Dwarikesh Sugar Industries

Let me present the 15th Annual General Report to you all.
 
 The year 2008 just concluded had a gory climax.  The dastardly act of
 terrorists in Mumbai sent Shockwaves not only throughout the country
 but tremors were felt in all parts of the world The city of Mumbai was
 virtually under seize for more than 72 hours as the terrorists chose to
 strike at the iconic structures of Mumbai city. The act of the
 terrorists and their patrons is condemnable and the courage and
 sacrifice displayed by the policemen, the military, the navy, the
 commandos, the media and the hotel staff is commendable.
 
 The citizens of the country reacted strongly and the rage, seething
 anger, and simmering discontentment reached a crescendo and the
 politicians of all hues and cries bore the brunt of public anger. The
 spirit of solidarity displayed by United States of India was
 heartening.
 
 This could prove to be a defining moment point in the history of our
 country. With the sustenance of public awakening, the political system
 and the bureaucracy is expected to be more accountable and responsible.
 We sincerely wish that terrorism is rooted out from the world.
 
 Financial Tsunami
 
 World over, the year 2008 was also financially a very turbulent year
 
 Financial tsunami has swamped the world as one financial institution
 after another has collapsed due to sub- prime mortgage crisis that has
 rocked the United States and the global economy. It is no brainer to be
 a financial sceptic these days. The crisis that has engulfed the
 financial markets in recent months has buried the Wall Street and
 humbled the United States. The near one trillion dollar bailout of
 troubled financial institutions that the US treasury has had to mount
 makes emerging market meltdowns - such as Mexico peso crisis in 1994 or
 the Asian financial crisis of 1997-98 look like foot notes by
 comparison.
 
 The tremor of equal gravity is felt in Indian Financial sector also. It
 looks like a rare instance of generalised organ failure. The capital
 market index which had peaked in early January, 2008 crashed to levels
 least expected.  Cynicism is yet, the order of the day and doomsayers
 predict that the pain surfaced so far is only a tip of the iceberg and
 the real pain is yet to surface. However the economists are unanimous
 in their belief that India, with its inherent strength will bounce back
 sooner than other economies. Maintaining a GDP growth rate of more than
 7% though, as of now, looks like a Herculean task.
 
 Sugar industry - macro view:
 
 The year 2007-08 was the most difficult year faced by the Indian sugar
 industry. The year started with a huge carried over stock of sugar. The
 burden of such huge carried over stock was phenomenal and industry
 continued to reel under the same. Sugar production was lower not only
 in India but across the globe. The domestic industry suffered in spite
 of lower production because it had to cope up with the legacy of huge
 carried forward stock.
 
 To begin with, the industry expected it to be yet another year of
 record production. The original estimate of domestic production was in
 excess of 30 million tons. However the arrears of sugarcane in the
 earlier year, unfavorable climatic conditions and better prices for
 alternative crops had a telling impact on the sugarcane area under
 cultivation. Estimates were revised a couple of times and finally India
 ended up producing 26.3 million tons, significantly less than the
 originally estimated number.
 
 Last two years, globally were characterized by higher production and
 lower consumption. Going forward though, the imbalance in production
 and consumption is expected to be corrected. Estimate of production of
 sugar in India is around 20 to 21 million tons, a significant drop as
 compared to the previous year.
 
 In the ensuing years, global consumption is expected to exceed
 production on account of lower production in India and in Brazil, two
 of the major sugar producing geographies. While the reasons for
 downfall in production in India are obvious, Brazil is expected to
 divert more than 60% of its sugarcane for production of ethanol. The
 international prices of sugar are therefore expected to remain buoyant.
 
 In spite of being the second largest producer of sugar in the world,
 Indian sugar industry is largely insulated from the world trade. Its
 export performance is not noteworthy because it is high cost producer
 of sugar, mainly because of the high price paid for sugarcane. Export
 subsidies and reliefs doled out by the Government have only caused a
 drain on the National exchequer and have not served any useful purpose.
 India does not import sugar because there are barriers such as higher
 import duty. Another important point that I desire to make is that the
 fortunes of sugar industry are not directly proportional to the
 fortunes of the economy in general. While the economy was booming and
 all other businesses were doing well in 2006-07, sugar industry was
 languishing and incurred unprecedented losses. In the year 2007-08
 though, the sugar industry did badly and so did the economy in general.
 In the coming years notwithstanding the performance of economy in
 general, the sugar industry should do well.
 
