| |
 Dear fellow stake holders,
Welcome to all of you at the 15th Annual General Meeting of
your Company. It is my proud privilege to address you on
this occasion and share my thoughts with you.
The year gone by:
I vividly remember that in the beginning of January 2008
there was all round euphoria with magical BSE sensex
hovering around 20,000. Optimism was all pervasive. However
what started in the middle of January, 2008 was a major
financial carnage and the economic landscape world over has
undergone a significant change since then. The growth of
domestic GDP then was around 9% and the buzzword was to
achieve a double digit growth rate.
In the meantime the sub-prime crisis in the US snowballed
into a full scale global crisis. The effect was contagious
and India, in spite of its robust fiscal system could not
remain insulated from the ensuing sequel.
The world has sunk into the worst recession since the 1930s
and there is a consensus that the existing order has failed
massively, especially in the US. The five biggest investment
banks in the world (Lehman Brothers etc) have vanished in
the financial mayhem. The two biggest mortgage companies in
the world, Freddie Mac and Fannie Mae, are under Government
Control. The biggest insurance company in the world, AIG, is
on Government life support. The biggest bank in the world,
Citibank, has survived only with massive Government
largesse. General Motors, the biggest auto company in the
world, is also on the verge of collapse. One iconic
institution after another has failed.
India has had its own challenges. The runaway inflation had
to be reined in. Oil prices which had touched a peak of USD
147 per barrel had caused serious imbalances in the country
and fuelled further inflation. The Indian Government and the
RBI had to act swiftly to respond to the tough challenges
and volatility. While on the one hand the Government had to
curb inflation, on the other it had to inject liquidity into
the system. The Government responded to by initialing
raising the rate of interest so as to curtail demand with a
view to check inflation. The reduction in the global oil
price also came to the rescue of the Government in its
combat against inflation. Later RBI responded to by easing
monetary policy and infusing INR 300,000 crores to stimulate
demand. The Government is tight rope walking and several of
its measures have boomeranged as huge fiscal deficit has
raised its ugly head resulting in weaker INR vis-à-vis USD.
GDP growth target of 6% to 7% though pale in comparison to
the earlier target of 9%, it does not look so bad in the
global context. The target is second only to that of China,
as the largest economy of the world US is expected to record
negative growth rates.
Sugar Industry: 2007- 08:
The year 2007-08 was a sequel to the year 2006-07 and
perhaps the most difficult year witnessed in the recent
history of sugar industry in the country. Our company has
had a glorious history of posting impressive operating
performance and financial performance which has warmed the
cockles of all of you. However, this year witnessed the
abrupt truncation of the growth trajectory of profits and we
could help but post losses. Fortunate we did not incur cash
losses. Alas! We could not translate our operating
efficiency into better financial performance.
The year started with a high sugar inventory in the country
manifested by extremely un-remunerative price of non-levy
sugar. The problem was compounded by the as the estimates of
sugar production which predicted yet another year of bumper
production. The Government of Uttar Pradesh announced a
price of INR 125 per quintal of sugarcane. The price
announced in the given context was extremely high and mills
had no option but a make a beeline to the Courts to seek
relief. The industry finally paid a price of INR 110 per
quintal under a directive from the Supreme Court.
There was no rally in the price of sugar prices as the
country had abundant sugar stock and the estimate of
production was also high. It was only towards the second
half of the year that realization dawned that sugar
production would not be as high (it eventually was 26.3
million tons) as originally estimated and that the outlook
of sugar production for the year 2008-09 would be extremely
bleak. The prices then started firming up although by then
irreparable damage had already been inflicted and sugar
mills could do very little to bounce back. The profitability
of most sugar mills was by then severely eroded and their
bottom-line was already in the red.
DSIL: 2007- 08:
Your company has significant footprint in the State of Uttar
Pradesh and is among the top ten manufacturers of sugar in
the State. It has earned reputation of being an efficient
performer and is known for the integrity of its operations.
Your Company has acquired the status of a sugar conglomerate
having composite facilities for manufacture of sugar, power
and ethanol. Your company also sells its surplus by-products
viz. molasses & bagasse. Your company has added another
stream of revenue to its repertoire and in future would be
able to sell CER (Certified Carbon Reductions).
During the year 2007-08 your Company recorded a recovery of
10.64% at its Dwarikesh Nagar unit which was the second
highest recovery recorded in the State of Uttar Pradesh. At
its Dwarikesh Puram unit, a recovery of 10.33% and at its
Dwarikesh Dham unit, a recovery of 10.27 % was clocked
during the same period. Recovery of 10.27% recorded at DD
plant in its maiden year of operation is impressive.
