Management Discussion & Analysis Report
Although, presently company is mainly engaged in trading activities, the same is going to be significantly changed from subsequent year onwards due to undertaking of manufacturing of sugar and also construction activities.
SUGAR
Sugar is one of the essential items not only in the household sector but also in various industrial formulations in pharmaceutical sector, confectionery, soft drinks, sweets etc. The consumption of sugar in the country is on the increase due to population growth as also due to various development plans of the Government. Still the per capita sugar consumption in India is much lower than the world standard and even from the developing countries. However, the per capita consumption of sugar is on the increase on account of improved standard of living and the changing life style of rural masses which now prefers sugar than any other alternate sweetening material.
Global Sugar Industry
In the third assessment of the ISO, world sugar production is put at 161.527 mln tonnes. A significant production shortfall in India and a further contraction of production in the EU, on the one hand, and a continuing expansion of sugar output in Brazil, on the other hand, are the three major supply features of 2008/09. The combined effect of output reductions in the EU and India is expected to shave off a massive 7.084 mln tonnes from world sugar supply, despite record high growth in sugar output in Brazil. So far, a lowering in forecasted production in India (from 23.9 mln tonnes projected in August to the current projection of 19.55 mln tonnes) has been neatly matched by a practically identical increase in Brazil (from 33.22 mln tonnes to 37.54 mln tones). Meanwhile, global consumption is forecasted to grow at the rate of 2.19% to 165.801 mln tonnes, raw value. World production is now expected to be 4.274 mln tonnes lower than world consumption as against 3.626 mln tonnes projected in November. Consequently, the statistical outlook for the market till the end of the season in September 2009 remains constructive and supportive to world market values. The ISO puts world export availability for 2008/09 at 49.608 mln tonnes, raw value, as against 46.25 mln tonnes in the previous crop cycle. Smaller output in importing countries and in India, in particular, is expected to trigger additional import demand which is estimated to reach 49.621 mln tonnes, up 3.673 mln tonnes.
A summary of the third assessment of the world sugar balance in 2008/09 is provided in the table below.
World Sugar Balance
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| Source: ISO quarterly market outlook, February 2009 |
The world’s largest consumers of sugar are India, China, Brazil, USA, Russia, Mexico, Pakistan, Indonesia, Germany and Egypt. According to USDA Foreign Agriculture Service, the consumption of sugar in Asian countries has increased at a faster rate, as a direct result of increasing population, increasing per capita income and increased availability.
Indian Sugar Industry
The Indian sugar industry is the second largest agro-industry located in the rural India. The Indian sugar industry has a turnover of more than Rs. 500 billion per annum and it contributes almost Rs. 22.5 billion to the central and state exchequer as tax, cess, and excise duty every year. With 566 operating sugar mills in different parts of the country, Indian sugar industry has been a focal point for socioeconomic development in the rural areas. About 50 million sugarcane farmers and a large number of agricultural labourers are involved in sugarcane cultivation and ancillary activities, constituting 7.5% of the rural population. Besides, the industry provides employment to about 2 million skilled/semi skilled workers and others mostly from the rural areas
Production, Consumptiion & Closing Stock in India [In million tones]
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| * Adjustment as per Central Excise Certificate |
Opportunities & Constraints
“Global sugar demand will exceed production by a wider margin than forecast three months ago because unusual weather is limiting cane harvests in India and Brazil, the International Sugar Organization said.
Production will trail consumption by 9.35 million tonnes in the year ending September 30, up from 7.8 million projected in May, Sergey Gudoshnikov, a senior economist at the London-based group, said Thursday. The deficit will reduce stockpiles to 38 per cent of projected global use, the lowest ratio in three years, Gudoshnikov said.
The price of raw sugar has jumped 92 per cent this year, reaching a 28-year high of 23.33 cents a pound last week on ICE Futures US in New York, as dry weather in India and excessive rain in Brazil threaten to prolong the shortfall into next year. Lower output in Mexico, China and Pakistan also spurred the rally, analysts said.
