MANAGEMENT DISCUSSION AND ANALYSIS Global Economy Global economy is poised for economic growth comparable to the recent years' performance, but with a somewhat different texture. European countries are expected to do better, Asian countries a tad less and natural resource-based economies, worse. The baseline projection for global growth in 2016 is a modest 3.2 percent. The recovery is projected to strengthen in 2017 and beyond, driven primarily by emerging market and developing economies, as conditions in stressed economies start gradually to normalize. But uncertainty has increased, and risks of weaker growth scenarios are becoming more tangible. China's growth rate of GDP is 6.9%, down from 7% in brvious quarters. India's growth remains strong, but capital spending has slackened this year. Consumer spending and low commodity prices are strengths that should enable India to continue its strong expansion. Commodity prices are 30 percent lower than their 2011 peak, driving cutbacks in mining, petroleum and agriculture Indian economy - growing, despite challenges India's economic growth is expected to be a tad lower at 7.4% in 2016-17, in juxtaposition with the growth of 7.6% in 2015-16, with tepid external demand and shrinking export offsetting the pickup in domestic demand. According to the report of Asian Development Bank (ADB), growth in India is expected to dip marginally this year as expansion in public investment weakens due to fiscal constraints, private corporations continue to deleverage ,and external demand remains anemic. The weak balance sheets of public sector banks may also hamper lending and growth prospects. the Economic Survey though pegged the economy's growth at 7-7.75% in 2016-17. The growth trajectory in 2017-18 could be better on account of the Government's strengthening of public sector banks' capital and operations, private investment benefiting from corporate deleveraging, the financing of stalled projects, and an uptick in bank credit. India is expected to be a star performer and will remain the fastest growing large economy in the world in the near term. The potential growth of the country can be raised further if it can successfully implement necessary reforms including unifying tax regime, improving the labor market regulations, as well as opening up further to foreign direct investment and trade. global sugar supply and demand scenario After a few years of surplus, things are looking tight and the global sugar deficit for the year 2015-16 has widened. The estimates of deficit range between 5 million tons and 7 million tons. Fresh figures of harvest and production estimates in key sugar geographies viz. India, Thailand and Brazil have caused a slash in the production estimates. Deficit mainly driven by erratic weather in Brazil, more diversion of sugarcane for ethanol production, drought running from China through India, including Thailand, resulting in lower production in China, Thailand and India. Global stockpiles are now showing signs of ebbing. Global sugar prices of both raw and whites which had recorded unbrcedented low levels in August 2015 have since rebounded by nearly 40% to 60%. Currently, international sugar prices are hovering around 16 cents per pound, up by more than 50% over the last 7 months from a low of 10.4 cents per pound in August 2015. It has indeed been a story of remarkable turnaround. Outlook for 2016-17: 3 Promising sugar production season is forecasted in Brazil. Excessive rainfall during the harvest season can dampen the production estimates in Brazil 3 Unfortunate drought in Maharashtra and Karnataka, is expected to drag the production by 3 million tons, However, surge in production in Uttar Pradesh and Tamil Nadu, can propel the production by 1 million ton. Overall production to be lower by 2 million tons 3 Production in Thailand is also expected to be lower. Lesser production outlook in India, China and Thailand will result in continuance of tight sugar balance, globally SOME TAKEAWAYS FROM THE KEY SUGAR GEOGRAPHIES: BRAZIL: 3 Globally, Brazil is the largest producer of sugar and accounts for around 20% of the global sugar production and it is also the largest sugar exporter Good level of rain since the beginning of rainy season has resulted in absence of water stress. It is estimated that the cane availability will be plentiful and CS Brazil mills will crush 624 million tons of sugarcane in 2016-17 (April to March) and sugar mix is expected to be slightly greater than 43% of the total cane crushed, as against 40.65% diverted in 2014-15 SS. Sugar production is expected to increase by 3.15 million tons to 34 million tons. Giant crop and bumper production in Brazil is likely to cut global deficit substantially during 2016-17 Besides the weather, political situation, regulatory changes, competitive prices of fuel are the other key factors which will influence sugar production. Export viability will be determined among other factors by the equation of Brazilian Real vis-a-vis USD which again is influenced by political climate. Impending impeachment of the President has led to a strong rally of Brazilian Real. There is also an expectation of tax hike in case of ethanol by the new dispensation which would make manufacture of ethanol more viable 3 Brazilian sugar industry is also experiencing enormous amount of