Dhampur Sugar Mills

A view from the senior management
 
 It would be futile to sugar-coat the reality of a challenging 2007-08,
 when we were required to manage politically motivated raw material
 pricing on the one hand and enhance value for shareowners on the other.
 
 Given this reality, our performance was creditable: a net profit of Rs.
 3.60 cr, following a net loss after tax of Rs. 60.48 cr in 2006-07.
 
 Given this industry inflection point, shareholders would be most likely
 seeking answers to not only what transpired in 2007-08, but also what
 they can now expect. This report communicates our optimism about an
 imminent improvement in sugar realisations, the growing choice of
 bagasse as an alternative energy source as well as an increasing
 preference for cane-derived ethanol and other value-added chemicals.
 
 Rise in sugar realisations
 
 We write to you from a point of optimism because sugar prices that were
 depressed for the large part of 2006-07 and a part of 2007-08 appear to
 have climbed out of an extended trough. Since Dhampur Sugar derives
 70.91 percent of its realisations from sugar, any improvement in the
 sweeteners realisation will lift the corporate average.
 
 Historically, sugar prices have been inversely linked with sweetener
 production. Lower cane acreage in SY 2008-09 will result in a lower
 production of sugar from around 26 million tonnes in SY 2007-08 to
 below 20 million tonnes for SY 2008-09. Once you factor in a projected
 domestic consumption of around 23 million tonnes for SY 2008-09, the
 reality is that a large proportion of the incremental demand will be
 met by the sugar inventory. There will be a significant moderation in
 the closing stock to around six million tonnes, estimated at a little
 more than three months of consumption. The net result is that
 realisations had strengthened in October 2008, compared with the
 corresponding period in the previous year.
 
 Bagasse as an exciting fuel
 
 Over the years, we consciously invested in bagasse-centric power
 generation for important reasons: we transformed an available commodity
 surplus into a product with a growing deficit, assured sale at
 protected, realisations and an accompanying tax hedge. Our intent is
 visible in the numbers: we enhanced the proportion of revenues derived
 out of power sale from nil in 2006-07 to 14.45 percent in 2007-08.
 
 The prospects of this business segment continue to be optimistic for a
 number of reasons. According to the Central Electricity Authority,
 Indias power deficit (around 10 percent of the total demand) is set to
 rise. The Government has been actively exploring various options to
 bridge the demand-supply gap. It is in this context that the export of
 surplus co-generated power has emerged as a profitable opportunity.
 Within this, bagasse-based power generation is one of the most
 promising energy creation centres with a number of advantages: a
 shorter gestation of cogeneration assets, effective utilisation of a
 by-product, cost-effective power generation, environment-friendly
 operations, tax rebates and interest-free loans. The fact that mills
 are now permitted to market merchant power directly, instead of selling
 it to state electricity boards means that they can select credible
 power trading companies and recover their proceeds faster. What makes
 this space interesting is that as per industry estimates, the potential
 for bagasse- based cogeneration is as high as 3,500 MW, of which only a
 small proportion has been realised so far. Even for companies like
 Dhampur, which are already selling excess power, there is a potential
 to market more.
 
 Increasing ethanol manufacture
 
 Perhaps no segment of the business is more environmentally relevant,
 with robustly sustainable prospects, than ethanol manufacture. The use
 of cane- derived ethanol is substituting high cost fossil fuel. There
 is an added incentive of generating ethanol from renewable crop sources
 year after year, since fossil fuel is finite and depleting. The
 economics of ethanol production from sugarcane represents the most
 viable alternative and also positively contributes to climate change
 management through lower greenhouse gas emissions.
 
 As a progressive organisation, we have responded to this reality with
 speed and surety.
 
 A more sustainable business model
 
 At Dhampur, we are excited by the possibility of deriving more gain per
 cane. We are proud to report that we are among the few in our industry
 to have taken a call of enhancing non- sugar capacities, achieving a
 lower conversion cost, reporting sustainable cash flows and a direct
 pass-through to the bottomline.
 
 This sustainable model has been centered around economics of scale: we
 are one of the most extensively integrated sugarcane complexes, with
 one of the highest ratios of exportable power and distillery capacity
 of 2.03 KW and 6.84 LPD, respectively per tonne of our installed cane
 crushing capacity.
 
 We are moving towards the higher end of the value chain through the
 following initiatives:
 
 - We are one of the largest refined sugar manufacturer in India with an
 installed capacity of 17,000 TCD. Our refined sugar, branded as
 Dhampure, is retailed to prominent beverage, confectionary and food
 companies at attractive realisations.
 
 - A flexible product mix enables us to swing between alcohol, fuel
 grade ethanol and value-added chemicals, depending on realisations.
 
 Overview
 
 Through this single-minded approach, we are geared to create enhanced
 value in the hands of all those who own our Company in 2008-09 and
 afterwards.
 
 Sincerely,
 
 V.K. Goel,                       A.K. Goel,
 Chairman                         Vice Chairman
 Dhampur Sugar Mills Limited