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Simbhaoli Sugar Mills
BSE: 507446 | NSE: SIMBHSUGAR | ISIN: INE270C01017 | Sugar
- Directors Report
- Chairman's Speech
- Auditors Report
- Notes To Accounts
- Accounting Policy
- Finished Products
- Raw Materials
| Directors Report | Year End : Sep '08 |
The Directors have pleasure in placing the directors report together
with management discussion analysis for the financial year ended on
September 30, 2008.
Global Sugar Industry
After two years of consistently rising stocks and relatively low
prices, the fundamental outlook for sugar is changing, with a clear
indication towards lower production in 2008-09. A combination of
factors, including lower production in India and some other countries;
rising demand for sugar and ethanol; and general economic slowdown have
upset the world sugar balance.
World Sugar Balance
2008/09 (E) 2007/08 (P) Change
mmtrv mmtrv absolute %
Opening stock 42.6 39.3 3.3 8.4
Production 158.8 166.6 (7.9) 4.7
Consumption 162.1 157.1 5.0 3.2
Surplus/deficit 39.3 48.8 (9.5) 19.5
Import demand 47.4 44.8 2.6 5.8
Export availability 48.2 51.0 (2.8) 5.5
End stocks 38.6 42.6 (4.1) 9.6
Stock/consumption
ratio in% 23.8 27.1 (3.3) 12.1
Source: USDA , FAS PSD database updated Nov 2008
mmtrv: million metric tones, raw value; mmt: million metric tones,
white value
During the current season (2007-08), the global availability of sugar
has gone up on account of surplus in Brazil (exported 19.75 mmtrv) and
India (exported 4.9 mmt), which has kept the sugar prices under check.
Raw-white premium, however, remained high because of lower quantities
of white sugar being offered by refineries including those in EU and
rising demands. The high freight costs created regional demand and
supply clusters and India, therefore, emerged as a major regional
supplier of white and raw sugar in this year.
Global sugar consumption during 2007-08 has gone up to 162.1 mmtrv, up
by 3.2% over the previous year. The reasons for increase in consumption
were rising global demand, improved standard of living in
developed/under developed countries and a shift of population from
rural to urban areas (around 3.3 bn people living in cities as per the
United Nations Population Fund).
The production levels in major sugar producing countries during this
period and estimates for the year 2008-09 are as under:
(Figures in mmtrv)
Country 2006-07 2007-08 (P) 2008-09 (E)
Brazil 31.5 32.1 32.4
India 30.8 28.6 22.8
EU 17.8 17.7 16.9
China 12.9 15.9 15.8
Thailand 6.7 7.8 7.9
Australia 5.2 4.9 4.9
US 7.6 7.4 6.9
World 164.5 166.6 158.8
Source: USDA , FAS PSD database updated Nov 2008
After touching the peak in 2007-08, global production is set to fall in
2008-09. Most of the fall is due to changes that are taking place in
India. While in response to the low prices relative to rising costs and
liquidity issues, going forward, production growth in Brazil is likely
to be minimal. Sugar production in China and Thailand are likely to
remain nearly constant for the 2008-09 season.
Brazil sugar and ethanol production estimates: Year 2008-09 production
estimate for Brazil at 32.45 mmtrv level is almost similar to that of
last year in spite of estimates of higher cane production,Total sucrose
destined for sugar and ethanol production is estimated at 40.5% and
59.5% for 2008-09 production against 45.5% and 54.5% respectively in
2007-08. With high crude oil prices in 2007-08 onwards, Brazil had
diverted a major part of its additional cane production for
manufacturing ethanol and consumed nearly 22.5 billion liters of
ethanol in 2007-08. In the 2008-09 season, sugar production has been
marginally higher than the last season. Total ethanol production in
Brazil for 2008-09 is estimated at 26.9 bn liters, up by 20% as
compared to the previous season. With the influx of additional flex
fuel vehicles at 87% of total new vehicles, Brazil ethanol demand is
higher by 15% in 2008-09 and estimated to double by 2011-12, which may
lead to unprecedented diversion of cane for ethanol manufacturing. With
nearly 20% devaluation of Real, Brazilian sugar realization has
improved in terms of domestic currency, partly mitigating the impact of
fall in sugar prices. However, further capacity expansion is
substantially curtailed because of lack of capital inflow. This may
reduce sugarcane processing in Brazil in 2008-09 and thereafter;
affecting their exports and consequently, supply of sugar and ethanol
to the world.
India, a regional hub for white and raw exports: The most unique
feature of sugar season 2007-08 has been the development of Indias
capabilities to export both raw and white sugar simultaneously. India
has exported over 4.9 mmt of sugar comprising 2.5 mmt of raw sugar
which has been exported first time from India. With higher ocean
freight costs, the demand around the Indian sub-continent has mostly
been met by India. The quality of Indian raw has been appreciated by
the buyers. Efficient logistics and 45 ICUMSA sugar proved to be key to
exports. In future, India may emerge as a regular exporter of raw and
premium white in its neighborhood, particularly in the surplus cane
years.
World sugar price trends: The world sugar prices remained highly
volatile and subdued on account of surplus sugar available. Except a
marginal rise in January 2008 to a level above 14 cents a pound, the
prices remained range bound between 10-12 cents. The price of white
sugar peaked in August 2008 (over 400 USD per MT), and went down
thereafter, with the lack of Investing Funds interest in commodities
hedging. The white sugar premium during the year remained constantly
high because of lower supply from EU and rising consumption. The
international prices, both of raw and white have softened considerably,
on account of economic and financial pressures and are ruling at 11.28
cents/pound and USD 322 per mt respectively (as on November 21, 2008).
The prices of Indian and international sugar have converged in 2007-
08, with the evolution of exports of raw and white and growing regional
preferences of Indian sugar.