pain as many sugar companies are facing bankruptcy caused by fractured cash flows emanating from low global sugar prices during the last few years Thailand: 3 Season 2015-16 was disappointing on the back of small cane supply and lower sucrose content. Sugar output is pegged at 9.8 million tons 3 Anecdotal evidence points out to lower cane plantation for the season 2016-17. Much of the plant cane sown during monsoon season has received less water for vegetative growth. However, sugar production is expected to increase to 10.1 million tons 3 Indonesia has been a major destination for raw sugar exports from Thailand China: 3 Lower cane supply and disappointing sucrose content would mean lower production as the output during 2015-16 is pegged at 8.8 million tons. Deficit seen at 6.5 million tons 3 However, this does not necessarily imply bigger imports of raw because of strong cross-border imports of whites and possibility of stock release by the government 3 the regional flows thus displace international trade. Nonetheless, lot of whites moving into China 3 Domestic prices, which are already high, not imbrssed by small crop and big deficit INDIA STORY: India is the largest sugar consumer and second largest sugar producer in the world with 538 operational sugar mills with total production capabilities in excess of 33 million tons of sugar annually. out of these, nearly 60% mills are privately owned. Many sugar mills are integrated having co-generation and distillery production infrastructure. Since India is a power deficit country and since ethanol blending program has been identified as efforts of priority to address the energy needs of the country, both co-generation and ethanol manufacture offer enormous scope for risk mitigation for the Indian sugar industry. India is the largest consumption market and though not isolated from global market and its vagaries, is partly insulated. Season 2015-16, a year of tectonic shift for the sugar industry in India: The season 2015-16 will prove to be a defining season in the history of Indian sugar industry. Concerned at the mounting cane arrears year after year, the Central Government introduced a slew of measures to nurse the Indian sugar industry back to good health. 3 It dawned on the Government that grant of loan (though subsidized or interest free) every year to help enable the industry to clear the sugarcane dues, has only led the sugar mills into a debt trap. Additional repayment obligation is cast on the already stressed cash flows of the Company. additionally, the grant of subvention has caused a drain on the exchequer of the Government 3 However, the Government did announce grant of loan of Rs. 6,000 crores to the cash-starved industry. the scheme was to help the industry clear the sugarcane dues of 201415. one year interest subvention of interest @ 10% is being provided through SDF 3 It was further assessed that the problems plaguing the industry are on account of excess production and hence the excess stock in the country. Skewed sugar balance had created an unbrcedented glut in the market resulting in a free fall in domestic sugar prices, so much so, that sugar was sold in the price band of Rs. 2,200 per quintal to Rs. 2,300 per quintal (ex-sugar mill) during august 2015, an incredible loss of more than Rs. 1,000 per quintal to the sugar manufacturers 3 the Central Government therefore ordered export of 4 million tons of sugar from the country. a compulsory 80% obligation was cast on all sugar mills in proportion to the ratio of their respective sugar production in the earlier years. Mills in the hinterland were provided window for trading their obligation of export on payment of charges to mills in the proximity of coastal area, who would physically export. out of the 3.2 million tons of obligation cast on the sugar mills, nearly 1.55 million tons has already been shipped out of the country. Myanmar has been the major destination for the exported sugar 3 the Government has announced that those sugar mills fulfilling their export obligation and also obligation to supply ethanol will be given a subsidy of Rs. 4.50 per quintal of sugarcane crushed during the season 2015-16 and that the said subsidy will be directly transferred to the account of farmers affiliated and supplying sugarcane to the concerned sugar mills in discharge of the sugar mills obligation to pay the sugarcane dues 3 In yet another significant move, Central Government increased the mandated procurement price of ethanol to be paid by oil Marketing Companies. tenders were floated for procuring ethanol which would facilitate 10% blending of ethanol with the conventional fuel. While achieving 10% ethanol blending is a far cry, 5% blending involving 1.6 billion liters of ethanol is achieved the Government has also granted a one year excise duty waiver on ethanol involving Rs. 5 per liter with the sole objective of providing impetus to the ethanol blending program and to encourage more and more ethanol producers to participate in the ethanol program. the Central Government has thus displayed commendable alacrity in bailing the sugar industry out of the woods. the effect of the policy initiatives has pulled the industry out of the depths of despair as the sugar prices which had fallen below the mark of Rs. 2,300 per quintal has now rebounded by nearly 