Good morning Ladies and Gentlemen
I welcome you to the 28th Annual General Meeting of your Company through video conferencing. In view of the Covid 19 pandemic, MCA and SEBI through its various circulars have permitted to conduct our AGM through Video Conferencing / Other Audit Visual Means. Your company appointed Central Depository Services (India) Limited (CDSL) to provide the facility of conducting this AGM through video conferencing. On behalf of the Board of Dwarikesh, I thank you for joining. Your presence is a testimony of your support to the Company
With your kind permission, I take the audited financial statements and the Directors' Report for the year ended on the 31st March 2022, as read.
The financial year 2021-22 was a defining year for your company. The revenue mix of the Company underwent a visible transformation with the ethanol segment’s profitability playing centerstage. The Company clocked record revenue of Rs. 1,974 crores and highest EBIDTA of Rs. 294 crores. The Company’s PAT of Rs. 155 crores, was nearly 70% higher than the previous FY. The Company is transforming from commodity company to an energy company. In line with this evolution and optimism, the Company declared and paid an interim dividend of 200% for FY 2021-22. The Company’s market capitalization had touched a 52-week high of around Rs. 2800 crores, before market sentiments in general softened the valuation of most companies on the bourses.
I will now take you through the contemporary sectoral developments and operations of the company.
Sugar Sector – Contemporary developments
The Central Government’s encouragement to sugar companies to sacrifice sugar production in favor of ethanol continued during the year under review. The government’s policies are customized to empower the sugar industry to moderate sugar production to enhance viability, pay timely sugarcane dues and catalyze realizations.
During the year under review, there was a rerating of the country’s sugar sector from that of a sluggish commodity sector at the mercy of cyclical forces to a vibrant energy sector with the potential to address India’s clean fuel requirements and sustaining its role as a rural economy backbone.
The Central Government continued to script the sector’s turnaround. The Government outlined an ambitious 20 per cent target of blending ethanol by March 2025. The challenges comprise the commissioning of ethanol distilleries across India with a capital expenditure for more than Rs. 100,000 crores and upgrading the infrastructure of Oil Marketing Companies. These OMCs need to enhance blending capabilities and make changes in fuel dispensing stations.
From the perspective of sugar companies, it is important for the Government to revisit the procurement price of ethanol produced directly from sugarcane juice. The tangible sacrifice of sugar in favor of ethanol will happen only when sugar companies utilize sugarcane juice to produce ethanol, a replication of the Brazilian model. In doing so, the Indian sugar industry can moderate sugar production by nearly 30%, which makes it necessary for the procurement price to be at a level that the sugar industry is attractively incentivized to produce ethanol over sugar. Representations were made to the Government to apprise them of the cost dynamics of producing ethanol from sugarcane juice and it is expected that the Government will respond positively.
The Central Government recently introduced a ban on sugar export beyond 10 million tons, fearing that export in excess of 10 million tons would cause inflation within India. This fear appears misplaced as the country’s sugar production is expected to cross 36 million tons. Even if an additional one million tonnes of export is permitted, the closing stock of sugar of more than 6 million tons would translate to nearly 3 months of consumption, adequate to keep sugar price under control. It is necessary that the present sugar realizations of around Rs. 34500 per MT rise to Rs. 36,000 per MT to strengthen cashflows for sugar companies and farmers. The abrupt move to cap exports and regulating the same by allocating quantities to sugar mills and exporters has created confusion as mills are now saddled with raw sugar stocks that they had produced pursuant to the contracts executed by them before the promulgation of the order capping exports
The Uttar Pradesh (SAP) sugar cane price for SS 2021-22 was raised by Rs. 25 per quintal across all varieties. Sugar production in UP though was lower on account of a diversion of sugar in favour of ethanol and a decline in yield at the farm level due to unprecedented unseasonal rain and red-rot disease incidence. This had an impact on sugar recoveries of most UP-Sugar mills. However, sugar cane arrears remained largely under control compared to the earlier seasons although these arrears comprised dues by only a few sugar companies. Sugarcane continued to be the most attractive crop for farmers. Nearly Rs. 1.80 lakh crores have been paid to farmers across five years for cane, indicating the success of an eco-system comprising State Government, farmers and the sugar mills.