Global recession/ slowdown, impact on sugar and ethanol industry:
Global sugar industry did not remain unaffected with the financial
meltdown and recent slowdown in the world economy. The recessionary
trends have impacted the liquidity position, which depressed values and
created new correlations between commodities, equities and emerging
market currencies. The reduction in risk appetite and withdrawals of
funds from commodity markets has reduced its depth and market making
abilities. Lower capital is being earmarked for future expansions and
the Brazilian industry is already showing sign of falling short of
market expectations with regard to production estimates for 2009-10 and
beyond. Fall in crude prices to a level below US per barrel may
impact the commercial viability of ethanol as a substitute to petroleum
products. The environmental impact of ethanol as a renewable fuel,
however, will keep its demand alive and nearly constant. The changing
currency conversion rates have started affecting domestic cost
calculations and import/export values. Falling freight rates, with
Baltic freight indices gone down by nearly 90% from 11500 in May 2008
to around 1000 in November 2008, have made movement of sugar feasible
to longer distances. The trade clusters created in 2007-08 season are
dismantling. While these issues are creating short term disruption, the
long term impact is difficult to ascertain at present. However, the
world sugar consumption is growing year after year.
Indian sugar, however, is expected to remain un-affected as it is
driven by high domestic demand which is least elastic; sugar
constitutes small percentage of household budgets; rising indirect
consumption; sugar business is mostly in cash and carry; and Indian
farmers are not credit dependant. Some impact of slowdown, however,
would be seen in the form of fewer transactions in commodity exchanges,
lower pipeline stocks and slower growth. Higher interest costs would
also affect the industry, which is highly capital intensive. The
financial stress may reduce flow of funds to the sugar sector resulting
in low capacity expansion, lack of working capital finance, and lower
funds investments in commodities.
Outlook for 2008-09 sugar: Year 2008-09 should witness a fall in global
production by over 7.9 mmtrv; due to a fall in production by over 5 mmt
in India and around 3 mmtrv in EU. Unlike Brazil, the sugar industry in
these countries is largely dependent on their domestic markets, and
lower production will translate into lower exports from these countries
affecting the globally tradable sugar. Globally, floating sugar will
reduce to 48.2 mmtrv from 51 mmtrv in 2007-08. India is likely to
produce 20 mmtrv of sugar in the 2008-09, as per the latest official
estimates available.
Year 2008-09 will largely be driven by emerging markets; with India and
China being the main drivers. On a regional basis, Asia and Africa will
have a more modest consumption growth. With lower production and rising
consumption, the stock to use ratio at the end of 2008-09 is expected
to be lower by 12.1%, from 27.1% to 23.8% . A marked contraction in
Indian production, followed by a modest decline in Brazilian sugar
production in 2009-10, will reduce global production by nearly 6%
year-over-year in 2008-09 leaving the global balance in a 1.8 mmtrv
deficit- a deficit more than double is expected in 2009-10.
Domestic Sugar Industry
Changes in India are following the volatility in the world sugar
balance. After record crushing numbers in the 2006-07 season, the
sugarcane crop has been marginally lower in the 2007-08 season due to
lower agricultural yields. With high carryover stocks and current
season surplus , prices remained soft and flat up to March 2008.
However, they have shown upward movement thereafter, in anticipation of
a lower 2008-09 crop.
India Sugar balancing
(figs in mmt)
Sugar Year 2006-07 2007-08P 2008-09E
Opening Stocks 3.6 9.2 8.1
Production 28.3 26.3 19.5
Imports - - -
Total 31.9 35.5 27.6
Consumption-domestic 21.0 22.5 23.0
Exports 1.7 4.9 0.80
Closing Stock 9.2 8.1 3.8
% age of consumption 43.8 35.9 16.5
- Till 12.09.2008, 4.8 mmt has been exported inclusive of 0.09 mmt
awaiting loading at the port.
- After accommodating for the stock adjustment
Source: ISMA/agst.xls/ras/sheet1updated on November10, 2008/ SSL
estimate
The Indian sugar industry has emerged as a raw sugar manufacturer and
exporter for the first time this year. Out of a total export of 4.9
mmt, raw sugar accounts for 2.5 mmt. White sugar export included the
export of 45 ICUMSA grade sugar, which fetched a premium in the world
market. With the emerging price difference between refined and
plantation white sugar, domestic manufacturing for refined sugar is
enlarging as buyers are becoming more quality conscious. Ethanol
adoption remained subdued due to state level restrictions and
alternative uses of alcohol. Bio-electricity is emerging as valuable
product with a potential to generate up to 5000 Mwh as against actual
power generation capacity of 1000 Mwh.
Domestic per capita sugar consumption has increased from 16.6 kg (year
2006) to 18.1 kg (year 2007); an increase of 9%, whereas the share of
alternate sweeteners (Gur, Khandsari etc) in total sweetener
consumption has declined from 5.3 kg to 5.0 kg per capita, which is
still much lower than the international standards (35 kg to 50 kg in
most of the developed countries). (Source: ISMA, F.O. Licht Year Book
and SSL estimates). During the period starting from 1980-81, the
indirect consumption of sugar (in the form of soft drinks, ready-to-eat
food, etc) has increased to 61% of the total free sugar consumption. In
developed countries this stands at 75% (EU). (Source: AC Neilson
survey; April 2007).
Over the last decade, domestic sugar demand has witnessed a compounded
annual growth of 3.75%, which is expected to rise at a faster pace.
This is due to rapid urbanization (expected at 3.3% p.a. between
2007-08 to 2011-12); increase in population (expected 1.5% p.a.); shift
from direct to indirect consumption of sweeteners (where growth rate is
much faster); and a shift of consumption from alternate sweeteners to
factory made sugar.