“Speculators are seeing blood out there,” said Scott Joss, the president of ClearTrade Inc in Chicago. “Funds are still active, and sugar at 30 cents is not out of the question.” Inventories are likely to shrink next year, Gudoshnikov said.” [Bloomberg/ August 21, 2009] [source: business-standard.com]
“Sugar may climb 80 percent to as high as 40 cents a pound on global supply shortages, said Singapore-based commodity hedge fund manager Michael Coleman. “Sugar is caught in a perfect storm,” he said. There is “a big hole” in world supply and no obvious solution in the next six to nine months, said Coleman, 49, managing director of Aisling Analytics, which runs a $1.4 billion fund invested in energy and agriculture. The sweetener has already surged 88 percent this year, reaching a 28-year high, as India, the biggest consumer, had its driest June in 83 years and parts of Brazil, the largest grower, were drenched by rainfall four times more than normal, too wet to harvest. World demand will exceed output by as much as 5 million metric tons in the year ending September 2010, according to the International Sugar Organisation. “Is there a possibility of reaching 40 cents a pound? Certainly,” said Coleman, whose fund returned 24 percent in 2008. “From this point on, it depends how price affects demand.” Sugar reach d a peak of 23.33 cents a pound in New York on August 12.
Investor Jim Rogers and Rabobank Groep NV have said the rally may have some way to go. Rabobank said yesterday it anticipates the “bull” run may not be complete even if prices consolidate around 20 cents a pound.
India, Brazil
“Sugar is certainly going to go much, much higher during the course of the bull market,” Rogers, chairman of Rogers Holdings, said in an August 6 interview in Singapore. “Sugar is still 70 percent below its all-time high and not many things in life are 70 percent below what they were in 1974.”
The Indian crop, the world’s second biggest, is “under stress” and “we think it is unlikely to be more than 15 million or 16 million tons” in 2009-2010, said Coleman.
India’s monsoon season, which brings 73 percent of the nation’s annual rainfall, may be the driest in seven years, a weather bureau official said.
“The world has to depend on Brazil,” Coleman said. There was a question over how much of the country’s cane crop can actually be turned into sugar, he said, as millers have invested heavily in ethanol and “somewhat neglected” the capacity for making sugar.
“Brazil seems to be fairly maxed out in the short to medium term” with “about 43 percent of its capacity able to be delivered to the market as sugar,” Coleman said. Building capacity would take a year, he said, and “we’re still living with the credit crunch so how does the Brazilian sugar refiner raise money? It’s not as easy as it was three years ago.”
Supply response
World farmers may raise output after prices jumped, he said. “There’s probably a big bear market coming in 2011 because there will be a supply response,” he said. “But it won’t be in time for the first half of 2010.”
The overall direction of commodities is a “macro call” about world economic growth and the direction of the dollar, and there is not too much clarity, he said. He is inclined to see the dollar stabilise at current levels, he said.
The Reuters-Jefferies CRB Index gained about 16 percent this year, aided by a weaker dollar as investors sought a hedge against inflation, and a recovering global economy. The dollar index, measuring the greenback against six major currencies, has dropped 3.5 percent this year. In other calls, Coleman said he was “moderately bullish” on the premium of white sugar over raw, and he was long “corn versus wheat” because wheat had large inventories and corn was in a position “to attract incremental demand from biofuel.” [Zeb Eckert And Claire Leow /August 17, 2009][source: business-standard.com]
Indian Sugar Industry
India is the largest consumer and second largest producer of sugar in the world. The Indian sugar industry is one of the key drivers of rural development, supporting India’s economic growth. The industry directly employs approximately 500,000 workmen, as well as many others in industries which utilize by-products of the sugar production process as raw material. Sugarcane is primarily grown in six states of India, namely, Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Uttar Pradesh and Tamil Nadu.
The sugar industry in India is highly fragmented. During 2007-2008 there were 619 installed sugar factories in the country out of which 240 were in the private sector, 62 in the public sector and 317 in the cooperative sector. Also, there are a number of companies in the unorganized segment who mainly produce jaggery and khandsari, which are less refined forms of sugar and act as substitutes.
