The world economy continues to face challenges on the road to
sustained economy. In the context of the slow recovery in the developed markets, focus of the world is on the developing and
emerging economies ncluding India. The year gone by, and the current
year are witnessing great changes in the international financial landscape.
Financial turmoil is bringing the sustainability of the Euro into question.
Commodity markets, foreign exchange markets and stock markets have
witnessed great volatility. The year has also been a very eventful year for
the business. Your company is more international than before, with an
export of over 25% of sales. The company is also producing a more
diversified basket of products that are all essentially produced from
sugarcane as the primary raw material. The company has witnessed an
increase in sales of over 70%, hence we have managed to grow in
volumes and strengthen our position in a tough and competitive
environment, however, the profitability has declined due to the turmoil in
the sugar sector.
The increase in sales is due to an increase in capacity of Ethanol, ENA,
Ethyl Acetate and Renewable power production. The increase is also due to a 15 month reporting period, as compared to a 12 month reporting
period for the previous year. The company aims transition towards
September year ending to coincide the reporting period with its
operational season and production cycle.
The profitability before tax shows a decline to Rs 540 lakhs as compared
to Rs 3182 lakhs of the previous year. The primary reason for the fall in
profitability was the loss incurred by the sugar division. The sugar
division loss was caused by an unexpected fall in sugar prices driven
largely by Government policy.
The world sugar prices were at an all time high, and Indian sugar
production was not expected to be able to meet demand. This caused a
large increase in sugar prices. The Government responded to this
increase, by increasing the levy quota from 10 to 20% of production
(now reduced back to 10%), and by dis-incentivising bulk consumers /
institutional Indian sugar buyers to buy sugar from local sources and
implementing a weekly release mechanism as against monthly. Cane was
purchased keeping in mind the high sugar prices, but when the sugar
prices fell, the division incurred losses.
The company still made a profit, based on the performance of its other
three divisions - the Power and Ethanol that are integrated with sugar at
Sameerwadi and the separate distillery and chemical division at
Sakarwadi.
The company successfully commissioned its increase in Ethyl Acetate capacity, and Power capacity as
planned. The Sakarwadi facility has also successfully modernized its fermentation system from a batch to a
continuous basis. The expansion of sugar capacity was delayed due to a fault in the equipment supplied by
one of our vendors. The same has been rectified in this season.
The Sakarwadi facility has now been converted into an Export Oriented Unit (EOU). This EOU status
reduces the load on working capital, costs and taxes. With the conversion to an EOU, and increased ethyl
acetate capacity and a greater brand name in Europe, the Middle East, Africa and India, the chemical division
is looking to repeat the performance of last year. The company is also trying to penetrate the USA market.
As far as ethanol is concerned, the Government is planning to link its prices with the price of crude. This is
expected to happen in the coming year. Your company continues to sell ethanol to the Oil Marketing Companies. Your company also converts ethyl alcohol to ENA that is sold as a premium grade to companies
in the potable segment. This is in line with our policy to be present in all markets consuming ethyl alcohol -
fuel, industrial as well as potable. In the coming year, we plan to market our ethanol overseas.
The power market is healthier this year than the last. Last year, the late monsoons had resulted in low power
realizations from Oct - Dec 2010 (since the hydro-electric power worked for longer). This current year, power prices are expected to be better than last year. Further, the Government of India has passed legislation incorporating the issuance of Renewable Energy Certificates. Once ratified by the respective State Governments, companies such as ours, who are generating renewable power, can apply to get these certificates issued. We expect the State of Karnataka to ratify this law in the coming year.
Going Forward:
In the coming year, Indian sugar production is expected to be in excess of demand, and so we expect a loosening of regulations by way of allowing exports, incentivizing bulk consumer purchases, reducing levy quota and decontrol etc. Now with capacity problems having been resolved & due to sugar plant modernization, better recovery, less energy utilization & increased volumes, we will have a better year in sugar
division.
The company continues to expand its non-sugar business in response to the continued regulation of the sugar sector. A division wise breakup shows that sugar is now approximately 50% of the business. The company is also expanding its presence in the international markets. We are sensitive to the uncertainties of the financial world in Europe, since much of our export happens there. Your company has a diversified revenue stream, in terms of products and markets, and so we expect to navigate the difficult waters safely. However, our interest cost has increased locally, and the company is
examining ways to alter capital structure to bring the cost down.
Although this past year has been difficult for the company, we are confident that the coming year, in the light
of a less restrictive Government regulatory environment for the sugar sector, better power and ethanol prices, will be better for the company. Your company wants to continue to be an innovator in the Bio-refining space. World over, companies are increasingly looking to convert biomass into chemicals. Your company has
been on the forefront of this research and has always aimed to convert biomass to chemicals as a greater
priority than biofuels. The company is ready to start work on the commercial implementation of converting
Bagasse to Cellulose and other derivatives. For the same, we are now looking to raise equity to implement the
projects. |