Global sugar industry trends in a nutshell
The global sugar production bucked the earlier deficit production estimate and is expected to register a small surplus mainly on account of bumper sugar production in India. There was decline in sugar production in Brazil, which was counter-balanced by gains in production mainly from India
Production and exports rose to record levels in India. The higher production and exports from India countered lower production and exports from Brazil. A spurt in crude prices strengthened international sugar prices as Brazil produced more ethanol in its production matrix as a result of which India has emerged as a key global sugar trade player.
The principal driver of the global sugar market was the geo-political tension following the Russian invasion of Ukraine coupled with lower production in Brazil supporting sugar realizations.
Higher international prices aided exports from India, mainly from mills in Maharashtra, notwithstanding the fact that no subsidy was provided.
The Indian sugar industry scenario summarized
The Indian sugar season 2021-22 proved eventful and some commendable numbers are as follows:
a. Highest ever sugar production of more than 36 million tons as per the latest estimate.
b. Sugar sacrifice in favour ethanol of 3.4 million tons which indicates a gross production of 39 to 40 million tons, reinforcing the premise that India is fundamentally a sugar surplus nation.
c. Maharashtra’s output is expected to be its highest ever of close to 14 million tons and for the first time Karnataka produced more than six million tons of sugar.
d. Highest sugar exports estimated at around 10 million tons, is a singular accomplishment considering that the entire export is without any export subsidy.
India’s Sugar Season 2021-22 commenced with an opening stock of 8.2 million tons. As per the latest ISMA estimate, sugar mills are likely to produce 36 million tons of sugar, after factoring in a sacrifice of 3.4 million tons of sugar production in favor of ethanol. Exports are likely to touch 10 million tons. Consumption is estimated at 27.5 million tons. Clarity regarding estimated closing stock will emerge only after Government of India takes a call on allowability of more exports. The 2022-23 season is also expected to be another bumper production season even after considering a probable sugar sacrifice of 5 million tons of sugar production in favor of ethanol.
The Indian sugar industry and Indian domestic sugar prices are seen as influencers of world sugar prices. Across the world, there is now an acceptance of the quality and delivery of Indian raw sugar and white sugar. Since sugar mills in Maharashtra and Karnataka are proximate to ports whereas sugar mills of Uttar Pradesh are in the hinterland, most export contracts have been signed by Maharashtra and Karnataka sugar mills.
In a decisive initiative, the Government of India advanced the target for 20 per cent ethanol blending in petrol (also called E20) from 2030 to 2025. E20 is expected to be rolled out from April 2025. The early introduction of flex-fuel vehicles which can accommodate higher ethanol proportions, including running these vehicles on pure ethanol, will help achieve the 20% blending target. By 2025, it is also expected that E20 vehicles will constitute around 25% of the fleet.
Country has achieved 10% blending target during ESY 2021-22 on a pro-rata basis. For the full ESY the OMCs estimated a total requirement of 459 crore liter for 10% blending and the country is on course to achieve this target. The Ethanol Blending Program intends to make India self-reliant for its energy needs, reducing carbon footprint, moderating sugar production, improving the sugar industry’s viability to empower it to pay an economically remunerative price for sugar cane and in line with the global trend of converting surplus food into energy.
The Indian sugar industry is on the threshold of a paradigm shift. With the ethanol blending program gaining traction, sugar production is expected to moderate. Besides, the Indian sugar industry is now expected to play a decisive role in the international sugar market through consistent exports
The policy interventions comprise the following
Retention of the minimum ex-factory support price of sugar at Rs. 3,100 per quintal.
Monthly release mechanism to regulate sugar availability in the open market
Ethanol procurement price for Ethanol Season Year 2021-22 (November to October) fixed at Rs. 46.66 per litre for ethanol derived from C-Heavy molasses, Rs. 59.08 per litre for ethanol derived from B-Heavy molasses and Rs. 63.45 for ethanol derived directly from sugarcane juice. The Government announced a mid-term increase in ethanol realisations to ensure that India achieves its maximum blending target in the lean months.
The Uttar Pradesh sugar industry
During SS 2021-22, Uttar Pradesh produced 10.2 million tons of sugar as compared to 11 million tons produced in SS 2020-21 and 12.6 million tons produced in SS 2019-20. The lower production is attributable to un-seasonal rain in September 2021, water-logging, low farm yields and declined recovery. Increased ethanol production also moderated sugar output. The red rot pest was prominent in Central and Eastern Uttar Pradesh on variety Co 0238 and urgent steps are required to be taken to ensure varietal replacement
UP sugar mills reported moderated sugar stock levels, owing to higher exports & ethanol production using B heavy molasses and sugarcane juice.