Chairman’s Speech

Good morning Ladies and Gentlemen

Welcome to the 25th Annual General Meeting of your Company. On behalf of the Board of Dwarikesh, I thank you for joining us today. Your presence is indeed a true testimony of your involvement with and support to the Company.

Through the unique opportunity provided by the AGM, I shall share my thoughts with you, take you through the operations of the company and brief you of the contemporary developments which will have far reaching implications on the future of sugar industry. With your kind permission, I take it that you have read the audited financial statements and the Directors' report for the year ended on the 31st March 2019.

Let me make you walk through the financial numbers of the FY 2018-19. The financial performance may be considered satisfactory as the industry operated in an extremely challenging environment.

During the financial year, the company had earned revenue of Rs. 1,084 crores vis-à-vis Rs. 1,458 crores in the previous year. This decline in revenue is attributable to the monthly release mechanism administered by the Central Government, which resulted in lesser quantity of sugar sold and lesser realization on sugar sold.
EBIDTA, during FY 2018-19 both in absolute numbers and in % terms is better as compared to the EBIDTA during previous period. In absolute numbers the EBIDTA amount is Rs 165 crores (15.23%) as compared to EBIDTA amount of Rs 160 crores (11.19%) in the previous FY. While power & distillery segments have clocked better EBIDTA, the sugar segment has reported lesser EBIDTA.
The company had earned EBDTA of Rs 144 crores as compared to Rs 135 crores earned in the previous FY and earned EBT of Rs 111 crores when viewed in juxtaposition with that of the previous FY (Rs 103 crores) has also improved.
Earnings after tax at Rs 95 crores as compared to the earnings after tax of previous FY of Rs. 101 crores is lower on account of higher provisioning of taxes.

Global Sugar Industry – emerging trends

Global production for sugar season (SS) 2018-19 was estimated at 179 million tons compared to ~183 million tons in 2017-18 SS.

This production decline was primarily due to unfavorable weather conditions and more sugarcane being diverted towards ethanol production.

Indian Sugar Industry

Considering surplus sugar production in India and the impetus provided by the Government for export, India has contributed 3.5 million tons of sugar to the Global trade. Raw sugar contributed to the major chunk of exports.
India's sugar production figure for SS 2018-19 is pegged at 33 million tons vis-a-vis actual sugar production of 32.5 million tons during SS 2017-18 and original estimate of sugar production of 35 to 35.5 million tons. Approximately 4.5 lac tons of sugar production was sacrificed in favor of ethanol production through B-heavy molasses route.

The States of Uttar Pradesh & Maharashtra which had contributed to higher production in SS 2017-18 have again played pivotal role during SS 2018-19.
During SS 2018-19, sugar recovery in Northern India improved substantially. Therefore, despite a drop in the quantum of sugarcane crushed in the current season, sugar production in SS 2018-19 is more than the previous year. State of UP clocked a recovery close to 11.5% during the just concluded season. This feat may be considered remarkable as the industry in UP has had a history of clocking average recovery not in excess of 8.50% until a few seasons ago
Sugar is presently being sold under regulated release mechanism and the Company is receiving lesser releases as overall quantity of release ordered for the country by the Food Ministry is lesser. While lesser releases have aided the stabilization of sugar prices at > Rs. 3150 per quintal, it has resulted in increased holding of sugar stock.
Ethanol blending target of 7% has been achieved although the rate of blending is not uniform across the country. While EBP (ethanol blending program) will partially mitigate long term problems of the industry, if more and more sugar mills sacrifice sugar production in favor of ethanol.
However, one more steroid dose of MIEQ of at least 7 MT coupled with incentive is required to address the problem of burgeoning stocks. As is learnt the same is on anvil.
The Government is facing challenges at WTO forum as disputes are being raised by some countries over the subsidies extended by GOI for encouraging export of sugar. Any scheme of export, therefore is sought to made WTO compliant.
Domestic sugar balance presents a scary picture. Given the higher opening stock of 10.7 million tons of sugar, production of 33 million tons, consumption of 26 million tons and export of about 3.5 million tons, the country will still have a stock of about 14.2 million tons by the end of SS 2018-19 which is a very large number representing 55% of estimated consumption. (in other words 7 months of consumption).
However, draught in Maharashtra is expected to drag the production estimate for SS 2019-20 down by 3 Million Tons. (29 Million Tons as per initial estimate of ISMA).
FRP of SS 2019-20 has been announced and it remains unchanged at Rs. 275 per quintal.
The sugar industry thus continues to stare at crisis and is dependent on Government bail-outs and reliefs. The sugarcane arrears on date is around Rs. 7500 crores in Uttar Pradesh alone. It is indeed going to be long haul for the sugar industry to be on auto pilot trajectory.

Government Initiatives

Announcement of a minimum ex-factory selling price of Rs. 2900 per quintal for sugar to be sold ex-factory, subsequently increased to Rs. 3100 per quintal by the Central Government.
Reintroduction of monthly release mechanism.