The Indian Council for Research on International Economic Relations
(ICRIER) in its report on Demand and Supply Trends and Projections of
Food in India of March 2008, has projected a sugar consumption at 29.3
mmt in year 2010-11 and per capita consumption of 24.9 kg p.a. In case
the GDP growth remains at 8% p.a, the projected sugar consumption is
estimated at 26.7 mmt, with per capita consumption of 22.6 kg p.a. This
demand is expected to grow up to 65.7 mmt in 2021, with a per capita
consumption of 48.8 kg p.a.
The possibility of growth in cane availability in the future is limited
because of nearly constant cultivable area and increasing competition
with other food and cash crops; stagnant farm yields; small landholding
size further getting fragmented; lack of basic research in improved
agricultural practices and ever increasing costs of agriculture. With
limited crop growth and increasing demand, Indian sugar balances may
turn from surplus to shortages as it may not be able to balance demand
from domestic production year after year.
Induced cyclicality: Domestic sugar sector is always impacted by the
induced cyclicality of high sugar prices leading to payment of higher
cane prices which in turn leads to increase in production at the cost
of other crops. This translates into higher sugarcane production and
higher sugar production resulting in lower sugar prices affecting the
ability of the mills to pay to farmers and creation of arrears. High
arrears cause a fall in cane cultivation in subsequent period and the
cycle restarts all over again.
In addition to the economic cycle, outline above, natural cycles, such
as climate variation, water availability and pest attacks, also affect
sugar cane production. In the current sugar cycle, production of
sugarcane was affected on account of higher realizations from other
food crops such as wheat, paddy and oil. With two years of excessive
sugarcane/sugar production, the cycle is turning into lower production
in the sugar year 2008-09. With rising consumption and linkages with
world sugar markets, these cycles are becoming shorter and more
volatile.
Sugar price and stock to use ratio: Like any commodity, the price of
sugar too is determined by demand-supply dynamics. The demand for sugar
has been more or less inelastic, with such factors as population growth
and per capita income influencing it. However, supply is affected by
cyclicality and seasonality of production. There has been an inverse
correlation between price of sugar and stock to use ratio at the end of
each sugar year. Domestically, season end stock to use ratio of less
than three months consumption is considered low and free sugar price
could be showing improvement with falling stock levels.
Sugar Year Consumption Stock use Ratio(%) Delhi free sale sugar
(mmt) (at end of season) price per qtl (Rs)
2001-02 16.78 67.4 1478
2002-03 18.38 63.2 1299
2003-04 17.29 49.1 1500
2004-05 18.50 25.8 1787
2005-06 18.50 19.6 1953
2006-07 21.00 43.8 1567
2007-08 22.50 35.9 1655
Source: ISMA handbook/ monthly data compilation
In the recent past, to meet sugar demand in the years when stock to use
ratio had been lower, the country resorted to import of white or raw
sugar.
Government policy measures: A number of policy measures have been
initiated by the union/state government which impacted this years
operations in the sugar industry. Sugarcane pricing issues in Uttar
Pradesh remained the major cause of disagreement between the state and
millers. The state advised price (SAP) of Rs. 125 per qtl for the
2007-08 (for general varieties), has been challenged initially with
Honble Allahabad High Court and thereafter with the Honble Supreme
Court on the rationality of non consultation process and arbitrariness
for fixation of cane price by the state government. The court fixed an
interim price of Rs. 110 per qtl instead. The matter is still sub
judice. Other policy issues initiated/implemented are:
1. Fixation of SMP at Rs. 81.18 per qtl linked to basic recovery of 9%
with a premium of Rs. 0.90 per every 0.1 point increase.
2. Increase in the rate of cess on sugar under SDF Act from Rs. 14 to
Rs. 15 per qtl w.e.f. January 1, 2008, and to Rs. 24 per qtl w.e.f
March1, 2008.
3. Buffer stock of 5 mmt created in 2006-07. This has since been
dismantled.
4. The E5 (5% blend of Ethanol with petrol) programme continued across
the country with few exceptions. The plan to increase it to E10 (10%
blend) from October 2008 has been deferred. There has not been any
change in ex factory purchase price of ethanol of Rs. 21.50 per litre.
5. Transport subsidy of Rs. 1350/1450 per MT for sugar export has been
introduced up to September 2008.
The UP Government did not reformulate the sugar incentives policy,
after its premature withdrawal in May 2007 (Sugar industry promotion
policy 2004-08) and benefits promised in the policy remained
unrealized. The matter has been referred to the Honble Allahabad High
Court for resolution and is presently sub judice. In respect of sugar
year 2008-09, the state has fixed SAP of Rs. 140/- per qtl (for general
variety), which has been challenged in the Honble Allahabad High
Court.
Future outlook: Based on updated industry estimates, sugar production
in the 2008-09 season is expected to be lower on account of a smaller
sugarcane crop, fall in farm yields and initial estimates of sugar
recoveries. These estimates have been revised downward from 22 mmt
(initial estimates endorsed by GOI). For the 2008-09 season, a large
number of cane farmers have diverted to the cultivation of other
food/cash crops with changing farm economics. The reported carryover
stocks from the 2007-08 season at 10.5 mmt still show a healthy
position. However, it is felt that the country may need stock
adjustment in the opening inventory of 2008. Taking this into account,
the carry over stock position by the end of ensuing sugar season may
lead to a situation where the season end stock to use ratio falls below
the comfort level of three months. After three years of record surplus,
the sugar cycle is now moving into deficit, having a positive impact on
sugar prices.
