Dear fellow stake holders, 

It is my pleasure to present to you the 16th Annual General Report of your Company.

From the global financial turbulence to the dramatic robust resilience demonstrated by India, history will not forget the year 2008-09 soon. Even as developed nations struggled to regain their lost stature, India clocked a robust 7.9 per cent economic growth in the third quarter of 2009 - clearly signaling that the worst impact of the global financial crisis had eased off for the Indian economy. Spurred by a multi-billion stimulus package, India’s USD 1.2 trillion economy was amongst the world's first to come roaring out of the global recession. The confidence in the turnaround is clearly reflected in the government’s projected growth figures of 7 to 8 per cent for March 2010 and approximately 9 per cent for the following year.

From a country historically branded loosely as a land of snake charmers and elephants to now being perceived as an important, emerging economic giant, India has finally arrived after a long struggle. However, it will be immature to forget the core challenges that continue to plague us. We surely cannot allow a pocketful of glittering hi-rise towers and elevated expressways in a few cities let us overshadow the harsh reality of extreme poverty prevailing in our country even after more than 60 years of independence. Illiteracy, inadequate infrastructure and unemployment continue to hold back the country’s true growth potential.

However, the rare `political will’ demonstrated to tackle the impact of the global recession rekindles hope that we, as a nation, can take on the various challenges head on if we so desire. Our systems and governance, though bureaucratic, are better managed than those of the developed nations and provide a distinct ray of hope for a better tomorrow for all.

While it is heartening to read about the all-round robustness of growth of the Indian economy - growth far beyond urban-centric states to include even states associated with backwardness and poverty such as Bihar and Uttar Pradesh, the caveat remains the same - look beyond mere numbers. The Central Statistical Organisation (CSO) figures for the last five years released recently place Bihar in the prestigious second slot as one of the fastest growing states in India (growing at nearly 11 per cent). As per the data, Bihar is apparently growing at a pace that is neck in neck with Gujarat. Yet, let us not forget this computation is on a base figure which itself is negligible and small, and thus provides a false picture of comfort - a lot more still needs to be done.

Similarly, Uttar Pradesh, the CSO data tells us has grown at a creditable 6.29 per cent in the last five years. However, what this single digit number does not tell you is that the large chunk of growth in Uttar Pradesh is largely credited with the progress and prosperity achieved in the Noida region. Issues of inadequate power and poor infrastructure need urgent attention for a more all-round, inclusive development in the State. Jharkhand where the growth rate is nearly 8.5 per cent - as is well known is mainly on account of exploiting its natural wealth - growth achieved through mining - besides being strangulated by corruption and poor governance.

Thus, while we feel happy about surging ahead, let the numbers not provide us a false cushion of comfort (at the Central or State level) but rather provide us with the impetus to strive for further growth and improvement.

While we, as a nation, may want to believe that we are just a few strides away from China; yet the distance to be traversed is over a decade away; if not more. In 2008, China's GDP was nearly three times that of India. If India's GDP growth continues at around 8 to 9 per cent Y-o-Y over the next decade, by 2020 it will be almost the same as China's in 2008. However, by that time, China would have obviously marched far ahead!

Sugar industry

Coming to the sugar industry, this is the second year in a row where a significant gap between consumption and production continued to exist. With the supply side apprehensions increasing, the global price of raw sugar, as well as the price of refined sugar, rose to a new peak since 1981. Cane production in India was hit by drought, while the world’s largest cane grower - Brazil - has now suffered from crop loss due to excess rainfall and low yields. In fact, the lower than expected output has forced Brazilian sugar mills to wash out export contracts or renegotiate delivery for the beginning of the next harvest season, March/May 2010. All eyes now rest on the sugar production in Thailand, which has got off to an early and promising season. Global sugar output is forecast to fall short of demand by 13.5 million tons in the current 2009-10 season.

Is importing a solution?

Though figures of production are being updated with each passing day, lower acreage and poor rains have kept India’s output to even lesser than the projected estimated of 16 million tons, while demand is far higher at an estimated 23 million tonnes. The current sugar stock in the pipeline at the end of the 2008-09 season are just about adequate to cover the requirement for a month to a month-and-a-half, primarily for Public Distribution System users.

There are no extra stocks that can be released to stabilize prices. Estimates suggest that India may need to import more sugar (5-6 million tons) in the coming months during 2009-10, amidst further rise in prices in the international market pushed by demand from Indonesia, Pakistan, Iraq and Bangladesh, apart from India. Pakistan and Indonesia have recently announced plans to import sugar.

But the question that arises is : Is importing a solution for the sugar industry? The government, on its part, has so far showed disinclination towards importing sugar, even though private parties are free to do so. The Government of India permitted duty-free import of raw sugar without any re-export obligation in March 2009 until December 2010. However, the high prices in the international market are a deterrent to direct retail import of sugar. Even after the reduction of import duties, the price of landed sugar is higher than the current retail rates, and hence, paradoxically, it is only when retail rates rise further that there will be an economic rationale for retailers and stockists to import sugar.

Besides, a policy stimulus of importing minus adequate political willingness can backfire. Sugar mills which imported large quantities of raw sugar are stranded with stock lying at ports (nearly 1.5 million tons) as Uttar Pradesh has restricted the inward movement of imported raw sugar in the midst of protests by sugarcane farmers over remunerative prices for their crop.

