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Dwarikesh Group Chairman's Address
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  Sh. Gautam R. MorarkaCHAIRMAN'S SPEECH AT 20TH ANNUAL GENERAL MEETING ON 21.03.2014:                                       

Dear friends,

It gives me immense pleasure to be amongst you on this august occasion of the 20th Annual General Meeting of your company. First, I welcome all of you and then I would like to share my views.

As you know, the world economy weakened considerably in 2012-13 and a number of economies have already fallen into a double-dip recession. Yet the global economy appears to be transitioning toward a period of more stable but slower growth. The World Bank has projected the whole-year growth for 2013 at 2.2%, a bit slower than 2012. A weakening global economy coupled with policy constraints contributed to slower growth. Many developing countries have navigated the crisis. However, for Indian economy, sharp decline in commodity prices especially of sugar remains a cause of concern.

A STEP IN THE RIGHT DIRECTION  

Government of India constituted a High Power Committee headed by Dr. C. Rangarajan, Chairman, Economic Advisory Council to Hon’ble Prime Minister to comprehensively look into all the issues related to regulation of the sugar sector and advise the government to reform the sugar sector. In October 2012, the Rangarajan Committee recommended the government to remove levy sugar obligation and to do away with the regulated release mechanism beside rationalization of sugarcane pricing and liberalization of sugar trade in a calibrated and phased manner.

Accordingly, the central government decided to partially decontrol sugar sector in April 2013, whereby the government removed the levy obligation from the sugar season 2012-13 and dispensed with the regulated release mechanism immediately. Although partial decontrol of sugar sector is expected to provide some relief, the larger issue of sugarcane pricing still remains unresolved. With the intention of ensuring stability in the sugar sector, the Rangarajan Committee recommended abolishing SAP and sharing 70% of the revenue from the sale of sugar and its major by-products with farmers. The government is, however, yet to implement this vital recommendation.

GLUT Led to heavy losses

Sugar production in the country has been estimated at 25.1 million tons in the season 2012-13 as against 26.34 million tons in the previous season. Continuous hike in sugarcane price led to an increase in the cane area, cane production vis-a-vis sugar production. Besides, carryover stocks of about 6.13 million tons of sugar from the previous season created a glut in the domestic sugar market. Meanwhile, domestic consumption remained at about 23 million tons. Similar situation prevailed in the world sugar market due to which India could hardly export about 3.4 lakh tons of sugar against 3.4 million tons in the previous season. In the given scenario, domestic sugar prices continued to remain depressed whereas the cane price was record high. This resulted into heavy losses to the sugar industry. Excessive import of cheap sugar further added to the woes.

Prolonged Crisis

Average sugarcane prices paid by mills in U.P. (SAP) increased at a CAGR of 19% over the last 3 years vis-à-vis 2% rise in sugar prices. In the last 3 seasons ending in 2012-13, the ratio of sugarcane costs to revenues from the sale of sugar and its by-products has been as high as 76-79% as compared with the previous decadal average of about 67%. As a proportion of sugar price, cane cost for U.P. sugar mills was as high as 97% in the sugar season 2012-13, as compared to an average of about 75% in other sugar producing states. Increasing cane costs have pushed even best performing sugar mills to face severe financial losses and the crisis seems to be prolonged this time.

CHALLENGES AHEAD

The SAP for sugarcane was increased by a whopping 17% to Rs. 280 per qtl in the season 2012-13 for the general variety from Rs. 240 per qtl in the previous season. Higher cane price encouraged the farmers to plant more sugarcane and divert more sugarcane to the sugar factories as compared to the unorganized sector like Gur and Khandsari. This led to an increase in sugar production in U.P. to 74.85 lakh tons in the season 2012-13 as against 69.74 lakh tons in the previous season i.e. an increase of about 5.11%. While cane price is increasing, sugar price is not following the trend as excessive production and stocks have softened the sugar prices. Thus viability of the sugar sector has been severely affected. Therefore, rationalization of cane price is vital for sustenance of the sugar sector.

As sugar is produced in few states but it is consumed across the nation, it is imperative that uniform rates of taxation and other levies should be applicable throughout the country. An uniform cane price formula based on realisation from sugar and its major by products beside sugar recovery etc. will ensure a level playing field to the farmers and millers across the nation.

Strict controls on by products also affect the viability of the sugar sector. Reservation of molasses for country liquor is just one example. Sugar industry is asked to subsidise other industries at its cost is unfair and such controls need to be removed.

Sugar sector face yet another challenge as rejected varieties are still under cultivation. That’s why yield and recovery is lower. It requires gigantic effort to eradicate such varieties. Recently, central government has declared a subsidy of Rs. 8000 per hectare to the farmers for planting new varieties.

Dwarikesh Sugar Industries: 2012-13

The overall negative environment prevailing in the industry impacted the working of your Company as well. Higher sugarcane cost vis-a-vis lower sugar sales realisation together pulled the performance down. Throughout the year sugar price hovered in the range of Rs. 2,800 to Rs. 3,200 per qtl. and are currently around Rs. 3000 per qtl. which is far below the cost of sugar production. This has resulted into heavy losses and accumulation of all time high cane price arrears. In view of this, sugar mills are having excessive pressure to clear cane price arrears. I wish to place on record that we have as on date cleared cane arrears of the company for 2012-13.