 However I must hasten to add that sugar industry can do well if and
 only if there is revival of sugar prices. Sugar prices which had shown
 signs of resurrection in August, 2008 have again hit roadblock. There
 are already a number of negative factors at play such as:
 
 - Higher sugarcane price: In yet another bewildering move, the State
 Government of Uttar Pradesh has announced a price (SAP) of Rs. 140 per
 quintal for the general variety of sugarcane. This is as compared to
 the SAP of Rs. 125 per quintal announced for the earlier year and a
 price of Rs. 110 per quintal for the last year paid and accounted for
 by Sugar Industry in Uttar Pradesh in pursuance of a Court order.
 
 - Lesser availability of sugarcane: The national estimate of sugar
 production is around 20 million tons and there would be clamor for
 procurement of sugarcane. Reckless expansion of capacities based on the
 incentive scheme announced by the erstwhile Government of Uttar Pradesh
 has further complicated matters and mills are expected to operate at
 less than optimum capacity.
 
 Another dangerous trend that has emerged is that while sugar mills in
 Uttar Pradesh and some northern States are paying a higher sugarcane
 price announced by the respective State Governments, Southern States
 and the State of Maharashtra are paying much lower price (SMP). This
 resultant disparity is injurious to the health of the sugar industry in
 the State of Uttar Pradesh and certainly not in the National interest.
 
 The myopic policies followed by the State of Uttar Pradesh in respect
 of sugar industry are baffling, more so when the sugar industry is the
 mainstay of the State. When things go totally out of control,
 revolution is round the corner and a possible revolution will lead to
 the renaissance of the sugar industry. Only when the industry will
 start sinking, perhaps there would be total awakening on the part of
 all concerned.
 
 Sugarcane price - litigations continue:
 
 The pricing of sugarcane has from several years remained the crux of
 the problem for the sugar industry in the State of Uttar Pradesh. The
 State Administered Price (SAP) applicable in the State of Uttar Pradesh
 has risen sharply in contrast to the rise in the Statutory Minimum
 Price (SMP) over the years.
 
 For the crushing year 2007-08 the State Government of Uttar Pradesh had
 announced SAP of Rs. 125 per quintal. Left with no option, the sugar
 industry filed suit before the High Court challenging the arbitrariness
 on the part of state Government in determining the SAP Honourable High
 Court has passed an interim order fixing the sugarcane price at Rs. 110
 per quintal. While there was set back in a subsequent judgement of the
 High Court, the Honourable Supreme Court has in the interim, upheld
 that sugar mills will continue to pay for the sugarcane purchased at
 Rs. 110 per quintal. A final decision on the matter is awaited. Most of
 the sugar mills have paid for and accounted for the sugarcane purchase
 during the season at Rs. 110 per quintal.
 
 Meanwhile the State Government has dealt another cruel blow to the
 Industry by announcing SAP of Rs. 140 per quintal for the crushing
 season year 2008-09. While the sugar prices are on the ascendency, the
 increase in sugar price cannot absorb such higher SAP This move would
 lead to rapid deterioration in the health of sugar industry which is
 already in the casualty ward. Aggrieved by the said order, the industry
 Association filed a writ before the High Court of Allahabad which has
 in a recent order dismissed the writ.
 
 The end to the spectacle of litigations is also not discernible as the
 aggrieved industry will certainly knock at the doors of Supreme Court.
 
 Company specific analysis:
 
 Your company has significant footprint in the State of Uttar Pradesh
 and is among the top ten manufacturers of sugar in the State. From a
 humble beginning in the year 1994, it has traversed many a miles,
 crossed many a milestones and has now reached a position of fortitude.
 It has earned reputation of being an efficient performer in the
 business and has unsullied reputation for the integrity of its
 operations. Your Company derives its income from manufacture and sale
 of sugar, Industrial alcohol, ethanol and generation & distribution of
 power. Besides, your company also sells its surplus by-products viz.
 molasses & bagasse. Your company has added another stream of revenue to
 its repertoire and in future would be able to sell CER (Certified
 Carbon Reductions).
 