Utilization of molasses for the production of ethanol not only provides
value-addition to the by product, it can also ensure better price
stability and price realization of molasses for the sugar mills. This
will improve the viability of the sugar mills, which will in turn
benefit cane growers. Further, cogenerated power is emerging as the
strongest revenue and profit generator for the mills. Availability of
sugarcane and its optimum utilization in the form of
ethanol/power/plant utilization factor would be the major revenue
drivers for sugar industry going forward. Such flexibility has become
very relevant in the current scenario of economic liberalization and
more particularly, as a means to correct the aberrations in sugar
production.
Alcohol/ ethanol usage and balancing: Energy security and environmental
concerns are motivating adoption of ethanol bio-fuel globally. Ethanol
fuel demand is likely to grow exponentially in the future. Most of the
leading countries have mandated ethanol doping at different per cent
levels, in all commercial automobile fuels over the long term. An
increase in the demand of ethanol will result in lower sugar supplies.
As more cane would be diverted to ethanol, sugar prices would rise.
During 2007-08, out of the total alcohol produced in India, around 33%
was used for drinking purposes, and almost a similar amount was
consumed by the chemical industry as feed stock, leaving around one
third for the fuel ethanol. If the trend continues, and E5 is
implemented fully, going forward there may be a gap in demand and
supply. With gasoline demand of 11.6 mmt in 2006-07, the requirement of
ethanol at 5 per cent blending is expected to be over 650 million
litres. The sugar industry has reiterated its commitments that it will
not be lacking in meeting the ethanol demand by the petroleum
companies.
Current demand for alcohol for manufacturing potable alcohol is
estimated at 1.2 bn bulk litres with an annual growth rate of 9 to 10%
p.a. With the increase in the population in the drinking age and
improvement in disposable income, this growth in consumption will
increase in future. Further, the use of alcohol for chemical industry
with a base consumption of 700 mn bulk litres (estimate for 2006-07) is
growing by 5 to 6% p.a. Thus, with the overall demand of 2.50 bn bulk
liters of alcohol for all the three major consumption streams, going
forward, India may find it difficult to meet its alcohol demand from
domestic supply. In India, almost all the alcohol is derived from
sugarcane molasses.
BUSINESS DESCRIPTION AND ANALYSIS
Simbhaoli Sugars: Simbhaoli Sugars Limited (SSL) started in 1933, one
of the initial sugar plants in western Uttar Pradesh with a moderate
capacity of 400 TCD. SSL is amongst the top 10 integrated sugar
companies of India. The Simbhaoli complex with 9500 tcd capacity can
produce refined sugar up to 750 MT/day and raw sugar up to 200 MT/day;
Chilwaria complex with 6600 tcd capacity can produce plantation white
sugar up to 660 MT/day and Brijnathpur complex with 4000 tcd capacity
can manufacture refined sugar up to 400 MT/day. SSL has a capacity to
export surplus power of 30 Mwh to the state utility. Apart from sugar
and cogenerated power, SSL has a capacity to produce total rectified
spirit up to 210 Kl/day inclusive of ethanol/extra-neutral alcohol (180
Kl/day) and potable liquor of one mn cases per annum. SSL is pioneer in
manufacturing specialty sugars comprising pharmaceutical grade,
superfine grade, breakfast, candy, icing, and natural golden brown
sugars. The retail packs in sugar are available under the Trust
brand. It also manufactures and sells Bio manure and has a total
capacity to produce up to 60 tons/day at these locations.
Branding-the future thrust area: Simbhaoli Sugars has been catering to
its markets with high quality products for over seven decades. Its
refined sugar conforms to EC I/EC II grades with color codification of
less than 20/45 ICUMSA respectively. The Companys thrust has always
been to achieve the highest levels of quality standards for meeting
customer expectations. The sugar brands are being introduced in new
geographical areas by tying up with modern retail chains. The sugar is
offered in convenient consumer and institutional packs.
The Companys alcohol division is strengthening its presence in the
premium, semi-premium and popular potable alcohol segments within
India. Its potable spirits are marketed Xing (Premium Vodka)
Hunters/Simbhaoli XXX (Rum), Seven Knights (Whisky), Seven Knights
Lemon flavor (Dry Gin), and Ice Blue Tango (Pre mixed) have been
introduced under different product categories. These brands have been
developed after extensive research based on the choice and taste of
consumers.
Sugar cane development: SSL always believes in empowering its farmers
by providing all possible support to them e.g. encouraging adoption of
improved agri-practices and seed replacements. The active participation
of banks is facilitated for meeting increased credit needs of farmers
by way of various agri-financing/credit models. SSL continued to work
on seed replacement programme for converting degenerated cane varieties
into high growth/high sugar varieties. It provides all agri-inputs to
cane growers including land preparation equipment, plant protection
devices, and men and material to control pests and diseases. There is
an intensive and integrated pest management system in sugar cane area
of the sugar facilities.
SSL undertakes demonstration, field trials and continuous training to
farmers, community welfare programs, etc. It is operating over 240 cane
purchasing centers in the command areas of sugar units. Such
initiatives are important for all the sugar complexes being located in
the sugarcane rich region of Uttar Pradesh.
International marketing and trading: Simbhaoli Sugars has an active
international marketing and trading division that carries out the
Companys commodity trading activities and markets the Companys
products in international markets. During the year, SSL exported its
manufactured and traded sugar amounting Rs. 2823 lacs and alcohol
products of Rs. 30 lacs to a number of markets including EU and Africa.
SSL has set up an associated business entity, Simbhaoli Global
Commodities DMCC (SGC) in the free trade zone of Dubai, UAE. SGC is
intended to be SSLs international trading arm, working for the
sustainable development of its overseas business of marketing sugar and
alcohol related products and identifying possible global investment
opportunities in sugar, alcohol and agro-commodities sectors. SGC
intends to enlarge the distribution of SSL products in Europe, Africa
and the Middle East.