50% and is now range-bound between Rs. 3,250 and Rs. 3,350 per quintal. Export of 1.55 million tons, tightening global sugar balance, lesser than estimated production domestically has all underwritten the revival of market sentiments amply demonstrated in the resurgent sugar prices. However, the industry needs reasonable sugar prices on sustained basis and not sporadic surges in the prices which emits erroneous signals and needless hue and cry across. the Government is then constrained to intervene as it happened recently, when the Government had to set stock limits for the traders across the country with a view to smother the prices and avoidable hoopla. The sugar stock in the country is at comfortable levels, notwithstanding the fact that the states of Maharashtra and Karnataka have suffered a cruel drought caused by El Nino factor. The table below illustrates the fact that the country is carrying adequate sugar stocks and there is no cause whatsoever for anyone to speculate wildly. As is evidenced by the above table, the country will carry a year-end stock of more than 7 million tons which translates into more than 3 months consumption and a healthy stock ratio of 27.7%. It is estimated that the punishing effect of the drought is carried forward to the season of 2016-17. While between Maharashtra and Karnataka, a drop in production of 3 million tons is projected, at least 1 to 1.5 million tons is expected to be made good from the higher production in Uttar pradesh and tamil Nadu. Based on the aforesaid number crunching, experts are extrapolating the production estimates for the crushing season 2016-17 at 23.5 to 24 million tons. However, even then, there certainly is no case for any import of sugar. Since the sugar trade has been decontrolled, new season's (2017-18) sugar production will be on offer for sale in the market no sooner the sugar season starts. the dread or the alarm over alleged shortage in sugar availability during 2016-17 or thereafter is therefore uncalled for, as logically no shortage is perceivable. Avoidable imports of sugar in the past had led to carnage of domestic sugar market. Uttar Pradesh sugar industry -heralding new territories: the season 2015-16 has been a year of turnaround for the sugar industry in the state. Distinguishing features of the season 2015-16 are enumerated below: ¦ For the 4th year in succession, sugarcane price (SAP) announced by the State Government remained unchanged at Rs. 280 per quintal for the general variety. the runaway increase in sugarcane price between 2007 and 2012 had spelt doom to the fortunes of sugar industry in Uttar pradesh. The positioning of sugarcane price at higher levels had created structural imbalance in the sugar industry However, the State Government displayed tremendous empathy of the problems tormenting the industry and not only did it not increase the price but also announced waiver of post-procurement levies such as entry tax, society commission and purchase tax. The State Government has also announced subsidies of Rs. 23.30 per quintal which is linked to the threshold average price of sugar and by-products The State Government of Uttar pradesh had paid a subsidy of Rs. 28.60 per quintal of sugarcane purchased for the earlier crushing season 2014-15. the amount was disbursed by way of direct transfer to the account of farmers against sugarcane price dues of respective sugar mills. these initiatives resulted in substantial decrease in cane price arrears of the season 2014-15. As on date, there are hardly any arrears pertaining to season 2014-15 For season 2015-16, the State Government also introduced two-tier payment. While payment equal to FRp of Rs. 230 per quintal was mandated payable within the statutory 14 days' time, the balance is payable within 90 days of the close of crushing season of the respective sugar mills this has resulted in each farmer receiving a payment of at least Rs. 230 per quintal, unlike in the earlier years when the farmer supplying cane early would be the beneficiary of full payment, whereas the farmer supplying sugarcane towards the fag end would have to wait for many months before getting any payment Extra-ordinary recoveries clocked by sugar mills in Uttar Pradesh: As against average recovery in the range of 9.25% to 9.50% normally recorded by sugar mills in Uttar pradesh, average recovery in excess of 10.50% was clocked by sugar mills. this was mainly on account of revolutionary sugarcane variety Co 0238. The said variety is an early maturing variety, reasonably good on fiber content and is generally favored by the farmers on account of its high yield properties. The phenomenal rise in the recovery is on account of focused and dedicated cane development efforts planned and executed by sugar mills. Though some distance away from the recovery clocked by sugar mills in Maharashtra, the recovery clocked is indeed path-breaking. A couple of mills have closed their crushing season with a recovery in excess of 12%. The cane development efforts are continuing on a sustained basis and sugar mills are not only helping farmers procure seeds of good variety but are also educating farmers on a regular basis to maximize their yields. Sugar mills have also minimized their harvest to crush time, so that the sucrose content in sugarcane is not lost. The higher recovery is also