MANAGEMENT DISCUSSION AND ANALYSIS I. Global scenario Production I Year 2014-15 is not expected to leave a significant world consumption may be balanced this year and it is _ sugar surplus as per estimates from renowned agencies expected that coming year (2015-16) would be deficit who track the sugar industry. World production vis-a-vis year after consecutive 5 surplus production years ICE 11: From the above, it can be seen that during the period April 2013 - March 2015, ICE 11 (Raw Sugar Prices) started from the level of 17.7 cents / pound in April 2013 and closed below 12.0 cents at level of 11.9 cents / pound during March 2015. During the period, ICE 11 Sugar Prices touched the high of 19.5 cents / pound during October 2013 and lowest levels were 11.9 cents during March 2015. LIFFE: LIFFE (White Sugar Prices) has travelled downwards from the level of 503 USD/mt as on April 01, 2013 to the level of 355 USD/mt brvailing as on March 31, 2015. During the period, White Sugar Prices have touched the high of 522 USD/mt during April 2013 and levels of 355 USD/mt as brvailing during March 2015 have been lowest during the period. From the above, it can be seen that in last 2 years, Raw Sugar Prices have come down by almost 32% and White Sugar Prices have come down by almost 29%. The reasons for such a steep decline in Sugar Prices are as under:- Consistent high production of sugar 2014-15 is Fifth consecutive year (estimated) when Sugar Production is estimated to be in excess of consumption due to which Global Sugar stocks have surged as mentioned in Table 1 above. Debrciating currency Brazilian Real has debrciated from the level of 2.26 Real/ USD as on April 01, 2014 to the level of 3.24 Real/USD as on March 31, 2015, which means devaluation of almost 43%. Valuation of sugar exports in terms of local currency has increased for Brazilian Sugar Millers (largest exporter of sugar) and thus the devaluation of sugar prices in USD terms. Dip in crude oil prices During the year 2014-15, crude oil prices have crashed and slided by more than 50%. As on April 01, 2014, crude oil prices were around 99 USD/ barrel which as on March 31, 2015 has come down to the level of 48.5 USD/mt. Such a massive devaluation in crude oil prices have disturbed macro factors across the globe including investments in commodity markets, market sentiments and devaluation of currencies against USD. Continuation of favourable weather across the Globe Weather across the globe continues to be conducive for sugar production with no major weather related interruption / damage to the sugar crop. During January 2014, Brazil CS has witnessed one of the worst drought conditions and there was fear of El-Nino being brdicted by major weather agencies like Australian and US weather agency where El-Nino brdiction probability was 70%. Due to continued dry weather conditions, there was a fear of big drop in cane yield in Brazil CS and cane crushing estimates were revised downward to the level of 545 million mt as against initial estimate of 580 million mt and last year actual cane crushing of 597 million mt. Even after 70% probability, the year 2014 did not witness El-Nino event and yields in Brazil were not low as estimated initially and estimates were revised upwards again to 567 million mt. In other major sugar producing countries also, there has been no major disruption / interruption on account of weather related issues. Consistently increasing production in india For world sugar prices, it has been seen that India has been a big swing factor. Indian sugar production has been cyclical in nature where after 2-3 years there used to be dip in production such that sugar production goes down below consumption and in the process country becomes net importer of sugar. Last 5 years, infamous cyclical nature of Sugar Industry has disappeared and country is producing more than its consumption. The sugar production pattern since 1980 given below:- Due to consistent high sugar production, India has commenced exporting sugar. To solve the problem of surplus in country, Indian Government is giving incentive which is further adding on to the bearish brssure on the International sugar prices. The year 2014-15 started with production estimate of 250 - 255 Lac MT which later on was revised to 260 Lac MT, then revised to 270 Lac MT. Now it is estimated that sugar production will touch the level of 280 Lac MT. In fact, year 2015-16 is also estimated to be bumper year and as per brliminary reports sugar production will be in excess of consumption. II. Indian scenario Domestic production and consumption Domestic production of sugar this year is