Corporate social responsibility: In an era where need for inclusive
growth is recognized, the sugar industry is amongst the few industries
that have successfully contributed to the last mile development. It has
done so by commercially utilizing the rural resources to meet the large
domestic demand for sugar and by generating surplus energy to meet the
ever increasing energy needs of India. The sector supports over 50
million farmers and their families. Sugarcane price accounts for
approximately 70 percent of the ex-mill sugar price which has become
the catalyst of rural growth.
Simbhaoli Sugars has always understood the importance of being a
socially responsible corporation. SSL meets its corporate social
responsibilities in many ways, including:
- Providing healthier and hygienic sugar and its variants to its valued
customers
- Manufacturing bio fuel to meet the green energy requirements of the
country
- Co-generating power from bio mass, which is supplied to the state
grid
- Lowering its environment footprint. The Simbhaoli plant has been
accredited by UNFCCC for carbon credits.
- The registration process is underway for the Chilwaria plant
- Manufacturing and distributing bio manure to its captive farmers
conforming to organic fertilizer standards
- Organizing rural welfare activities such as health camps, sports,
banking needs, providing clean water, etc
- Making all business operations environmentally compliant
Going forward, the sector has the potential to cater to the large and
growing domestic sugar consumption and emerge as a significant bio fuel
and co-generated power producer. It is also capable to cater to the
ethanol blending programme of E5 and beyond. Simbhaoli Sugars is
relentlessly working towards these directions.
SWOT analysis
Strengths
- Three technologically advanced facilities located in the
sugarcane-rich area of Uttar Pradesh.
- Sugarcane crushing capacity of 20,100 tcd with a capability to
produce up to 0.22 mmt of premium refined sugar and 0.08 mmt of white
sugar annually. The entire sugar at Simbhaoli and Brijnathpur locations
conforms to EU standards (45 ICUMSA and below).
- Capability to process external raw sugar in the event of shortfall in
cane availability and to create economic arbitrage.
- Strong relationships with over 120,000 sugarcane farmers, not only in
sugar cane related areas but also in other crops.
- Producer of pharmaceutical-grade and specialty sugar products under
branded categories, targeting retails, industrial users, and
hospitality and tourism industries.
- Venturing into premium/ semi premium potable alcohol segments, a
business not dependent upon sugar cycles.
- De-risked operations with power co-generation, alcohol and bio-
manure.
Weaknesses
- Sugar business is affected on account of financial constraints and
lower margins in sugar business.
- Company is part of the sugar manufacturing system of the country and
subject to induced agro climatic/ business cycles and Government
regulations.
- High gearing leading to higher financial costs and risks.
Opportunities
- Growing opportunities in bio-energy segment which includes bio- power
and ethanol.
- Brand building in potable alcohol and sugar. Trust brand of sugar has
created a number of opportunities. The potable alcohol market, in which
the Company is increasing its penetration, is growing by over 10%
annually.
- Commodity trading, both domestic and global. An offshore associate
company has been set up for this purpose.
- An excellent relationship with the cane farmers for implementing an
integrated agri- model for them.
Threats
- The sugar is the primary business of the Company, which may not only
be impacted by the changing agro-climatic conditions but also the
Government policies and regulations.
- The present economic slowdown may affect the business of the Company
in more than one manner.
Human resources: The Company has formulated a transparent HR Policy
with the objective to retain Companys over seven decade old family
culture apart from the induction of qualified personnel, who are
experts in various professional activities related to the Companys
business. These employees are the driving force behind all the assets
of the Company. They fulfill the Companys responsibility towards all
its stakeholders including themselves. The Company assesses the
learning needs of employees on regular basis to ensure that the
employees remain up to date on the latest technological changes and
management techniques.
During the year, SSL has conducted 732 man-days (previous period, 67
man-days) of training for executive staff and 1782 man-days (previous
period, 109 man-days) for non-executive staff. Quality Circle movements
adopted by the Company in 2004 have gained further strength and at
present 19 Quality Circles are operating. Industrial relations have
never been an issue as the management and employees are not two
entities but parts of the same family.
Risk assessment and mitigation policy: SSL has adopted a system based
approach for risk management, with the clear objectives of
identification, evaluation, monitor and minimization of the
identifiable risks. A policy has been formulated and adopted by the
management for controlling the risks. The management periodically
reviews the risk management framework to identify the major business
risks as applicable to the Company and work outs the mitigation
strategy.
Technology initiatives and energy conservation methods: The Company has
adopted various technology initiatives and energy conservation methods
for efficient operations. The detailed measures taken during the year
are described in the annexure forming part of this report.
Growth plan updates: SSL has implemented its growth plan (2004 to 2008)
with an investment of over Rs. 460 crores. The focus was to de- risk
the business and reduce reliance on the sugar segment alone;
diversifying business in the field of sugar, alcohol/ethanol and power.
The plan involved enhancing the capacities in all the segments of the
business as well as setting up a green field sugar complex.
Segment Unit Capacity growt
From To
Sugar TCD 11300 20100
Alcohol/ ENA KLD 75 210
Cogenerated Power (surplus) MWH 8 30
Bio Manure MTA 15000 35000
All the projects have been completed except for Phase II of Chilwaria
cogeneration, which will become operational during the 2008-09 crushing
season. Phase I of the project has been commissioned and the unit is
exporting surplus power to the state utility Company regularly.
Quality management system certifications: SSL has adopted an integrated
quality management system comprising of system based approach in its
day to day operations. It has got accredited ISO 9001:2000 for Quality
Management System, 14001:2004 for Environment Management System and
HACCP: 2002 for food safety for its Simbhaoli complex. It has also been
granted status of Star Export House vide certificate of recognition
issued by the Government of India, Ministry of Commerce and Industry.
