MANAGEMENT DISCUSSION AND ANALYSIS REPORT Industry structure and development World Sugar Sugar is produced in over 120 countries from beet or cane. Over time, the relevant share of cane sugar has increased from 56% during 1960s to 80.6% during 2014-15 by reason of growing sugar production out of cane in tropical countries. Global sugar production has resolutely remained surplus over consumption for the fifth consecutive season in 2014-15. Better crops in India and the EU more than counter balanced the smaller output in Brazil and China. World sugar prices under brssure from surplus fundamentals have hence suffered the severest of beating. Raw sugar for the near month delivery touched a six year low of 11.93 cents/pound on 31st March 2015. Indeed, global sugar prices are down by 50% in three years with only a bleak prospect of getting out of bears grip under the current scenario. Brazil is the dominant sugar producer and exporter, while Thailand is the second largest sugar exporter. India is steadfastly placed as the second largest sugar producer and the numero uno sugar consumer in the World but is just an occasional and marginal player in the global trade. 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 in an environment friendly manner. Sugarcane and sugar production are seasonal with more than 90% happening in the winter months of November to March. Sugarcane use for production of sugar has steadily increased over time in brference to alternative sweeteners. Maharashtra and UP are the dominant sugar producing States while of late Karnataka has significantly stepped up its production. In contract, sugar production in Andhra Pradesh is on a discernible decline during the last four years due to the recurrence of drought, drying up of rivers, poor storage in reservoirs and resultant rebrssive water shortage. As if following the global cues, Indian sugar production has outstripped consumption since 2010-11 for five consecutive seasons. Still worse, early estimates are a clear pointer to the persistence of this surge during 2015-16 as well. It is hence no wonder domestic sugar prices have been smothered, weighed by cumulative supply overhang and diminutive scope for sugar exports despite sops for sugar exports periodically, albeit belatedly, announced by the Government. Indeed, sugar prices have now been hovering for several quarters far below the cost of production across regions. As a result, sugar industry, the producer of green power and green fuel, is financially pushed into red. It looks as though sugar production has convincingly come out of the influence of traditional cyclical swings. For long, lower sugar prices would mean commensurate lower sugarcane prices, consequent delayed payments and boisterous build up of arrears prompting in that process a proactive crop switch by the farmer. In turn, sugar production would decline to push prices up. This conventional and time tested cycle has now been balefully broken due to the huge disparity between the price for cane compared to other competing crops. As a result, the farmer remains deep rooted with the cane crop, where he has the twin benefits of a guaranteed market access and a lucrative price that more than effectively compensates in the end for the delayed price realization. Blighted by such a structural problem and burdened by the high cost of raw material, Indian sugar is brposterously priced out in the export market, obliterating the scope for stock correction. Government interventions through soft loans and other sops to help clear cane arrears prove only palliative, with the fundamental problem posed by the huge mismatch between sugar and cane price manifesting to prove malignant. In this context, it is imperative that sugarcane pricing is structured on a formula towards equitably sharing a br-determined percentage of realization from sugar and its by-products. A Cane Price Stabilization Fund could concomitantly be in place to tweak this price for taking care of year on year volatility and bringing in stability to protect the interest of cane farmers. Government Policies • The Central Government decided in January 2015 to hike the FRP for sugarcane to Rs.230/- Qtl. for 2015-16 sugar season linked to a basic recovery of 9.5 %. • Central Government in December 2014 approved a mechanism for Ethanol blend at a fixed price band of Rs.48.50 to Rs.49.50 per Ltr. for delivery at the depots of OMCs. As a further fillip to the Ethanol blending programme, the Centre has also decided to totally exempt excise duty on Ethanol from October 2015. • Import duty on sugar has been increased from 15% to 25% in August 2014 and further to 40% from 30th April 2015. • Import facility for sugar under duty-free import authorization scheme has been withdrawn, while the deadline to fulfill the export obligation under AAS has been reduced from 18 months to 6 months. Opportunities & 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 higher production to meet growing demand and capture export markets besides strengthening the by-product segment to greater value addition. Sugar business is intrinsically cyclical. Market sentiments move disproportionate to demand-supply parity causing 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. Sugarcane availability is critically dependent upon conductivity of nature. Repeated monsoon failure and poor storage of water in Aranier reservoir catering to our command area pose a severe challenge to agriculture in our neighborhood, impacting cane cultivation in the process. Unscheduled power tripping disrupting irrigation schedule continues to remain a major impediment. Drip irrigation is only slowly catching up due to its high capital outlay, glitches in getting