estimated to rise by almost 15.0%. During 2014-15, sugar production is estimated to be around 280 Lac MT as against 243.95 Lac MT last year. Due to continued surplus sugar production and arbitrary fixation of cane price by State Government with no linkage to sugar prices, the situation is quite grim. Ideal solution is movement of surplus sugar out of system by way of enhanced exports and linkage of cane price to sugar prices as suggested by Dr. Rangarajan Committee. Certain measures suggested by Industry were taken by the Government but certainly not sufficient enough to address Industry woes:- • Increase in import duty During August 2014, Import duty on sugar increased from the level of 15% to 25% discouraging imports of sugar in country. Due to debrssed international sugar prices (6 year lows), the Government further increased the import duty to 40%. Defraying expenditure for incentive towards marketing & promotion services for raw sugar production: During February 2015, Government of India extended the incentive towards marketing & promotion services for raw sugar production and notified incentive at Rs. 4000 per MT for exports of up to 1.4 Million MT raw sugar up to September 30, 2015. Further, Government of Maharashtra has announced subsidy of Rs. 1000 per MT on production and exports of raw sugar from Maharashtra. • Ethanol: CCEA on December 10, 2014 has fixed the uniform delivered price of Rs. 48.50 - 49.50 per Litre for supply of anhydrous ethanol to depots of oil companies. Government is committed to promoting ethanol blending programme and is taking measures to resolve the difficulties being faced in terms of tender conditions, state excise duty procedures and formalities. Basis above decision of CCEA, on December 29, 2014 Exbrssion of Interest (EOI) had been floated by oil companies for a quantity of 97 crore Litres at fixed delivered price of Rs. 48.50 - 49.50 per Litre. This EOI has a provision that oil companies will keep on floating their requirements from time to time (after every two months) till the month of July 2015. In fact, Government is pushing the industry to supply more ethanol for blending and have also linked raw sugar incentive with the ethanol production. Sugar units with attached ethanol manufacturing facilities will not be eligible for raw sugar incentive if they are not supplying a minimum 25% of their ethanol production to oil companies. Ethanol can be one of the areas which can solve the problem of sugar surplus by diverting part of the sucrose content from sugar to ethanol. Country has a big requirement of ethanol for blending with gasoline and under the mandate of Bio-fuel Policy, Government has set a target to achieve 20% Ethanol blending as against current year estimate of 3% Ethanol blending. Oil companies require approximately 105 crore Litres at 5% blending level against which during current year, oil companies have got the offers for a quantity of 126 crore Litres and have finalised a quantity of 79 crore Litres. For blending at 20% level, there is a big requirement of ethanol. Currently ethanol production is done through molasses route in India. Production can be greatly enhanced by using B Heavy Molasses, Secondary Juice / Primary Juice. This on one hand will give additional availability of ethanol and on the other it will solve the problem of sugar surplus. Waiver of central excise duty on ethanol On April 29, 2015, Cabinet has allowed waiver of Central excise duty on ethanol from next sugar season. This waiver is estimated to give additional saving of approximately Rs. 5.0 per Litre. • Creation of buffer stock Government is considering creation of buffer stock of up to 50 lac MT which will provide financial incentive to the millers in terms of buffer subsidy. Industry is also pushing the Government to purchase sugar to the tune of 10% which works out to approximately 27-28 Lac MT. This will solve the problem of cash flow of sugar millers and will reduce the sugar supply in near future which will help in stabilising prices. However, ideal situation is that cane price should be linked to sugar prices as per Dr. Rangarajan Committee formula. This will ensure fair price to farmers, reasonable margins for sugar millers and timely remittance of cane payment. • Incentive on exports of white sugar To solve the problem of surplus sugar, Government has allowed incentive on raw sugar exports. On similar lines, the industry is urging the Government to allow incentive on white sugar exports as well. During off-season, country will have only white sugar available for exports and at that time raw sugar export incentives will not be of any