The sugar industry has a number of transformational opportunities. In addition to the potential to cater to the large and growing domestic sugar consumption, the industry can emerge as a carbon credit and power producer through co-generation. It is also in a position to support the ethanol blending programme of E5
(blending petrol with 5% ethanol).
Sugar Prices
The Government has been following a dual pricing policy for sugar, under which a fixed percentage (currently 10%) of total production is to be sold by sugar companies to the Public Distribution System (“PDS”) set up by the Government at a fixed price referred to as levy sugar. This price is fixed with respect to each mill and varies from mill to mill. The balance sugar, called free sale sugar, can be sold in the open market.
The price of free sale sugar during the year depends on the demand supply situation. The movement in sugar price is determined by the net deficit or surplus in sugar (production plus import less domestic consumption less export) and stock-to-use ratio.
Sugarcane procurement and prices
India has a unique structure with respect to procurement of sugarcane. Every sugar mill is assigned a reserved area around the mill within which any sugarcane that is grown is required to be supplied to the mill, and the mill is obligated by law to crush the sugarcane available to it within the reserved area. The reserved area may change if a mill is unable to crush all of the cane within its reserved area and a portion of the reserved area may be allocated to a mill that is able to crush the sugarcane.
On an average, sugarcane cost constitutes approximately 70% of the total cost of producing sugar. The SMP set by the Central Government controls the sugarcane procurement price for sugar manufacturers. The SMP notifications are generally released at the beginning of each Sugar Season. For the 2008-2009 Sugar Season, the Government set the SMP of Rs.81.18 per quintal for a base recovery of 9% subject to a premium of Rs.0.90 for every 0.1% point increase in the recovery above that level. For the 2009-2010 Sugar Season, the Cabinet Committee on Economic Affairs has approved the SMP of Rs.107.76 per quintal of sugarcane for a base recovery rate of 9.5% subject to a premium of Rs.1.13 for every 0.1% point increase in the recovery above that level. Sugarcane prices tend to be higher for a sugarcane variety that has a higher sugar recovery. Most State Governments in north India fix the SAP to provide additional incentives to the farmers.
By-products opportunity
The main by-products in the production of sugar are molasses, bagasse, press mud and fly ash. Effective utilization of these by-products can de-risk the revenue stream of a sugar company and make it less cyclical.
Bagasse
Bagasse can be used for co-generation to meet the electricity and steam requirements of sugar mills.
Bagasse is burnt in a large furnace, which releases substantial amounts of heat for boiling water and generating high pressure steam. The steam is used to drive a turbine, which generates electricity. The residual low pressure steam is used in the sugar making process. The power produced by co-generation is used for captive consumption and excess power is sold to the State utilities distribution companies. The realization from exportable power is dependent on the long-term power purchase agreements with the Government and power companies. Co-generation also has proven revenue potential in Clean Development Mechanism (“CDM”) based carbon credits. However, the potential for bagasse based co-generation of power is yet to be fully realized. According to ISMA, sugar units have currently set up a capacity to produce 2,635 MW of co-generated power and the potential to co-generate power by the sugar industry has been assessed to be much higher going forward. In addition, bagasse is also used for production of paper and particle boards.Particle Board and Medium-Density Fibre Board
Bagasse is also used to produce particle board and medium-density fibre board, which are environmentally friendly substitutes for plywood. Although particle board and medium-density fibre board have been produced in India for some time, these products were previously exclusively made by manufacturing plants which used wood as raw material. The production in India of particle board and medium-density fibre board from agricultural wastes such as bagasse using advanced manufacturing technologies only began in recent years.
Molasses
Molasses is extensively used for the manufacture of ethanol. These molasses are fermented with yeast to get ethyl alcohol or ethanol. The mixture is then distilled to separate the alcohol from the mixture.
Normally for every 1 ton of sugar produced, around 0.45 tons of molasses is generated as a by-product. One ton of molasses can produce around 225 litres of ethanol.
Ethanol is 99.5% pure alcohol and is used as feedstock for alcohol-based downstream chemicals like paints, inks and to manufacture potable alcohol. Ethanol is also becoming popular across the world as a fuel.