attributable to excellent climatic conditions. Uttar pradesh witnessed frost-free winter, huge swings in day and night temperature. The climate was conducive for optimized maturity of sugarcane. Next season, when the climate is expected to be normal, it will be possible to draw distinction between the role of superior varietal mix and the impact of better climate on the recovery and assign specific numbers Various measures of the Central and State Government coupled with realignment of market dynamics on account of global as well domestic contraction in sugar production has breathed a new life in the industry which was on the brink of being vanished in the wilderness. The pain in the industry accumulated on account of losses which it still carries forward and will take some time to subside. As mentioned earlier, sporadic price rise creates needless exuberance. Sustained sugar price at reasonable levels where the industry earns a decent profit and which will help enable the industry to discharge its responsibility to all stake holders, is the key. Farmers have to be paid on time and need to be paid a reasonably remunerative price, employees should be a contented lot, banks and lenders' servicing obligations needs to be served on time, shareholders should be paid their dividend and more importantly, the industry should be in a position to fulfill its responsibilities to the society. These are the key parameters on which the industry will be judged. Ethanol: Activities over the last few years in the sugar industry are focused on integration. there has been hardly any capacity addition in the sugar space. Ethanol offers an attractive value-added risk mitigating option. Lately, ethanol blending program (EBp) has been identified by the Government as a means to bail the sugar industry out of trouble and also to address the energy needs of the nation. During 2015, oil Marketing Companies invited bids of supply of ethanol for 10% blending. against the 10% blending target, 5% blending has already been achieved and the industry is gearing for supplying ethanol required for 10% blending. To motivate the industry to participate in the EBp, the Government has waived off excise duty of 12.50% on ethanol for 201516 which will result in an additional realization of approximately Rs. 5 per liter. While the first target is 10% blending, it is to be progressively increased to 20% and in order to do so, the industry could divert B-heavy molasses to produce ethanol which will help enable the industry to limit sugar production in a year of sugar surplus. Co-generation: Presently, only half of the sugar mills in India have infrastructure for co-generation with a capacity in excess of 5,500 MW of power. Many sugar mills have added high brssure boilers which have resulted in better combustion of bagasse. Rates offered by the State Government Electricity Boards range between Rs. 4 and Rs. 6.50 per unit. though sugar mills have an option to sell sugar in the open market, most sugar mills have entered into long-standing power purchase agreements with their respective State Electricity Boards, although a challenge generally faced by sugar mills in evacuating power to the State grids is the delay in receiving the payment. DWARIKESH OPERATIONS - A SNAPSHOT In Uttar Pradesh, typically sugar season starts in November and ends in April / May. However, since the accounts are drawn for one year period starting from 1st April to 31st March of next year, the results capture the operating performance of a small part of brvious crushing season (April / May 2015) and a large part of another crushing season (2015-16 from November 2015 to March 2016). By a similar analogy, accounts for the year 2015-16 covers part of the season 2014-15 (from 1st April, 2015), off-season of 2015-16 season and the crushing season of 2015-16 till 31st March, 2016. operational highlights of the season 2013-14, 2014-15 and 2015-16 are given below: ¦ Significant drop in cane availability and cane crushed. Drop more pronounced in DD unit - in excess 13%. In case of DP unit, nearly 11% fall in cane crushed. Lesser cane availability was a common phenomenon across all parts of Uttar Pradesh ¦ However, increase in recovery across all plants. DN unit recorded recovery of more than 12%, a hitherto unknown occurrence in Uttar Pradesh Higher recovery on account of proportionately higher mix of early variety in the total varietal composition. Early variety Co 0238 has transformed the dynamics of sugar industry in Uttar Pradesh. Hitherto laggards, in recovery, Uttar Pradesh mills now rub shoulder to shoulder with sugar mills in Maharashtra, on this score. Because of its higher yield properties, Co 0238 is also a favored variety among farmers. Higher per hectare output vis-a-vis other varieties, obviously results in higher income to the farmers ¦Group recovery of 11.73%, among the highest in North India. Record sugar production in DN unit ¦Higher recovery also on account of lowest cut - crush (sugarcane) time and increasing awareness among farmers to supply fresh cane ¦Climatic conditions played a weighty role in improvement of recoveries. Frost-free winter, lesser rainfall and huge swing in the day and night temperature resulted in optimized maturity of sugarcane and higher sucrose content ¦Reasonable accurate impact of early variety on the