help. These measures being taken by the Government are temporary in nature and can help the industry only in the short run. Permanent measure is linkage of sugar cane price to sugar price. Sugar exports from country International Sugar prices continues to be bearish with 6 years low sugar prices. Such low levels has affected sugar exports from country inspite of big surplus available as exports are unviable at these prices even with export subsidies. Exports during current sugar year (2014-15) till April 30, 2015 :- - Raw sugar exports: 1.94 Lac MT - White sugar exports: 1.63 Lac MT Total sugar exports: 3.57 Lac MT During the sugar year (2013-14), Sugar Exports has been in excess of 20 Lac MT and achieved the level of 21.7 Lac MT. As per trade sources, total sugar exports during current sugar year (2014-15) will not cross 6.0 Lac MT and majority will be raw sugar exports. Should the Indian Government provide incentives on white sugar exports as well, it would increase exports and provide some relief to millers. Sugar imports in country During current sugar year 2014-15, there will hardly be any Sugar Imports in country for sale in domestic market. There are certain policy measures taken by the Government to discourage imports as under :- - Increase in import duty to 25% during August 2014. - Cabinet decision further increase in import duty from 25% to 40% on April 29, 2015. - Time period for re-export of sugar after sugar import under advance authorisation reduced from 18 months to 6 months as decided by the Cabinet on April 29, 2015. This will discourage importers to import sugar under advance licence with zero duty and dump in domestic market as they will have limited time available for re-export. - Withdrawal of scheme of Duty Free Import Authorisation (DFIA) for sugar as per Cabinet decision on April 29, 2015. III. Bajaj Hindusthan Sugar's (BHSL) Position BHSL has 14 sugar plants having an aggregate crushing capacity of 136000 TCD, 6 distilleries with aggregate capacity of 800 KL/day and about 151 MW of surplus power. Key risks and concerns 1. Raw material BHSL has continued its thrust on cane quality promotion and is continually investing in cane variety development. The major area of concern is the ability to make timely cane price payment to farmers given the unremunerative sugar realisations in the domestic market and further exacerbated by the irrationally high cane price fixed by the state government. 2. Sugar price risk While cane price is fixed by the state government, sugar realisations are totally market driven and are dependent on demand supply dynamics. This has often led to complete mismatch between the cane price and sugar realisations. This year sugar production is expected to be higher than last year by almost 15% which coupled with earlier high stocks is going to keep the sugar prices under brssure. 3. Regulatory risk Sugar industry is subject to many regulatory risks like environment, raw material pricing, government policies, etc. The biggest risk to the business is the disjointed irrational sugarcane price fixed by the state government. De-Risking strategy As part of our business strategy, we are rapidly de-risking our business with the investment in power generation capacity. This business is non-cyclical and therefore expected to generate steady cash flows year on year. Further, sustained ethanol supplies to oil companies has provided some element of risk mitigation West U.P.: Sugar produced by our West UP mills is sold in the region of West UP and neighbouring States in Northern India like Punjab, Haryana, Rajasthan and Delhi etc. Central U.P.: Sugar produced in our Barkhera and Maqsoodapur mills is sold partly in Central U.P. and also in neighbouring states i.e. Punjab, Haryana and Delhi, whereas the sugar produced by Gola, Palia and Khambarkhera mills is sold in Central UP, East UP, Bihar, Bengal, Jharkhand and North East States. East U.P.: Sugar produced by our East UP Mills is sold in the region of Eastern UP and states like Bihar, Jharkhand, West Bengal, Assam and North East States. Competition Other than the mills in state of UP, we have to face competition mainly from mills in the state of Maharashtra, Karnataka and refinery in West Bengal. For movement of sugar to neighbouring states like Punjab, Haryana, Bihar, UP millers face competition from mills in these states, as well. Sugar sales outside of UP is purely on the basis of the price parity with competing mills. Internal control system and their adequacy Given the magnitude and nature of its business, the Company needs to maintain sound commercial practice with an effective internal control