Raw material prices

From the point of view of sugar mill owners, too, the situation is not a very happy one. The price of procurement is escalating. The Central Government amended the applicable Acts and announced an F&RP of Rs. 129.84 per quintal linked to a recovery of 9.50 per cent. The U.P. State Government, in the meantime, announced SAP of Rs. 165 per quintal - an increase of Rs. 25 per quintal over the SAP of earlier years. The U.P. Sugar Mills Association offered an additional incentive of Rs. 15 per quintal. The price thus worked out to Rs.180 per quintal of general variety of sugarcane delivered at factory gate. A broad understanding has now been reached among the mills and the leaders representing various factions of farmers. Consensus was reached at a price of Rs. 190 per quintal. (SAP of Rs. 165 plus an incentive of Rs. 25 per quintal). However, prices have continued to escalate unabated and at the time of writing this letter, SAP has already touched Rs. 235.

Consumers, thus, may have to live with high prices for at least the foreseeable future. The steady rise in sugar prices since the second half of last year is a consequence of shortfall in production, which is now further aggravated by the Christmas-New Year season.

Levy obligation in the meantime has been increased to 20 per cent so as to make increased quantity of cheaper sugar available to people below the poverty line.

Stop national waste

It is also important to understand that price rise is a direct consequence of diversification of cane to Jaggery and Khandsari - all of which is ultimately employed for the manufacture of illicit liquor. Plus the sucrose extracted by Khandasri and Jaggery manufacturers is not optimum - it is in fact far lower than extraction achieved by the sugar manufacturers. Hence, strong action by state governments against this menace is required - diversification (which unconfirmed sources estimate to be as high as 50 per cent) if stopped can directly help control retail prices.

Tackle long-term problem

While prices of sugar have increased and corrective action is required, it is important to appreciate that prices of all food products are, in fact, rapidly scaling new peaks since the last year and sugar is no exception to the rule. Food price inflation is abnormally high. It is apparent that shortage of food products is visible on the horizon. Hence, while government attention is sought to curb hoarding and prompt corrective action is needed, it is the large picture of promoting healthy growth of agricultural sector which will help us tackle this problem in the long-term. Some of the concrete measures to address the food shortage is through research and development of higher yielding variety of seeds, promoting use of soil-friendly fertilizers, promotion of water conservation, educating farmers, etc.

Dwarikesh’s performance

It gives me pleasure to report that, despite an overall negative environment, your Company has shown a marked improvement in its financial performance for the year under review as enumerated hereunder:

(Rs. in lacs) 

Particulars	2008-09	% of Net Sales	2007-08
Net Sales	46,188	100.00	27,265
EBIDTA	12,598	27.28	4,958
EBDTA	6,433	13.93	10
EBT	3,138	6.79	(2,933)

While 10 per cent obligation of levy sugar was sold @ Rs. 1,331, the rate at which it was sold in the earlier years, average realization on sale of free-sale sugar increased to Rs. 2,136 per quintal in the current year as compared to average realization of Rs. 1,428 per quintal in the previous year. While sales increased, there was significant depletion in the stock levels.

High interest burden impacted our financials. All efforts are on to rationalize interest costs and, if possible, pre-pay the debt which was raised for the green field expansion project in Bareilly.

On the operational side, Dwarikesh had the distinction of recording excellent recovery (amongst the top 5) in Uttar Pradesh at two of its plants. Another notable achievement of your Company for the year was that the process losses recorded at DN and DP unit are one of the lowest in the sugar industry in Uttar Pradesh.

Going forward

The situation, as it prevails today, is unlikely to change drastically in the immediate future. The surge in sugar price is expected to sustain for a couple of years as the global sugar industry grapples with lower production worldwide. Accelerated releases will result in low inventory levels.

Robust cash flows would help enable your Company recast its debt structure. Interest costs on working capital are also expected to be lower, which will lead to their rationalization.

Moving ahead, we may explore the opportunity to import raw sugar and process the same with a view to maximizing profits.

The State Government in Uttar Pradesh has announced a new energy policy. The energy policy, if implemented in the right spirit, would offer a plethora of opportunities and open additional streams of revenue for the sugar mills. Depending on the details announced in the policy, your Company may convert its bagasse plant into a multi fuel fire (bagasse and coal-based) plant.

This will help us in two ways: First, dual usage of boilers - bagasse and coal-based - will allow us to refine raw sugar even in the off season between March and September, when local cane is not available.

Secondly, we will enjoy the dual advantage of selling power in the open market while continuing to de-risk our revenue generation capability.

Our initiatives to follow a green and sustainable growth continue. Two of our plants are already CER (Certified Emission Reduction) registered and in future, this revenue stream of generation of power by using bio-degradable fuel i.e. bagasse will continue to be important.

Hence, moving forward, we at Dwarikesh see robust growth prospects for the industry and we believe that with the right decisions taken at the right time, we are poised to further ride the growth curve in the times to come.

On a concluding note

I take this opportunity to thank all our members of the staff, our bankers and all officials for their co-operation extended during the year. On behalf of the Board, let me assure all stakeholders that we continue to strive hard with shareholders’ interest in the forefront and I am confident of enriching your worth in the years to come.

Thank you.


Gautam R. Morarka

(Chairman and Managing Director)