Metrics of cane crushed, sugar produced and recovery
recorded is given herein under:
|
Units |
Sugar capacity (TCD) |
Cane crushed in MT |
Sugar produced in quintals |
Recovery in % |
|
Dwarikesh
Nagar (DN) |
6,500 |
721,911 |
768,075 |
10.64 |
|
Dwarikesh Puram
(DP) |
7,500 |
712,989 |
736,265 |
10.33 |
|
Dwarikesh Dham
(DD) |
7,500 |
504,217 |
517,759 |
10.27 |
|
Total |
21,500 |
1,939,117 |
2,022,099 |
10.42 |
Number crunching:
For the second time in its history the company had to face
the discomfiture of posting losses although yet again the
saving grace was that no cash losses were incurred. The main
reasons for the losses were lower realization on sale of
sugar and higher interest & depreciation cost. EBIDTA earned
during the year was higher than that in the earlier years.
The higher EBIDTA is on account of lower procurement cost of
sugarcane.
The following chart is illustrative of the impact of
depreciation and interest on the profitability of the
Company:
|
Particulars |
Year 2007-08 Rs. in crores |
Year 2006-07 Rs. in crores |
|
Gross Income |
343.10 |
297.41 |
|
EBIDTA |
49.57 |
18.90 |
|
EBDTA |
0.10 |
0.44 |
|
EBTA |
(29.33) |
(12.87) |
|
Profit after
tax |
(24.78) |
(6.28) |
In view of the late start of the cogeneration plants and
early closure of crushing at DD plant, the assets were not
optimally utilised. The interest cost includes interest for
the off season when the assets were not in use.
Expansion Plans:
During the year Greenfield plant of 7,500 tons per day (TCD)
(expandable up to 10,000 TCD) at Faridpur, in District
Bareilly, Uttar Pradesh commenced production. During the
year power evacuation from DP plant and DD plant at 24
megawatts capacity each also commenced, albeit the
evacuation got delayed because delay in laying of power
distribution lines by UPPCL. We now have a combined capacity
to crush 21,500 TCD. We are also equipped to supply 56
megawatts of power to the State grid after meeting all our
captive requirement of power. The capacity to manufacture
ethanol is 30,000 litres per day.
Sugar Season 2008-09 - sugar production estimates going
haywire:
While the last two years were globally characterized by
higher production and lower consumption, it was widely
perceived there would be role reversal in the season of
2008-09. In our country, the original estimates were drawn
at 23 million tons. There have been one too many downward
revisions thereafter and now that most of the sugar mills
are inching towards the closure of their crushing season the
present number is pegged at around 16 million tons, a near
35% decline from the last year's production.
The salient features of the season 2008-09 and the trends
that have so far emerged are as follows:
1. Lower production and lower capacity utilization: Mills in
Uttar Pradesh and the northern states are operating at
sub-optimal capacity. The crushing clocked by sugar mills is
only 50% to 60% of the cane crushed in the last year. The
duration of the crushing season has ranged from 75 days to
100 days as against a healthy average of 150 days. It is
startling fact that as on date more than 90% of the mills
have completed their crushing operations. In fact some mills
concluded their crushing as early as in January, 2009. There
will be near 40% decline in sugar production UP. The same is
the case in most other States. The lower production of sugar
is on account of nearly 1% drop in the recovery, nearly 20%
drop in the yield of sugarcane in farms (on account of host
of factors such as attack of pests, unseasonal rains etc.)
and farmers drifting away from sugarcane crop and growing
other remunerative cash crops. It is also worth noting that
while overall production of sugar in UP is down by about
40%, because of reckless expansion of sugar industry the
capacity utilization of each unit is down by more than 40%.
2. In a bewildering move State Government announced a SAP of
INR 140 per quintal for the crushing season. The kneejerk
reaction of the industry was one of despair and once again
industry made a beeline to the Courts. However the plea of
the industry was dismissed by the High Court. With lower
crushing operations and lower cane availability menacingly
lurking large on the horizon the industry reconciled to
paying the SAP. However what happened thereafter was virtual
hara-kiri. One mill after another started paying higher
sugarcane price with a view to lure the farmers.
Unscrupulous poaching of cane of cane from the command area
of other sugar mills became the unwritten rule. Caution was
thrown to the winds and long term benefits were sacrificed
at the altar of short term gains. The industry has been in a
state of total disarray in so far as procurement of
sugarcane is concerned.