Internal control systems: SSL has adequate systems of internal control
to reasonably safeguard the assets against loss from any unwarranted
use. All transactions are authorized, recorded and reported correctly.
Internal audit and checks are carried out regularly at various units/
projects/ activities centre to ensure the adequacy of control system
and its monitoring. The main objectives of the internal control system
are: ensure critical examination of reasons causing the problems and
offer solutions to overcome the same; identify the shortcomings that
affect the Companys operations significantly; ensure the compliance of
Company policies and procedures and develop a cost effective approach
to work.
An audit committee of the Board, headed by an independent non-
executive director, is in place to review the internal controls and
other financial systems. SSL has implemented detailed plans to control
all the elements of costs to remain competitive. It has appointed a
firm of chartered accountants to carry out internal audits.
Communication: SSL has developed a transparent system for communicating
with its stakeholders. Apart from having a website,
www.simbhaolisugars.com, it has a quarterly journal Trust Talk,
which is distributed to its customers, suppliers, major investors and
employees. During the year, four issues of Trust Talks were published
and distributed. Each quarterly result of the Company is accompanied by
an investor update analysis. These communications are available at the
Companys website and are regularly updated.
During the year, business login for institutional and corporate clients
and newsletter auto- subscription were introduced. Business to business
login through website will allow the customers, dealers, and other
stakeholders to interact and deal with the Company directly through the
website login, thereby saving the time and costs involved in the
communication and confirmations. Direct subscription of the newsletter
from the website will facilitate sending the newsletter to the
subscribers automatically every quarter.
OPERATIONS
A summary of the physical operations of various business units of the
Company for the year under report is stated as under:
Manufacturing facilities Unit Year/Period Ended
September September
30, 2008 30, 2007
(12 Months) (18 Months)
Simbhaoli Sugar (SSD)
Sugarcane consumed MT 11,23,395 14,69,776
Sugar recovery % 10.28 9.34
Raw sugar refined MT 2,946 12,383
Sugar produced* MT 1,24,151 1,47,405
Surplus Power exported Kw 313.14 83.78
Gross season Days 142 196
Date of closure of plant 17.04.2008 15.05.2007
Chilwaria Sugar (CSD)
Sugarcane consumed MT 5,52,757 8,37,484
Raw sugar consumed MT Nil 19,655
Sugar recovery % 9.00 8.75
Sugar produced* MT 49,420 91,710
Surplus power exported Kw 171.38 Nil
Gross season Days 135 230
Date of closure of plant 14.04.2008 16.06.2007
Brijnathpur Sugar (BSD)
Sugarcane consumed MT 3,33,354 1,56,998
Sugar recovery MT 9.50 8.01
Sugar produced MT 31,656 12,575
Gross season Days 126 92
Date of closure of plant 02.04.2008 23.04.2007
Simbhaoli Distillery (SDD)
Alcohol/ Ethanol produced B.L. 2,22,77,750 4,12,45,180
Potable alcohol sold Cases 5,94,906 5,31,660
Days of operations** Days 220 464
Chilwaria Ethanol (CED)
Alcohol/ Ethanol produced B.L. 1,16,08,632 1,11,70,010
Days of operations** Days 265 253
- Including conversion of raw sugar
- Days of operation were lower, due to shortage of molasses
The operational performance for the current year is not comparable with
the performance achieved in the previous period of 18 months.
During the year, an aggregate 2.01 mmt of sugarcane was crushed at all
the sugar divisions of the Company as against 2.46 mmt in the previous
period of 18 months. The average sugar price realization during the
year ended September 2008 including excise duty is Rs.1625 per qtl.
(previous period Rs. 1687 per qtl.). Levy price for the season 2007-08
at Rs. 1275 per qtl. remaining at the level of 2006-07 season only.
SSL exported 17,799 mt (previous period 58,980 mt) of white sugar
during the year, which included exports under advance license scheme
(ALS) and open general license (OGL). 29,421 mt of export obligation
was outstanding at the year end. During the year, the Company commenced
export of potable alcohol to Africa.
FINANCIAL RESULT AND ANALYSIS
(Rs.in lacs)
Particulars Year ended Sept Period ended
30, 2008 Sept 30, 2007
(12 months) (18 months)
Net Sales/Income from operations 43,545.15 65,646.51
Other Operating Income 1,009.16 554.39
Total operating income 44,554.31 66,200.90
Profit from Operations
before other income, interest,
exchange fluctuation
and derivative loss 1,576.24 (3,533.73)
Other Income 93.23 575.31
Profit/(Loss) before
Interest, exchange fluctuation
and derivative loss 1,669.47 (2,958.42)
Interest and finance cost 3,963.75 3,638.80
Exchange fluctuation and
derivative loss/(profit) 2,112.12 (235.50)
(Loss) before tax (4,406.40) (6,361.72)
Tax expense
deferred tax benefit (1,555.73) (1.70)
Fringe benefit tax 59.50 62.70
Net (Loss) after Tax (2,910.17) (6,422.72)
In view of the loss incurred during the year under report, your
directors express their inability to recommend any dividend for the
year.
The analysis of balance sheet of the Company as at September 30, 2008
and profit and loss account for the year ended as on that date is
reported as under:
Share capital: The following movement in the share capital has taken
place during the year:
a. 14,96,000 share warrants have been converted into 14,96,000 equity
shares in the Company. The issue proceeds of Rs. 705 Lacs were utilized
for capital expenditure/ working capital requirements of the Company.
b. 1,26,524 stock options issued to employees have been converted into
1,26,524 equity shares in the Company. The issue proceeds of Rs. 49
Lacs were utilized for capital expenditure/working capital requirements
of the Company.