~Rs. 1,200 crore was allocated for creation of 3 million tonnes of a sugar buffer stock on which Government will reimburse sugar mills the carrying cost of this buffer stock. The buffer stock scheme expired on 30th June, 2019 and a new buffer stock of 4 million tons has been created effective 1st august, 2019.
The Government ordered a compulsory export of 5 million tons for the SS 2018-19 out of which 3.5 million tons has been exported.
Transport subsidy of varying amounts was announced to defray the transportation cost incurred by sugar mills to transport their sugar from their mill to port for export.
A production subsidy of Rs. 13.88 per quintal of cane crushed during SY2018-19 was announced to offset the cost of cane. This subsidy was made available to sugar mills on the fulfilment of certain conditions (compared to a subsidy of Rs 5.50 per quintal of cane crushed for SS 2017-18).
The Central Government announced a Rs. 8,500-crore package for the Indian sugar industry, comprising Rs. 4,440 crore in soft loans to mills to enhance ethanol manufacturing capacity and a related interest subvention of Rs. 1,332 crore.
The Central Government announced an increase in price from Rs 40.85 per liter to Rs 43.70 per liter. It also announced attractive price for ethanol made from B heavy molasses and cane juice.
The Central Government announced a scheme of soft loan with interest subvention @ 7% per annum to help sugar mills clear cane dues.
During the year the State government of Uttar Pradesh paid a subsidy of Rs. 4.50 per quintal of cane crushed during the SS 2017-18; it also announced and disbursed a soft loan at ROI of 5% per annum to help clear cane dues of season 2017-18.
Central Government has also announced reasonable prices for sale of ‘C’ Heavy made ethanol (Rs. 43.46 per liter). However, the price of ‘B’ heavy made ethanol at around Rs. 52.43 per liter equates to sugar price of Rs. 2900 per quintal. The Government has recently announced cabinet decision to increase ethanol price from C heavy molasses to Rs. 43.75 per litre (increase of Rs 0.29 per litre), ethanol price from B heavy molasses to Rs 54.27 per liter (Increase of Rs 1.84 per litre) and ethanol price from sugar cane juice/sugar/sugar syrup is fixed at Rs 59.48 per litre.

Uttar Pradesh sugar sector highlights, 2018-19

UP State has clocked yet again bumper sugar production of 11.8 million tons during season 2018-19 at an impressive recovery of close to 11.5%.
The economics of sugar industry continue to be unviable. Sugarcane dues of SS 2017-18 were cleared by availing production subsidy from the Central Government, soft loan under SEFASU 2018 by the State Government and a subsidy of Rs. 4.50 per quintal also form the State Government. Central Government has announced yet another soft loan scheme under which mills will be eligible to receive interest subvention for one year @ 7% per annum.
In spite of various measures, the arrears of season 2018-19 have built up and the amount due presently is in excess of Rs. 6,451 crores as on 03rd September 2019. Some companies with checkered record aren’t in a position to avail any assistance under the Government announced schemes. Till date very few companies including your company has made full cane price payment of SS 2018-19.
Power segment which was an area of immense strength for sugar industry has become a defensive bet for the sugar industry in UP as the tariff of power evacuated by the industry to state grid has been revised downwards by more than Rs. 2 per unit (more than 40% decline), effective 1st April, 2019.
The same though will be legally challenged as the revised tariff is based on fundamentally flawed hypothesis.

Dwarikesh score card, FY 2018-19:

Total cane crushed is during SS 2018-19 is 306.84 lakh quintals and sugar produced (including BISS) is 37.77 lakh quintals at a recovery of 12.31%. Sugarcane crushed during SS 2018-19 is lower by nearly 16% vis-à-vis crushing of SS 2017-18.
The distillery capacity expansion project execution is as per schedule. The plant is based on the technology of incinerating the spent wash mixed with bagasse. The technology adopted is the latest and the estimated project cost is Rs. 146.1 crores. It is expected that the same will be operational during November, 2019.

Long term debt profile: The company has availed a soft loan of Rs. 134.5 crores under SEFASU 2018 which is funded by the State Government @ 5% ROI. The same is repayable in 60 monthly instalments commenced from the 3rd July, 2019. The company has also received a soft loan of Rs. 140.98 crores. As the same was carved out of working capital loan, it did not result in any additional infusion of funds. Nonetheless interest subvention @ 7% will be available on the same for a period of 1 year. Out of sanctioned term loan of Rs. 116.88 crores for the distillery project, an amount of Rs. 72.79 crores is disbursed till 31st August, 2019. Additionally, the company has outstanding preference shares of Rs. 15 crores which are due for redemption in FY 2020-21.
Company’s long term loan rating from ICRA is A + and the company has the highest rating of A1 + also from ICRA for its CP program of Rs. 300 crores. All ratings are valid till March, 2020. Internal rating accorded by PNB is A2.
Company has fully paid cane price dues relating to cane purchased during SS 2018-19.

Summing Up:

Dwarikesh Sugar will continue to maximize efficiencies and economies within its control in the hope that when the sugar industry revives, it would be one of the first off the blocks in strengthening its performance and profits.

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 for their tireless efforts in braving adversities, our farming brethren who are not only our partners but our backbone for having reposed immense confidence in us by growing & supplying sugarcane to 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.

Thank You
B. K. Agarwal
Chairman
(September 5, 2019)