 Your company has been constantly investing not only in adding
 capacities but also technologically upgrading the plants and automating
 them.
 
 During the year 2007-08, your Company recorded a recovery of 10.64% at
 its Dwarikesh Nagar unit which was the second highest recovery recorded
 in the State of Uttar Pradesh. At its Dwarikesh Puram unit, a recovery
 of 10.33% and at its Dwarikesh Dham unit, a recovery of 10.27 % was
 clocked during the same period. Recovery of 10.27% recorded at DD plant
 in its maiden year of operation is impressive.
 
 Financials - nothing to cheer about:
 
 For the second time in its history the company had to face the
 discomfiture of posting losses although yet again the saving grace was
 that no cash tosses were incurred. This was in spite of loftiest
 standards of operating efficiency being achieved and tightening the
 leash on the costs. The main reasons for the losses were lower
 realisation on sale of sugar and higher interest & depreciation cost.
 EBIDTA earned during the year was higher than that in the earlier
 years. The higher EBIDTA is on account of lower procurement cost of
 sugarcane.
 
 Expansion Plans:
 
 During the year, Greenfield plant of 7,500 tons per day (TCD)
 (expandable up to 10,000 TCD) at Faridpur, in District Bareilly, Uttar
 Pradesh commenced production. During the year, power evacuation from DP
 plant and DD plant at 24 megawatts capacity each also commenced, albeit
 the evacuation got delayed because of delay in laying of power
 distribution lines by UPPCL With the commencement of production in DD
 plant and power evacuation from DD and DP plants, our transformation
 from a single sugar mill complex in 1994 to a conglomerate with
 multiple composite facilities for manufacture of sugar, power and
 ethanol is complete. We now have a combined capacity to crush 21,500
 TCD. We are also equipped to supply 56 megawatts of power to the State
 grid after meeting all our captive requirement of power. The capacity
 to manufacture ethanol is 30,000 litres per day. We intend to scale up
 the capacity to generate power and distill ethanol in future.
 
 Going forward:
 
 Outlook for the year 2008-09 is better as the estimated sugar
 production in the country is lesser and price of sugar has already
 shown signs of resurgence. While the standalone sugar mills will still
 find the going tough, companies such as ours who have forayed into
 power generation and ethanol will do better. We have already incurred
 capital expenditure to put our assets in place and are now poised to
 reap the benefits. Where as, the cost side is already reflected in
 numbers, the revenue side is about to unfold. Year 2008-09 would be the
 first full year when the assets of your company would be optimally
 utilised. The incidence of depreciation cost and interest cost per
 quintal of sugas produced would therefore be lesser. Accelerated
 release of sugar on the back of lower production of sugar in the
 country will result in lower inventory levels and consequently lower
 interest cost on working capital.
 
 Clean Development Mechanism
 
 Sugar mills are entitled to sell carbon credit becoming available to
 them on sale of power generated by using bio-degradable fuel viz.
 bagasse. I am pleased to inform that both DP and DD projects for supply
 of supplying of 24 megawatts each of power to the state grid are
 already registered with UNFCCC and the process of issuance of
 (Certified Emission Reduction) CERs is in advanced stage. The power
 projects were operational during the year gone by for a limited number
 of days. However in the coming year when the power generation would be
 optimal, we would be able to generate significant revenue from sale of
 CERs. The sale of CER would thus be an important stream of revenue in
 the coming years.
 
 Sign Off:
 
 Permit me to sign off with an assurance to fellow stakeholders that our
 best efforts in the times ahead in our combat against odds will
 continue spiritedly and we shall surmount the odds and emerge
 triumphant. The interest of the shareholders rank foremost in our minds
 and we are committed to enrich your worth.
 
                                                        Gautam R Morarka
                                        (Chairman and Managing Director)
 
 Place : Mumbai
 Date  : 1st January, 2009