Dwarikesh – HIGHLIGHTS: 2012-13

On the operational side, I am happy to inform you that DN plant maintained its highest standards of manufacturing efficiencies and clocked the best recovery in the State. Another notable achievement of your company for the season was that the process losses recorded at DN and DP unit are among the lowest in the sugar industry in UP. In totality, crushing and production was in line with the expectation and was quite comparable at all the three units.

I am pleased to inform you that your company exported cogenerated power worth Rs. 7180 lakhs to the state grid in the season 2012-13 against Rs. 7316 lakh in the previous season. However, multiple barriers on sale of molasses adversely impacted the top-line and cash-flows of sugar companies including your company as well.

Financial Score Card (Rs. Lacs)

Particulars

2012/13

%

2011/12

%

Net Sales

92,761

100.00

68,887

100.00

EBIDTA

7,183

7.74

9,611

13.95

EBDTA

127

0.14

1,725

2.50

EBT

(3,192)

(3.44)

(1,564)

(2.27)

TRENDZ: 2013-14

Sugar production in the country is estimated at 23.8 million tons against the consumption of about 23.5 million tons. However, with 9.3 million ton surplus sugar from the previous season, the market is currently facing the bearish trend. Spot prices declined from Rs. 3400 per qtl before partial decontrol to as low as Rs. 2800 per qtl. Imports of cheap sugar have further aggravated the problem and the mills are not in a position to clear the all time high cane price arrears. Imports of sugar need to be stopped.

The international market prices are still under pressure; however, the world sugar surplus is shrinking to 4.2 million tons in the season 2013-14 as compared to 9.9 million tons in the previous season. This is the 4th consecutive surplus season, which is however a rare phenomenon. White sugar price went down to $ 407 per ton at the end of January, 2014. Similarly, raw sugar prices also dropped below 15 cents per pound on 29th January 2014, a level not seen since 2010, have however started to recover.

Given the surplus scenario for the season, the way out for Indian millers is to take control over the excess supply through export markets. Owing to low sugar prices in the world market, central government came forward with a helping hand in February 2014 and provided an incentive of Rs. 3300 per ton to export raw sugar. The amount of incentive is liable to be reviewed at times and the scheme is applicable for an export of 4 million ton raw sugar during the season 2013-14 and 2014-15. Again with the infrastructure, the mills closer to ports may explore the opportunity. The central government also provided an assistance of Rs 6600 crores through excise loans to clear the cane price arrears.

Meanwhile, government of U.P. also facilitated the sugar industry in the state to make payment for sugarcane price in 2 tranches i.e. say Rs. 260/- per quintal for general variety in the first within the stipulated time and balance Rs. 20/- per quintal in the 2nd by the closing of the crushing season i.e. by 30th September 2014. The state government also agreed for a relief of Rs. 11.03 per quintal of cane in the form of Entry Tax, Purchase Tax and the Society Commission. The state government is also considering an appropriate cane price formula linking cane price with sugar price and recovery etc. to ensure the long term viability and growth of the sugar sector.

I do appreciate the measures taken by the government which will provide immediate relief to the crisis ridden sugar industry. However, linkage of sugarcane and sugar price will play pivotal role for sustenance of the sugar sector in the long term.

Going forward

At the time of partial decontrol in April 2013, central government advised the state governments to implement revenue sharing model for determination of cane price as recommended by the Rangarajan Committee. Karnataka state passed the Karnataka Sugarcane (Regulation of Purchase and Supply) Act, 2013 to decide sugarcane prices on revenue sharing basis taking into consideration the revenue realised from sugar, bagasse, molasses and press mud.

Maharashtra state also passed the Maharashtra Regulation of Sugarcane Price (Supplied to Factories) Act, 2013 for linking cane prices with end product prices as per Rangarajan Committee recommendations. However, in case of Maharashtra, factories will have to pay the FRP within 14 days and the balance price after publication of half yearly ex mill prices and values as determined by the Board. Meanwhile, other sugar producing states are yet to implement the novel recommendation of the Rangarajan Committee and the central government advisory.

Indian millers pay a high price for sugarcane and realize a low price for sugar. The intrinsic imbalance between sugar and cane price often leads to huge build up of cane price arrears that accelerates the infamous Indian sugar cycle. A long term pricing formula for sugarcane based on sugar sales realization in accordance with proven global sugarcane price model and as recommended by the Rangarajan Committee would bring stability and eliminate the vicious sugar cycle as also benefit all the stake holders i.e. millions of farmers, consumers and millers.

Summing up

I would like to take this opportunity to thank you for all your support. I seek your continued support in our endeavor to achieve better results in future. I would also like to use this opportunity to thank all our business associates, our employees, our farming brethren who have reposed immense confidence in 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)

21st March, 2014


 
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