Reserve and surplus : The following movement has taken place under the
reserve and surplus heads during the year:
a. Revaluation reserve: Deduction during the period of Rs. 40 lacs due
to depreciation charged on re-valued amount of fixed assets.
b. Share premium account: Rs.5526 lacs.
c. Profit and Loss account: Total loss is Rs. 2910 lacs for this year.
Total equity shareholders funds excluding revaluation reserve of the
Company decreased to Rs. 2513 lacs as on September 30, 2008 from Rs.
5455 lacs as on September 30, 2007. The book value per equity share is
Rs. 11.75 as on September 30, 2008.
Secured loans - The Company took various loans secured on its assets to
fund its expansion plans. The cash credit facilities utilization during
the year remained higher on account of higher carry over inventory.
Unsecured loans - Unsecured loans mainly represent 0% foreign currency
convertible bonds (FCCB) of Rs. 15490 lacs (US million) issued by
the Company on March 10, 2006 to finance its expansion plans. The fixed
deposits have been decreased from Rs 54 lacs to Rs 15 lacs by payment.
Deferred tax liabilities/assets (net) - A deferred tax asset of Rs.
1927 lacs is recognised in these accounts. Board is confident that
there is a virtual certainty that sufficient future taxable income will
be available against which these assets will be realized in the normal
course of Companys business.
Fixed assets : The following movement has taken place under the fixed
assets head during the year:
a. Capital expenditure: An amount of Rs. 10785 lacs has been spent on
capital expenditures including capital work in progress on the ongoing
projects during the year.
b. Capex commitment: The remaining capital expenditure commitments of
the Company are at Rs. 2446 lacs as at September 30, 2008, (previous
period Rs. 2217 lacs).
c. Retirement of assets: The Company has retired/ transferred various
assets having gross book value of Rs. 229 lacs (previous period Rs. 269
lacs) and net book value of Rs. 47 lacs (previous period Rs. 139 lacs).
Pre-operative expenditure - The pre-operative expenses pending
allocation of Rs. 1175 lacs (Previous period 3118 lacs) represents pre
operative expenses related to projects under execution.
Sundry debtors - Sundry debtors (net) amounting to Rs.3695 lacs as on
September 30, 2008 (previous period Rs. 2983 lacs), considered good and
realizable. Provisions are generally made for all debtors outstanding
for over 360 days subject to their scope of realization and depending
on the managements perception of the risk. Debtors are at 5.59% of
gross revenues for the year ended September 30, 2008, as compared to
3.06% for the previous period, representing an outstanding of 20 days
and 17days of gross revenues for the respective year/period.
Current liabilities and provisions: Sundry creditors comprises amount
due to small scale industries, the suppliers of raw materials, stores
and services, other expenses. Other provisions include provision for
FCCB of Rs. 2718 lacs (previous period Rs. 1362 lacs) towards the
premium on redemption of FCCB and Rs. 128 lacs (previous period Rs.114
lacs) towards provisions for leave encashment.
Sales and other income : Sales and other income (net of excise) for the
year was Rs. 44648 lacs (Previous period Rs. 66379 lacs). On annualized
basis, sale has gone up marginally. Average realization rate of sugar
for the year has increased by Rs. 39 per quintal. The other income
comprises interest, rent, profit on sale of fixed assets,
liability/provisions no longer required written back and miscellaneous
earnings from credit for carbon credits.
Accounting policies: The Companys financial statements are prepared in
compliance with the requirements of the Companies Act, 1956 and
Generally Accepted Accounting Principles in India. The management of
the Company accepts responsibility for the integrity and objectivity of
these financial statements, as well as for various estimates/ judgments
used in preparation of these statements. The estimates and/ or
judgments have been made on a consistent, reasonable and prudent basis
to reflect true and fair picture of the state of the affairs of the
Company.
Debt servicing and public deposits: The sugar industry faced a sharp
decline in earnings on account of fall in the margins on free sale
sugar sold and increase in the cost of production due to increase in
the sugarcane prices, from August 2006 onwards. SSL incurred losses
including cash loss in 2006-07 and required additional funds for
completion of its projects and to meet its working capital needs.
Therefore, a Scheme for restructuring of existing secured loans and
obtaining fresh loans was approved by lenders to the Company under
Corporate Debt Restructuring Mechanism on December 12, 2007. The
Scheme became effective from July 1, 2007. The main features of the
scheme comprises the reduction in interest rate on certain loans,
re-schedulement for repayment of term loans with increased moratorium
and additional funding to meet the capital expenditure and working
capital needs.
The Company has not accepted any fresh public deposits during the year
and repaid deposits aggregating Rs. 43 lacs. There has not been any
amount overdue towards the public deposits accepted earlier.
AUDITORS REPORT
The comments on the statement of account referred to in the report of
the auditors are self-explanatory, and explained in the appropriate
notes to accounts.
DIRECTORS
At the forthcoming 72nd Annual General Meeting (AGM) of the Company,
Mr. Samir Kumar Ganguli, an Independent Director is retiring by
rotation and being eligible offers himself for re-appointment. Mr. Ram
Sharma, another independent director also retires by rotation and
expressed his inability to continue as the director of the Company, on
account of other engagements.
During the year, due to untimely demise, Mr. B. Gowri Prasad on January
15, 2008 ceased to be director of the Company. Mr. Prasad was the
technical head of M/s J. P. Mukherjee & Associates Private Limited,
Pune. His valuable contribution to the Company as director will always
be remembered.
ICICI Bank has withdrawn the nomination of Mr. J.K. Jain and nominated
Mr. Naveen Atrishi in his place as its nominee director with effect
from May 6, 2008. Mr. Naveen Atrishi is MBA (Finance) from FMS, Delhi
University and B.E. (Engineering) from DCE, Delhi University and is
associated with ICICI Bank since 2005 at a senior position. IDBI Ltd
has withdrawn the nomination of Mr. Suman Kumar with effect from
September 1, 2008.