Government subsidy and draconian deficiency in water resources not enough to meet even the minimal drip requirement for cultivation. In view of fragmented capacity and high input costs, India suffers systemic un competitiveness in the world market. As a result, sugar exports often times have to rely on the crutches of Government support measures. Outlook Defying earlier estimates of a smaller output for 2014-15 season (October/September period), sugar producers have only added to the global supply and in turn aggravated the pricing brssures during the year. Looking ahead to the 2015-16 season, higher Indian production is a clear dampener to the world sugar market with brliminary data showing an increase in the acreage, undaunted by the record high cane price arrears crossing Rs.20000 crores. As a corollary, sugar prices have little scope for rebound and little hope for rejoice barring occasional intermittent corrections. Weather as for ever would be the only unbrdictable factor in influencing the ultimate outcome of 2015-16 season. Six strong headwinds in the near term and macro forces in the medium term are impacting the industry and exerting downward brssure in the futures market. • Too much supply caused by five successive years of surplus production. • Considerable lag in the switch from cane ( a semi perennial crop) to other crops and lack of incentive for switch due to debrssed prices of other agri commodities. • Strong USD having a negative impact on the price of all global commodities (sugar isn't immune). Brazilian Real hit a 12 year low against USD, thereby sustaining value of world market sugar in local currency terms. • Crash in global crude oil prices and consequent ongoing uncertainty over the future bio-fuel demand. There is thus debrssed demand for sugar based ethanol in US and EU. • Sugar consumption marginally increasing in emerging markets but demand dropping in developed markets due to health concerns related to obesity and diabetes. • Widesbrad farm subsidies, import restrictions and trade blocks that are all in place since the colonial days keeping sugar prices low. It thus looks obvious that headwinds would continue to haunt global sugar markets in the near term and the hapless industry should reconcile itself for a long battle. Risks and concerns The management cautions that the risks outlined below are not exhaustive and are for information purpose only. Investors are requested to exercise their own judgment in assessing various risks associated with the industry and the Company. Industry risks Sugar industry being agro based and vulnerable to commodity cycles is fraught with several risks. Source of sugar cane for other sugar factories is largely dependent on our command area due to less availability of cane in there zone area where growth and availability would depend on monsoon and water flow in the river. Despite recent liberalization by Centre, there are continuing controls on cane area reservation as well as fixation of cane price by State Governments. The growing mismatch between free market prices for end product and Government controlled price for inputs poses a persistent and grave concern. Risk mitigation The Company has built excellent relationship over the years with the local farming community. It has of course no control over agro-climatic risks and regulatory interventions. Risk specific to the Company It is also surrounded by other sugar mills that limits scope for major cane area expansion. Of late, its command area for cane has become increasingly susceptible to water stress. Risk Management The Board being responsible for framing, implementing and monitoring the risk management plan for the company has laid down the framework for risk assessment and mitigation procedures. It has set out detailed framework to deal with key areas of risks encompassing raw material risk, product price risk, regulatory risk, finance risk and risk specific to the company. It has put in place adequate system to keep its key operating team aware and beware of the likely risk factors. Internal control systems and internal audit checks help the company continuously monitor emerging risks and take timely corrective action. 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 ongoing 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 149 seasonal and 181 non-seasonal employees. We have sugar wage board applicable for our workers. Industry relations remained cordial throughout the year. Discussion on Financial Performance with respect to Operational Performance Marginal rise in cane volume and marginal improvement in sugar recovery have however been below the long term average due to the continuing impact of drought in the region. Financial Performance Turnover indeed declined further during the year and the fall is moderate compared to the peak achieved in 2012-13. The only saving grace in the year was the buoyancy in the price of Molasses. Operating margins were negative in line with the industry. Interest cost was lower by reason of interest subvention facility available on the SEFASU Loan. Debrciation is lower due to the impact of new Law as per Schedule II of the Companies Act, 2013. In the end, the company has suffered a Net Loss after tax of Rs.70.17 Lakhs as against the net profit of Rs.105.99 Lakhs in the brvious year. Its operations were decimated by drought and marred by adverse market conditions thereby rendering its overall financial performance unsatisfactory. Cautionary Statement Statements made in the 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 exbrssed or implied. On behalf of the Board for Prudential Sugar Corporation Limited Vinod Baid Chairman (DIN 00010142) Place : Hyderabad Date : 28.09.2015 |