Management Discussion and Analysis Report Industry Facts

1 Sugar is one of world's major agro- based industries and is also one of the most actively traded soft commodities on the exchange

2 More than 80 % of Sugar produced is from sugarcane while balance is from sugar beet.

3 Top 5 sugar producers in the world, namely, Brazil, India, EU, China & Thailand , account for over 60 % of the total production .

4 The global sugar prices have been seen high level of volatility.

5 India is the second largest producer of sugar in the world and its production's share in 2014-15 was 16%.

Global Sugar Industry

Global Sugar Industry has managed the growth in demand for a fifth consecutive year. The estimated sugar production for year ended 31st March, 2015 was 174.3 mmt (rv) as against consumption of 170.6 mmt(rv), with a surplus of 3.7 mmt(rv)(source : USDA Trade Report-May,2015). However, the sugar production in Brazil was 35.8 mmt lower by 8% than the brvious year. Brazil exported 24.5 mmt during year ended 31st March, 2015. Further, a moderate global sugar surplus is expected in the year 2015-16, continue to remain positive for the fifth consecutive year. As per the latest estimates, the Sugar Production forecast for the sugar year 2015-2016 is at 174.3 mmt.

Indian Sugar Industry

The Government of India in its recent decision has dispensed with the regulated release mechanism of sugar for domestic consumption. Further, obligation to supply sugar as levy on production at a control rate for Public Distribution System (PDS) has also been done away with for sugar produced . Now, the PDS requirements will be procured by the States through open market and the gap will be supported by the Central Government. These measures shall facilitate the Sugar Industry to plan their cash flows and reduce the working capital requirement. However, the deregulation process remained incomplete as they have not addressed the issues of the State Control on cane prices with lack of parity between sugar and cane prices.

INDUSTRY SCENARIO

Cane management is the most indispensable part of the whole sugar manufacturing process. It is said "Sugar is produced in the field and extracted in the factory". This makes Cane management, the most important part of the Sugar Industry. The Uttar Pradesh Government had announced an unbrcedented increase in State Advised Cane Price ( SAP ) by Rs.40/- per quintal for the year 2012-13, which increased the Cane Prices in the State to the range of Rs.275/- to Rs.290/- per quintal. The U.P. Government retained the cane prices at Rs.280/- per quintal during the season 2013-14 and 2014-15. However, The U.P. Government announced a financial assistance of Rs.40/- per quintal to reduce the burden of increase in cane price.

Sugar Mills in U.P. pay SAP for sugar cane which historically is significantly higher than the FRP fixed by the Central Government. This has made an aggregate increase of Rs.150/- per quintal in SAP of cane in the last four years. The Cost of Sugar in U.P. has become the highest in the Country. This escalation in cane price announced by the U.P. State Government has rendered the U.P. Sugar Industry cash- crunched, heavy losses and uncompetitive. The Sugar Mills have been facing hardship in making payment to the Cane Growers in time. The Central Government has come out with loan assistance to the Sugar Mills for clearance of dues of cane growers, which would not be enough for the survival of the Sugar Industry.

Government Policies

The Government is becoming aware of the woes of the sugar industry on account of stifling Government intervention, policy inertia and absence of realistic initiatives. The GOI, during the year under review, dispensed with the system of allocating sugar mill-wise export quota and permit export of sugar without any restrictions.

Government hikes import duty on sugar

The Government hiked the import duty on sugar to 40 per cent from 15 per cent to curb inflow of cheaper sweetener, a move that could see a rise in sugar prices.

Govt. notifies export subsidy of Rs. 4,000/- per ton for raw sugar

The Government has notified the incentive for sugar mills to export raw sugar. The rate of incentive will be Rs. 4,000/- a tonne. According to a gazette notification, sugar factories which produce raw sugar and undertake export eiter by themselves of through exporters will be eligible for the incentive.

Trend in Sugar Industry Trade

Domestic sugar prices have continued moving downwards during the period. Weakening world market prices have made export parity negative as sales of sugar to the world market are not commercially attractive to the Indian Sugar Industry. The domestic sugar prices during the 18 months ended at 31-03-2015 have fallen deeply. The prices at the major markets during the year have been volatile. The prices of sugar in 2011-12 ( Aug.,2012) moved upto Rs.3900/- per quintal and throughout the past three years hovered in the band of Rs. 3900/- to Rs.2600/- per quintal. For the fear of food inflation being stoked, Government policies aimed at pegging domestic sugar prices at lower level continued, regardless of the fact that the incidence of sugar price of inflation is miniscule. Going forward, any significant strengthening of domestic sugar prices in the near future is uncertain.

Power Sector

As per the report of Central Electricity Authority (CEA), the renewable power constitutes about 25,600mw or 12% of the Indian Power generation capacity. Sugar industry has been traditionally practicing cogeneration by using bagasse as a fuel. It can also produce significant surplus electricity for sale to the grid using bagasse. To make Sugar Mills viable, they have now started to set-up cogeneration plant. There is potential to increase this capacity to 10,000 mw.

Ethanol Sector

The Central Government had made 5% ethanol blending mandatory with petrol across the country procured at market. In order to give boost to ethanol blending program, the State Oil Firms (OMC) have decided to procure for the year 2015-16 at the price of Rs. 49/-per liter. OMCs had invited bid for 156 crore liters of ethanol from the domestic and international suppliers for blending with petrol in the sugar year 2015.

SWOT ANALYSIS:

KM Sugar Mills consists of manufacturing and trading facilities of sugar, alcohol and power. Each of its business segments has its own strengths and weaknesses and exposures to a variety of opportunities and threats. The Company has the following SWOT attributes broadly :

Strengths and Opportunities

i) The promoters are in this line for over 4 decades and are having good experience of the line.

ii) Company has integrated Sugar Plant, alongwith distillery and Co -Generation situated in the sugarcane-rich Indian State of U.P.

iii) Company has integrated facilities to produce sugar and also has ability to Process Raw Sugar.

iv) Company Produces Ethanol, Power enhances the Revenue of the Company.

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Weaknesses and Threats

i) Though de-licensed, sugar industry remains a highly regulated industry with the acts and orders through which government regulates the sugar Industry.

ii) Sugarcane being an agricultural commodity, its availability is dependent on vagaries of monsoon.

iii) Non availability of sugar cane may adversely affect the sugar mills as well as cogeneration power plants.

iv) Sugar Industry has political intervention.

v) Steep decline in sugar price adversely affect the sugar mills