The Board of Directors places on record its appreciation for the
advices and guidance extended by the outgoing directors to the Company.
SHARE WARRANTS
The Company has issued and allotted 31,00,000 share warrants at an
exercise price of Rs. 42.55 (including premium of Rs. 32.55) per equity
share to the specified promoters on January 30, 2008 under the
provisions of SEBI (Disclosure & Investor Protection) Guidelines, 2000
for preferential issues. These warrants are convertible into equity
shares of the Company within 18 months from the date of allotment i.e.
January 30, 2008. During the year, 14,96,000 warrants have been
converted into 14,96,000 fully paid up equity shares in the Company.
EMPLOYEE STOCK OPTION SCHEME
Under Simbhaoli Sugars Limited- Employees Stock Option Scheme 2007, the
Company has issued and allotted 5,94,425 options to eligible employees
on June 20, 2007 at an exercise price of Rs. 39.00 (including a premium
of Rs. 29.00) per equity share in accordance with the provisions of
SEBI (Employee stock option scheme and employee stock purchase scheme)
Guidelines, 1999. During the year, 1,26,524 stock options have been
converted into 1,26,524 equity shares in the Company. The details for
stock options issued and exercised are given in the Annexure A to the
report.
The scheme has been implemented in accordance with the said guidelines
and the resolutions passed by the shareholders of the Company.
CORPORATE GOVERNANCE
As per clause 49 of the listing agreement with the stock exchanges, the
report on corporate governance along-with certificate from Chairman and
Managing Director and Director (Finance) form part of this annual
report.
LISTING OF SECURITIES
The equity shares of Company are listed with Bombay Stock Exchange
Limited and National Stock Exchange of India Limited. Foreign Currency
Convertible Bonds issued by the Company are listed with the Singapore
Stock Exchange.
FOREIGN EXCHANGE EARNINGS AND OUTGO
An aggregate of Rs. 2852.79 lacs (Previous period Rs. 9853.31 lacs) was
earned by the Company against export of sugar. A sum of Rs. 193.46
lacs (previous period Rs. 693.15 lacs) was spent in foreign currency.
RESEARCH AND DEVELOPMENT
The details relating to Research and Development activities carried out
by the Company are stated in Form B of this Report as required under
Companies (Disclosure of Particulars in the Report of Board of
Directors) Rules, 1988.
CONSERVATION OF ENERGY
Details of steps taken for conserving the energy are stated in Annexure
to this report.
PARTICULARS OF EMPLOYEES
Information relating to employees of the company, as required under
section 217(2A) of the companies act, 1956, read with the companies
(particulars of employees) rules, 1975, as amended is set out in the
Annexure B to this report. However, as per the provisions of section
219(b)(iv) of the Companies Act, 1956, the report and the accounts are
being sent to all the shareholders of the company excluding the
aforesaid information. Any shareholder interested in obtaining such
information may write to the Company Secretary at the registered office
of the Company. The said information is also available for inspection
at the registered office during working hours upto the date of the
annual general meeting.
AUDITORS
The Auditors, M/s A F Ferguson & Co., Chartered Accountants, retire at
the ensuing annual general meeting of the Company and, being eligible,
offers themselves for re-appointment. Yo u are requested to re- appoint
the auditors for the year 2008-09 and fix their remuneration.
DIRECTORS RESPONSIBILITY STATEMENT
Pursuant to the provisions of section 217(2AA) of the Companies Act,
1956 as amended, with respect to the Directors responsibility
statement, it is hereby confirmed:
(a) that in preparation of accounts for the year ended on September 30,
2008, the applicable accounting standards have been followed along with
proper explanation relating to the material departures.
(b) that the directors of the Company have selected such accounting
policies and applied them consistently and made judgments and estimates
that are reasonable and prudent so as to give a true and fair view of
the state of affairs of the Company as at September 30, 2008 and of the
loss of the Company for the year ended on that date.
(c) that the directors of the Company have taken proper and sufficient
care for the maintenance of adequate accounting records in accordance
with the provisions of the Companies Act, 1956 for safeguarding the
assets of the Company and for preventing and detecting fraud and other
irregularities, and
(d) that the directors of the Company have prepared the accounts of the
Company for the year ended September 30, 2008 on going concern basis.
CAUTIONARY STATEMENT
Certain statements in the Report of the Directors and Management
Discussion and Analysis with words or phrases such as “will”, “should”,
etc., and similar expressions or variation of these expressions or
those concerning our future prospects are forward looking statements.
Such statements represent intention of the management and the efforts
put in to realize certain goals. Actual results may differ materially
from those suggested by the forward- looking statements due to a number
of risks or uncertainties associated with the expectations. These risks
and uncertainties include, but are not limited to, our ability to
successfully implement our strategy and changes in government policies.
The Company may, from time to time, make additional written and oral
forward looking statements, including statements contained in the
Companys filings with the stock exchanges and our reports to
shareholders. The company does not undertake to update any
forward-looking statements that may be made from time to time by or on
behalf of the company. Investors, therefore, are advised to make their
own judgments before taking any investment decisions.
ACKNOWLEDGEMENT
The Board of Directors places on record their gratitude to all the
banks and financial institutions for their continued assistance and
guidance. The Directors acknowledge with gratitude the co-operation
and assistance received from all executives, staff and workmen of the
Company.
The Directors also wish to emphatically state their gratitude to the
Government of India, State Government of Uttar Pradesh, farmers,
suppliers and all other concerned persons who have continued their
valuable support to your Company.
For and on behalf of the Board of Directors
Simbhaoli Sugars Limited
New Delhi Gurmit Singh Mann
November 28,2008 Chairman and Managing Director
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