system. The system ensures that all transactions are authorised, recorded and reported correctly to safeguard assets and protect them from any loss due to unauthorised use or disposition. The Company employs stringent controls to ensure the safety of its asset against loss and misuse. The transactions and process are guided by delegation of powers and documented policies, guidelines and manuals. Its organisational structure is well defined in terms of structured authority and responsibility at particular levels of the hierarchy. The operation managers make sure that all operations within their area are compliant and safeguarded against all risks. The Company has robust internal audit system. A strong and independent internal audit functions at the corporate level carries out risk focussed audits across the company enabling identification of area where process controls are required to strengthen. Internal Audit function is strengthened by outsourcing audit to two Chartered Accountants' firms. Internal audit of 8 units and Noida office is conducted by M/s. Singhi & Co. and 6 units and Lucknow office is conducted by M/s. L.B. Jha & Co. on quarterly basis. Internal audit reports are brpared to create awareness and to take corrective actions on the respective units or areas, which need rectifications. These reports are then reviewed by the management team and the Audit Committee for follow-up action. Apart from Outsourced Audit firms, the In-house Zonal Internal Audit teams are placed at one of the units of each of the three Zones to coordinate with outsourced audit firms for facilitating Audit, arranging unit comments from auditee & implementation of Audit recommendations. An illustrative list of scope of activities of in-house areas of Internal Audit is broadly summarised as under: • Cane centre visits: - Review of Cane balances at Centre. - Review of extraneous matters in Cane. • Checking of Cane store records for centre material received back from centre after season end. • Physical Verification of Store Inventory 100% annually. • Physical Verification of civic condition of Sugar Godowns & empty Molasses Tanks. • Checking of Sugar Bagging, weighment and handling. • Special assignments and Audits assigned from time to time. The scope of activities of outsourced areas of Internal Audit is broadly summarised as under: • All types of vouchers and records including adherence of company policy & defined authority levels & contingent liabilities. • Purchases including Purchase Orders / Work Orders and other Agreements / Contracts. • Statutory compliances - TDS, Service Tax, PF, Minimum Wages and filing of return etc. • Cenvat Accounting claims and assessment for excise duty and service tax. • VAT and Sales Tax - Input Credit and assessment. • Trial and Ledger Scrutiny including General, Debtors, Creditors and Advances Ledger etc. • HR, Time office and Security Audit. • Stores - Material inspection, Store Ledgers, Records, Issues, Inventory and other subsidiary records + surprise checks and verification on sample basis covering 'A' Class items in each quarter. • Sales of Sugar, Molasses, Bagasse, Pressmud, Ethanol, Alcohol, Power, etc. • Weighment, Logbooks, Pool Vehicle, Diesel consumption, Guest House expenses, etc. • Budgetary Controls & MIS, Insurance coverage & claims. • Compliances of Industrial & other applicable Laws. • Bank Reconciliation statement, Checking of Interest rate and Bank charges. • Review of system in place for Physical verification of Fixed Assets, Sugar Stocks and Disposal of Scrap. • Surprise check covering dispatches of all products including By-products, Log Books and Civic conditions of Sugar Godown, Molasses and Alcohol Tanks and Safety measures etc. The Internal Audit carries out audit effectively throughout the year covering all areas of operations including the follow-up action. The audit approach is based on random sample selection and takes into consideration the generally accepted business practices. The Internal Audit reports are first discussed by the Management and subsequently placed before the Audit Committee of the Board of Directors along with the direction / action plan recommended by the respective Functional Head. The direction is implemented by the respective Head of the Departments and Action Taken Reports are placed before the Audit Committee members in next meeting for their review. Human resources/industrial relations The industrial relations at the Company's Sugar Mills and Head Office were cordial throughout the year under review. The Company is committed to create an organisation that nurtures the talent and enterprise of its