Ethanol is used as an additive in petrol to lessen vehicular pollution as it contains 35% oxygen, which helps complete combustion of fuel thus reducing harmful tailpipe emissions.
With a view to providing an incentive to the agricultural sector and reduce environmental pollution, the Government mandated 5% blending of ethanol with petrol across India except for certain states.
Additionally, 10% blending was proposed to come into force in October 2008, however such increase has not been made effective. The contracts with Indian oil companies are expiring in October 2009. However, the Government is likely to further extend the contract for the next two years beginning October 2009. Globally, Brazil is the leading country in terms of ethanol blending which is mandated at approximately 20%.
Sugar Outlook
The 2008-2009 Sugar Season is expected to be the first year of upturn in the sugar cycle, after two years (2006-2007 and 2007-2008 Sugar Seasons) of surplus production and rising sugar inventories.
Sugar production in the 2008-2009 Sugar Season is expected to fall in the range of 14 MMT to 15 MMT as against 26.3 MMT in the 2007-2008 Sugar Season. This is on account of a decline in the area under sugarcane cultivation caused due to sugarcane arrears and higher prices for alternative crops which led to farmers switching to other alternative crops and lower recovery on account of agro-climatic conditions.
Lower than expected production in the 2007-2008 Sugar Season, an expected further fall in production in the 2008-2009 Sugar Season coupled with steady growth in domestic demand will lead to depletion in domestic sugar inventories. These factors are also expected to result in India’s raw sugar imports totaling approximately 2.5 million tons during the 2008-2009 Sugar Season. Inventory levels are expected to decline further in the 2009-2010 Sugar Season, leading to an improvement in sugar selling prices.
Domestic sugar prices (Mumbai M-30) which fell continuously for a 12 month period, from Rs.19,060 per metric ton in April 2006 to Rs.13,600 per metric ton in April 2007, and thereafter remained depressed until 70 the end of 2007, moved up to Rs.14,550 per metric ton in April 2008. The current prices (May 2009) are at 23,000 levels per ton and are expected to increase further which will improve the profitability of sugar mills.
Construction
The Company has also commenced the business of construction and selling of residential houses.
India is the world’s largest democracy in terms of population with 1.2 billion people (estimate as at July 2008). Its GDP stood at approximately US$1,237 billion in 2008 (estimates). This makes it the fourth largest economy in the world in terms of GDP (purchasing power parity) after the United States of America, China and Japan. (Source: CIA World Factbook)
India’s GDP maintained its steady rise in 2007-08 to clock 9% growth. The average GDP for four years upto 2007-08 had been 8.6%, signifying stable economic growth and domestic demand. Although, because of global slowdown, sub-prime issues, high interest rate factors the GDP growth of Indian Economy was adversely effected in the year 2008-09, the growth momentum in the coming years is not expected to be completely absent because of high domestic consumptions, corrective steps from time to time taken by the Indian Government and RBI for boosting consumptions and demands. The Government of India as well as analysts all over world targets a minimum of 7% GDP growth of the Indian Economy.
As mentioned above, in spite of the recent economic slowdown, India is expected to remain amongst the fastest growing economies of the world, leading to a significant increase in purchasing power of its population. As per a study conducted by Mckinsey Global Institute, the percentage of Middle Income Group (MIG) households is likely to increase from 6 per cent. in 2005 to 24 per cent. in 2015 and 45 per cent. In 2025.
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| (Source: Mckinsey Global Institute) |
As per the Ministry of Housing and Urban Poverty Alleviation (MHUPA), there was a shortage of 24.71 million dwelling units for 67.4 million households in India in 2007. Out of this, close to 99 per cent. of shortage is in the Economically Weaker Section (EWS) and LIG (Low Income Group) segment. Housing shortage is expected to increase to 26.53 million dwelling units for 75.01 million households by 2012, of which approximately 85 per cent. is expected to be in the EWS and LIG segment.