recovery will be known in the ensuing season when the climate is expected to return to its normalcy Distillery: During the year, Bio-methanated spent wash plant involving an outlay of nearly Rs. 10 crores was commissioned. The plant will de-bottleneck ethanol manufacturing capabilities. It is a plant based on the most modern technology and will help solidify the spent wash and will facilitate easy composting. It will also aid in the uninterrupted working of distillery for most part of the year. The plant will enable the Company to be compliant in fuelling norms of effluent treatment. While expenditure in creating the infrastructure has been incurred during the year, its real benefit will accrue to the Company in the coming years. Zero liquid discharge: There has been an increasing alertness to minimize the liquid discharge from the sugar mills. pollution Control Boards have set formidable norms to reduce the liquid discharge. typically, sugarcane contains 50% water and it is expected that the same would be used in the process and no additional groundwater will be drawn. Sugar mills, however, are known to draw additional groundwater. Efforts are now directed to not only recycle and reuse the process water, but to draw minimum groundwater as well. the Company has taken many small steps with a view to optimize the use of processed water, adequately treat the water to be discharged and make it suitable for irrigation. the energized efforts of the workforce and the Company have not only minimized drawing of groundwater, but also minimized the liquid discharge from its sugar mills. the avowed objective of the Company is to achieve zero liquid discharge in the near foreseeable future. the Company has also set up online monitoring systems to monitor the quality of liquid and air discharge. the Company is committed to playing the role of a responsible corporate citizen. accounting policies the financial statements have been brpared in compliance with the requirements of the Companies Act, 2013 and the Generally accepted Accounting principles (GAAp) in India. the significant accounting policies followed by your Company form an integral part of the annual report. internal control systems and their adequacy Your Company has in place an adequate internal control policy and internal control system in order to ensure that all transactions are authorized, recorded and reported correctly and that all assets are protected against the perils of unauthorized use or disposition. towards enhancing the efficacy of internal controls, services of external consultants are hired wherever necessary, and their suggestions are reviewed and implemented. Your Company also periodically reviews its business processes with a view to fine-tune them. Your Company also has in place an Internal audit system, whereby an independent professional firm of Internal auditors conducts regular audits across the Company and their scope and findings are reviewed by the Management and audit Committee on a regular basis. the Company also has a concurrent internal audit system. the audit Committee of the board also meets periodically to review the internal controls, internal audit findings, action-taken reports and to advise the management on corrective polices, if necessary. HUMAN CAPITAL Your Company recognizes the importance of human capital and has built a strong talent which provides it with the competitive edge. Your Company is always on the lookout for fresh talent acquisition and makes all efforts for their retention. Skill-mapping and matching is done on a continuous basis. assessment of training and development needs of the employees is carried out at the time of performance appraisals and the training programs are then designed to bridge the gaps, if any. Key Result areas of employees are determined and their performance evaluated accordingly. the industrial relations continued to be cordial with your Company enjoying the lowest attrition rate among the peers. Your Company employed a total of 1,287 employees, including seasonal employees during the year. RISKS AND CONCERNS the Company has in place a mechanism to inform the Board Members about the Risk assessment and Minimization procedures and periodical reviews, to ensure that the risks are controlled by the Executive management through the means of a properly defined policy. the details of these are discussed in the Corporate Governance Section of this annual Report. CAUTIONARY STATEMENT the statements in the Management Discussion and analysis report detailing the Company's objectives, projections, estimates, expectations or brdictions may be forward-looking within the meaning of applicable securities laws and regulations. As these statements are based on certain assumptions and expectations of future events, actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include economic conditions affecting global or domestic demand and supplies, political and economic developments in India or other countries, government regulations and taxation policies, prices and availability of raw materials, prices of finished goods, abnormal climatic and geographical conditions, etc. the Company assumes no responsibility in respect of forward-looking statements that may be revised or modified in the future on the basis of subsequent developments, information or events. |