people, helping them grow and find fulfilment in an open culture. Its growth strategies are based on a strong Human Resource (HR) foundation created through a judicious use of innovative and complementary HR processes and systems. HR policies are reviewed, revised and updated from time to time to make it relevant, effective and useful to the employees and also to the company. The basic objective is to facilitate the smooth execution of transparent policies. As of March 31, 2015, BHSL had 7,176 employees. The various HR initiatives carried out by the Company during the year are listed below: Programmes • In-house Training & Development - HR department brpares advance training calendar on six monthly bases scheduling various topics after consulting all the departments for the subject and strength of the participants. After brparing the list of the topics, schedule and name of the participants it is communicated to everyone concerned by the HR department. On average 20-25 persons attends any such training programme session. The major topics covered by our internal training faculty are on cane sowing, Irrigation and Pest Management techniques, Operational Procedure and Skill up-gradation methods, Safety, House-keeping, Fire fighting, Environment Health & Occupational Hazards, Energy Conservation, Attitudinal & Behavioural Management, Taxation, Computer Awareness, Statutory Compliances, Awareness on Health & Occupational Diseases, etc. • Other Training Programmes (External faculty) -Our organisation provide the external training to their employees by outside expert with specialist knowledge so that the entire team can improve their skills set with relevant, up to date information and techniques learned in an environment that is familiars and conducive to advancement group learning also encourage interaction from the entire group and some surprising techniques can develop that are particularly relevant to their field. It also grow the team and opportunity to interact on a much more personal basis building strongest bonds between team members and more efficient working environment. We cover the topic related to engineering, production, finance & account, store and H.R. by the external faculties so that the employees of our organisation can update with new techniques, technologies and develop their skill which resulting give impact to their productivity. During year 2014-15, HR dept. of Bajaj Group had organised various training programme through the involvement of various external agencies and training faculties. • Induction Programmes for New Employees: Induction programmes are regularly conducted at unit level by HR department for all the new employees. This is an interactive programme supplemented by power point brsentation about the company. • Quality Circle - QC movement is adopted by our organisation to create a sense of belongingness among employees by participation in deciding and implementing process thereby helping in cost reduction through optimum utilisation of resources and cutting wastages. It promotes participation culture, team working & development of employees at grassroot level. • Activities and Events: As a part of Employees Engagement Programmes, celebrated religious, cultural, national integration programmes, e.g. Annual function of Holi Milan, Shivalya Temple, Janmashtami, Dussehera, Teej & Lohri festival, Republic Day, Independence Day, Vishwakarma Day, Environment Day, Safety Week (4 March to 10 March), Labour Day (1st May), Zonal Cricket Tournament various type of children's events like drawing competition, Fancy Dress Competition, Annual Picnic & Excursion Tours etc. Corporate social responsibility 1. Bajaj Public School (BPS) - In furtherance of the guiding philosophy of the Corporate Social Responsibility (CSR), the group visualised the dire need to impart high standard education at low cost to the wards of the inhabitants. The Bajaj Public School is a non-profit making organisation, is an outcome to fulfil the said need. It was incorporated during year 2009 and extended its branches in Maqsoodapur, Gola, Palia, Barkhera, Kinauni, Gangnauli, Bilai & Utraula Units in month of April 2010. The school has got affiliated from CBSE up to Class-XII (Science & Commerce). BPS has so far taken responsibility to nurture positively the delicate & tender minds of approx. 1900 students. School is running as a creative centre for learning & development. It has provided employment to more than 75 people, including spouses of the employees. BPS solely aims to continuously connect, grow, serve & reach the new horizons. 