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| (Source: Ministry of Housing and Urban Poverty Alleviation, India) |
Opportunities, Threats and Outlook
This consistent growth of the economy has catapulted India as the fastest growing economy after China for the following reasons:
- Changing composition of GDP; reduced dependence on agriculture and growing industrial and services sectors
- Strong outsourcing growth momentum – IT and financial services, healthcare and manufacturing
- Strong improvement in the external sector and a gradual fiscal deficit correction
The Indian construction industry is an integral part of the Indian economy and an important portion of investments into the development of the Indian Economy takes place through the construction industry. The construction industry is expected to grow with further economic development, industrialisation, urbanisation and improvements in the standard of living.
According to Indian Infrastructure, the Indian construction industry accounts for more than 5% of India’s GDP and is the second largest employer after agriculture, employing nearly 32 million people. In the course of liberalization of the Indian economy, the Government has placed a priority on infrastructure development and emphasised the involvement of private capital and management in order to respond to the growing demand for new infrastructure projects.
According to the Indian Central Statistical Organisation, investments in construction in India grew at a compounded annual growth rate of 12% during the last ten years.
Ministry of Housing and Urban Poverty Alleviation, India (MHUPA) has framed the National Urban Housing and Habitat Policy, which carefully analyses ways and means of providing ‘Affordable Housing to All’ with special emphasis on the EWS and LIG segments. The new policy lays emphasis on earmarking of land for the EWS/LIG groups in new housing projects and also emphasizes on the Government retaining its role in social housing so that affordable housing is made available to EWS and LIG of the population as they lack affordability and are hopelessly out priced in urban land markets.
Government initiatives coupled with increasing per capita income in India on the back of high economic growth is expected to provide strong impetus to affordable housing demand.
REFORMS IN THE REAL ESTATE SECTOR
In recent years, various reforms have been initiated at the Central as well as State level which have led to greater organisation and transparency in the real estate sector. These include:
- Support from the GoI for the repeal of the Urban Land Ceiling Act (introduced in 1976), with nine State Governments having already repealed the Act. The law was repealed by the Central Government in 1999. However, land being a state subject, the law is still in force in some states like Andhra Pradesh, Assam, Bihar and West Bengal;
- Modifications in the rent control statutes to provide greater protection to homeowners wishing to rent out their properties;
- Rationalisation of property taxes in a number of States;
- The proposed conversion of land records into electronic form; and
- FDI being permitted in the real estate sector, subject to certain conditions.
Residential Development
The residential sector accounts for approximately 75-80 per cent. of the total real estate sector in the country. The growth in the residential real estate market in India has been largely driven by rising disposable incomes, a rapidly growing middle class and youth population, low interest rates, fiscal incentives on both interest and principal payments for housing loans, heightened customer expectations, and increased urbanisation and nuclearisation.
According to CRISIL Construction Annual Review, May 2007, over the period between 2006 to 2007 and 2010 to 2011, housing investments are expected to grow to Rs. 17,338 billion as compared with Rs. 9,810 billion invested in the previous five years.
A large proportion of the demand for residential developments, especially in urban centres is likely to be for high-rise residential buildings. Since this is a fairly new segment, the growth of the high-rise segment is expected to be faster than the growth of more traditional urban housing segments. The reasons for the anticipated demand are the lack of space in cities and proximity to offices and IT parks. The high-rise culture is gradually seeping into other cities such as Kolkata, Hyderabad and Chennai due to increasing affordability, nearness to IT or BPO parks and the township concept being embraced within close proximity to such IT and BPO parks.
The emergence of the integrated township format is another key highlight in the residential sector. Availability of large land parcels as well as office developments in major cities’ peripheral areas have led to an increase in the number of integrated townships to accommodate the growing population of the city. These integrated townships offer consolidated development of commercial, retail, residential, and leisure facilities. The scope of development is estimated to be approximately 400 township projects over the next five years, spread across 30-35 cities, each having a population of 0.5 million. (Source: Cushman & Wakefield Report: India Gaining Momentum – Indian Real Estate Investment Dynamics).