3. From July 2008 sugar prices have been on the upward
spiral. In January, 2009 sugar price reached record high
levels. With an eye on the impending elections, the Central
Government announced a spate of measures aimed at
controlling the sugar prices. Political rhetoric has taken
precedence over logic of economics. There is total disdain
on the part of policy makers at the plight of sugar
industry. The sugar market therefore since then is in a
state of total lull. Sugar prices are not allowed to be
market driven. It is worth noting that a Rs. 5 per kg
increase in the price of sugar to a consumer will result in
a minuscule increase in the monthly budget. However sugar
has remained a politically sensitive commodity for several
decades and is used for appeasing the vote bank. Nearly 1 to
1.5 million ton of raw sugar has been contracted to be
imported. However it will not in any significant way change
the dynamics of domestic sugar market.
Going forward, it is expected that undue attention accorded
to increase in sugar price wanes away and the market forces
are allowed to operate freely and independently and sugar
prices attain their logical levels. Only if the sugar prices
are remunerative and economically viable, will the industry
survive and only then the fortunes of sugarcane growing
farmers will flourish.
DSIL- Crushing season 2008-09:
Metrics of cane crushed, sugar produced and recovery
recorded till 23rd March, 2009 is as given herein under:
|
Units |
Sugar capacity (TCD) |
Cane crushed in MT |
Sugar produced in quintals |
Recovery in % |
|
Dwarikesh Nagar
(DN) |
6,500 |
506,473.74 |
*519,290 |
In Process |
|
Dwarikesh Puram
(DP) |
7,500 |
457,562.21 |
454,380 |
9.93 |
|
Dwarikesh Dham
(DD) |
7,500 |
300,658.19 |
258,461 |
8.61 |
|
Total |
21,500 |
1,264,694.14 |
1,232,131 |
|
* Only white sugar production
DD plant closed crushing operations on the 31st January,
2009. DP plant worked till 5th March, 2009 and crushing
operations of DN plant culminated on the 21th March, 2009.
During the season we have sold nearly 7.51 crores units of
power to the State grid which is exactly half of what we had
estimated. As is evident capacity utilisation has been
dismal.
While increase in sugar cane price is something to cheer
about, DSIL will also be benefitted from the huge carried
forward stock of last year on the sale of which there should
be smart gains. While these are redeeming facts, there are
many flip side factors at play.
Capacity utilisation has been dismal. On the other hand
sugarcane price paid is higher. However the most
disappointing feature of the year's crushing operation is
the loss of opportunity to sell power. On account of lower
utilisation of capacity we have not been able to
successfully utilise the huge investment made by us in power
infrastructure. The revenue reaped is less than half of its
true potential.
Singular Achievement:
I am pleased to inform that both DP and DD projects for
supply of supplying of 24 megawatts each of power the state
grid are already registered with UNFCCC While 6,944
(Certified Emission Reduction) CERs have been issued for the
DD project the issuance of CERs for DP project is in
advanced stage. Though the CERs do not translate into mind
boggling number, it is yet a giant step in our quest to
provide green and clean environment to the society. When the
power projects would be fully and optimally operational,
this number will become impressive and contribute
significantly to the top and bottom-line of the Company. The
sale of CER would thus be an important stream of revenue in
the coming years
Going forward:
We expect sugar prices to firm up in the coming months
providing the much needed surge to the Company's working.
Increase in sugarcane prices should also provide the
required impetus to the farmers to grow more and more
sugarcane for the coming year. We therefore expect better
commercial exploitation of investments made by us. The
industry is also waiting with baited breath the
reintroduction of incentive policy. The incentive policy
which has proved to the nemesis of the industry will, if
reintroduced will prove to be the savior of the industry.
While many sugar mills have accounted for the benefits of
incentive policy, we as a matter of prudence have refrained
from doing so.
Summing up:
We are committed to ensure sustained growth of wealth of our
shareholders. However the factors in the year gone by were
beyond our control. The adversity has tested our spirit of
resilience and we are now battle hardened and stronger. We
are emboldened and strengthened in our battle against
derisive cyclic forces and are well prepared to dare
challenges. I thank you for all your support and seek your
continued support in our endeavor and trust me, we shall
bounce back and emerge triumphant. I would also like to use
this opportunity to thank all our business associates, our
employees who are the fulcrum of our organization, our
farming brethren who have reposed immense confidence is us,
our Banks and Financial Institutions who have proved to be
our reliable and trustworthy friends, various Government
agencies and last but not the least the illustrious members
of our Board who have provided their valuable guidance
whenever required.
Gautam R Morarka
(Chairman and Managing Director) |
|
