selling part of its export
quota. |
|
|
Other
Income |
|
Last year the
Company had surplus funds deployed in Mutual Funds
fetching dividend income. It also had foreign exchange
gain on the import trade credit obtained for raw sugar
import. In the absence of these, current year has
recorded much lower other
income. |
|
Material
Cost |
|
Government of
Tamil Nadu hiked the SAP for 2011-12 by ` 100/- per
metric tonne. Average cane cost went up by 6%. Usage of
50 kg pp bags for export helped reducing overall packing
cost.
| Overhead
Cost |
|
Increase in utility
cost and employee costs are nominal. Increase in repairs and
maintenance cost is attributable to higher crushing and
replacement of evaporator tubes. Variance in other expenses is
principally due to freight and handling on larger sugar
exports.
|
|
Operating
margin |
|
Improved recovery and
increased cane volume could more than neutralize higher cane
cost. Sugar export helped to further strengthen margins during
the year. The Company could thus achieve 81% increase in the
operating margin (PBIDT) over the previous year.
|
| FinanceCosts
|
|
Interest on
fixed loan declined in line with installment repayments
during the year. Due to reduced utilization of working
capital limits, the cash credit interest was also
minimal. |
| |
| Depreciation
|
|
There is no
change in the method of depreciation during the
year. |
| Exceptional
Items |
|
The company
during the year has incurred ` 212 lakhs of expense
towards power evacuation arrangement for obtaining grid
connectivity approval and facility from TNEB. The
expenses incurred were at the instance of TNEB and have
not resulted in any asset under its control or
ownership. Accordingly these expenses have been charged
to Profit and Loss Statement in line with the accounting
standards and following the opinion of the Expert
Advisory Committee of ICAI in Jan
2011. | |
|
|
| 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. |
|
|
|
| Debt |
|
Debt servicing is as
per schedule.
The Company has fully
repaid the loan availed under the Special Scheme of the
Government. Interest subsidy of Rs. 120 lakhs however
remains unrealized. The Company has drawn an aggregate of
Rs.35 crores from Canara Bank for its Cogeneration
Project.
|
| Fixed
Assets |
|
Addition to Plant
& Machinery is marginal towards replacing obsolete
equipment. Normal capital additions have been funded out of
internal accruals.
The Company has
incurred ` 84 crores of expenditure towards Cogeneration
Project under construction. This is now targeted for
completion by June 2012. All direct and related expenditure
for this would get capitalized in accordance with Accounting
Standard 10 during FY 2012-13. |
|
Investments
|
|
Advance towards
investment of ` 7.50 crores in Subburaj Papers Ltd (since
renamed as SPB Papers Ltd -SPL) was made last year. Together
with additional exposure of ` 5 crores, total investment in
this associate company is ` 12.50 crores. Steps to merge SPL
with Seshasayee Paper and Boards Ltd (SPB) have been
initiated. Share Exchange Ratio has been proposed at one
Equity share of SPB for every Eleven Equity shares held in SPB
Papers Ltd.
|
|
Working
Capital |
|
Sugar inventories have
declined considerably with accelerated exports. The stock
volume and value for molasses declined marginally during the
year. Unrealized subsidies pose a severe stress on working
capital. Surplus funds have since been fully deployed in Cogen
Project. As a result, the Company has resumed working capital
availment.
|
| 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 Cogeneration Project and investment in SPB
Papers Ltd.
|
| Cost-realisation
trend |
|
During the
quinquennium 2007-12 the relative change in CAGR (%) for major
items are as under:
|
| Cost |
Realisation |
| Sugarcane |
12 |
Sugar |
11 |
| Process
& packing |
9 |
Molasses |
21 |
| Employees |
15 |
Bagasse |
18 | |
| 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 |
| 30th May 2012 |
Chairman | |
|
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