The total demand estimated for the residential segment is estimated to be approximately 687 million square feet across India for the next five years, of which the top seven cities account for nearly 77 per cent. (Source: Cushman & Wakefield Report: The Metamorphosis – Changing Dynamics of the Indian Realty Sector, October 2008)
SEGMENTWISE PERFORMANCE
Presently, the Company mainly deals in trading activity. Therefore, it is not required to give segment wise performance.
RISKS & CONCERNS
Both sugar as well as construction business of the Company being undertaken have been rapidly growing because of urbanization and economic boom as discussed above. Further, performance of sugar industry is dependent upon demand-supply gap apart from crop level of sugarcane as discussed in the preceding paragraphs. The same rule of demand-supply gap apply to construction industry. As such, the continuance of economic slowdown and increased demand-supply gap may be main fears for both sugar as well as construction industries.
However, as mentioned in the preceding paragraphs India’s GDP maintained its steady rise in 2007-08 to clock 9% growth. The average GDP for four years upto 2007-08 had been 8.6%, signifying stable economic growth and domestic demand. Although, because of global slowdown, sub-prime issues, high interest rate factors the GDP growth of Indian Economy was adversely effected in the year 2008-09, the growth momentum is since improved in the coming years is not expected to be completely absent because of high domestic consumptions, stimulus packages from time to time announced by the governments of various countries including India and other monetary and non-monetary corrective steps from time to time taken by them.
INTERNAL CONTROL SYSTEMS THEIR ADEQUACY
Your Company has a proper and adequate system of Internal control to ensure that all assets are safeguarded and protected against loss from unauthorized use or disposition and that the transactions are authorizedly recorded and reported correctly.
The Internal control system is designed to ensure that financial and other records are reliable for preparing financial information and other data and for maintaining accountability of assets. There is an elaborate internal audit system which is done by Independent firm of Internal Auditors. Their reports on the internal controls and their adequacy are regularly discussed with the Management and corrective measures wherever required, are taken and continuously monitored.
The Audit Committee of the Board meets regularly to review the adequacy of internal controls, Internal audit findings and the corrective actions are taken, if necessary. The Management is reasonably satisfied about the adequacy of these internal control systems.
DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE
Revenue
The gross revenue of Rs. 1572.10 lacs was recorded in the financial year ended 30t June, 2009 as compared to Rs. 1305.51 lacs in the previous year, showing a growth of 20.42%.
Profits
The Company has earned Profit before Interest, Depreciation and Tax of Rs. 478.49 lacs during the financial year ended 30th June, 2009 which represents an increase of 23.41% on year to year basis. PAT increased to Rs. 281.90 lacs during the year under review, representing an increase of 37.00%, from Rs. 205.78 lacs in fiscal 2007-08.
Earnings Per Shares (EPS)
The Company recorded an EPS of Rs. 1.76 per equity shares of Rs. 10/- each during 2008-09.
Dividend
The Board has recommended a dividend of Rs. 0.30 per equity share (being 3% on the par value per equity share of Rs. 10/- each), to be appropriated from the profits of the Company for the financial year 2008-09.
Dividend Payout
The proposed dividend, if approved at the ensuring Annual General Meeting, would result in appropriation of Rs. 56.16 lacs (including Corporate Dividend Tax of Rs. 8.16 lacs) out of profits. The total appropriation of Dividend of Rs. 56.16 lacs gives 19.92 per cent payout on net profit of the Company.
MATERIAL DEVELOPMENT IN HUMAN RESOURCES/INDUSTRIAL RELATIONS FRONT
A cordial industrial relations environment prevailed in the Company during the year. There was constant focus on all round organizational development. Regular promotions are granted and succession plans are effectively implemented. Our system of compensation is as per the market trends and job requirements. Other benefits to employees are provided for motivation.
MATERIAL DEVELOPMENT IN HUMAN RESOURCES/INDUSTRIAL RELATIONS FRONT
A cordial industrial relations environment prevailed in the Company during the year. There was constant focus on all round organizational development. Regular promotions are granted and succession plans are effectively implemented. Our system of compensation is as per the market trends and job requirements. Other benefits to employees are provided for motivation.
Place: Kolkata
Date: 1st December, 2009
Sd/-
(B. K. Nopany)
Chairman cum Managing Director