2. Women empowerment (self help groups) BHSL undertook a project 'Charka' (spinning wheel) to boost women empowerment and rural entrebrneurship. It is not only for improving the economic conditions through income generation but in creating awareness about health & hygiene, sanitation and cleanliness, environmental protection, importance of education & better response for development schemes. The members of the society worked hard over the charkha to spin thread & help the underprivileged people get clothes. The next project was conducting surveys in the adjoining villages of the units and finding out the people who are extremely underprivileged. Their forms were filled so that the society can provide them some help. The society even collected clothes, utensils, footwear, medicines etc. and packed them neatly to give it to those who need it. Even the BHSL employees helped the society in raising funds for their projects. BHSL Women's Society, brpared Mango pickles, Daliya, Papad. Later, these products were sent to all other units and offices of BHSL. Within a few days, the products got so much in demand that the society started receiving orders and dispatching accordingly. 3. Other activities a. General Medical Checkup, Eye Check-up, Hepatitis-B vaccination camps in Factory Campus and also in neighbouring villages, etc. b. Woollen clothes & Blanket distribution among under-privileged class of surrounding areas. c. Kanwar Seva Shivir on Mahashivratri Parv. d. Distributing Organic Manure on subsidised rates to the farmers. e. In winters lighting Alao at every Chauraha by distributing bagasses. f. Fogging & Spray for mosquito in nearby villages. g. Blood donation camp. h. An Eye Check-up camp was arranged in factory hospital, Rudauli in which eye specialists from Sant Kabir Eye Hospital, Basti were brsent. They had taken various eye tests of most of our employees and suitable medicine/spectacles were provided them on payment. Among the beneficiaries there were various outsiders farmers also. . Financial Analysis of Operations of the Company The financial results for the year under review are of 12 months from April 01, 2014 to March 31, 2015, whereas figures for the brvious period are of 18 months for the period from October 01, 2012 to March 31, 2014, hence are not comparable During the year, the production of sugar from sugarcane has decreased to 11,37,815 MT as compared to 22,73,088 MT. The production of Molasses is 6,14,634 MT as compared to 12,65,184 in brvious period. The Industrial Alcohol / Ethanol production is at 1,25,463 KL as compared to 2,54,764 KL in brvious period. Power generation is at 7,78,057 MW as compared to 16,15,638 MW in brvious period. Looking to the increase in sugarcane crop acreage in sugar season 2014-15, Company took necessary steps to ensure availability of cane so that plants can operate at optimum capacity. Cane crop acreage increased in U.P., resulting increase in the quantity of sugarcane crushed and higher production of sugar and other related products i.e. molasses and power. Average recovery of sugar from sugarcane is at 9.38% as against 9.20% in the brvious period. The farmers have again shifted from other crops to sugar cane crop due to higher Fair and Remunerative Price (FRP) and State Advisory Price (SAP) fixed by the Central Government and State Government respectively. Turnover During the year ended March 31, 2015 the Company's total revenue is Rs. 4,570.12 crore as against Rs. 6,694.06 crore in the brvious period. Analysis of sales During the year, the Company sold 12,39,186 MT of sugar as against 16,30,924 MT during the brvious period. The Company sold 33,684 MT of Molasses as against 53,883 MT in the brvious period. However, Alcohol/Ethanol sales during the year was at 1,09,389 KL as against 2,25,678 KL during the brvious period. The Company exported 3,29,277 MW of power during the year as against 7,02,371 MW during the brvious period. Product-wise sales quantity, value and per unit realisation details are given in Table 10 Cautionary/futuristic statements Statements in the management discussion and analysis report describing the Company's objectives, projections, estimates and expectations may be "forward looking statements" within the meaning of applicable laws and regulations and futuristic in nature. Actual performance may differ materially from those either exbrssed or implied. Such statements rebrsent intentions of the management and the efforts put into realising certain goals. The success in realising these depends on various factors both internal and external. Investors, therefore, are requested to make their own independent judgements before taking any investment decisions. |