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It would be reasonable to expect that a sector as critical to the country’s agricultural prosperity as the sugar industry would be supported by the Central and State Governments.
The reality is that over the last number of years the Indian sugar industry has been battling a protracted downturn.
This was the result of unrealistically high cane prices on the one hand, which induced additional cane planting, triggered a sugar surplus, weakened sugar realizations and eroded industry profitability.
The fact that the downturn was among the longest that we have ever seen was not just a result of the demand-supply dynamics; it was a reflection of an inability to moderate cane prices to a point where they would still be remunerative for farmers and also affordable for consumers.
We are relieved to state that this extended downtrend is finally over.
There are a number of reasons for this, some for which we need to thank the climate for, some for which we need to thank the Central and State Governments and some for which we sugar manufacturers need to take the credit, albeit modestly.
Primarily, the country''s sugar industry turned around because persistently high cane prices and enhanced cane planting resulted in such extensive cane arrears that farmers were compelled to plant less cane during 2015-16. Farmers also encountered challenging meteorological conditions in Uttar Pradesh, Maharashtra and Karnataka (78% of India''s sugar production cumulatively) leading to a 3.20 million ton decline in sugar output during SS 2015-16, 11% lower than in the previous sugar season.
Given the fact that India''s sugar consumption is expected to increase by 3-4 % during SY2016-17, this could be the first time in five years when the country would consume the entire sugar produced during season 2015-16. That the industry expects yet another year of decline in output during 2016-17 on account of below par precipitation in Maharashtra and Karnataka could lead to the second successive year of inventory decline.
Things have already started to take a turn for the better. India''s domestic sugar prices reported their strongest recovery in four years; ex-factory realizations rebounded to a year-end price of B34 per kilo in Uttar Pradesh, brightening prospects for most sugar manufacturers. Dhampur was no exception. The Company showed stable cash flows in 2015-16, heralding the arrival of better days. Case in point: we had 33 lac quintals of closing stock on our books as on 31st March 2016, which will be marketed in 2016-17 at considerably higher realizations.
We believe that this sharp increase will raise the level of water across the sector, enabling some of the weaker mills to break even and the stronger mills to post handsome profits. We can safely surmise that Dhampur figures in the latter group. The increase in sugar production from 46.63 lac quintals in SS 2014-15 to 48.13 lac quintals in SS 2015-16 came about despite a statewide 4% drop in production. We could also turn the higher production to our advantage with the enhanced recovery that we generated as result of a superior varietal mix, enhanced corporate productivity and favorable weather conditions.
It would be reasonable to expect that a sector as critical to the country''s agricultural prosperity as the sugar industry would be supported by the Central and State Governments.
And this is where things get interesting. Our aggregate recovery of 10.66% during SS 2015-16 was 1.07 bps higher than in the previous season, which alone contributed an incremental output of 0.48 lac tonnes. This highlights the point that one wishes to make - that perhaps the gains accrued from superior cane varieties and farsighted operating practices will sustain across the foreseeable future.
Our optimism stems from the fact that during FY2015-16 our loss-making sugar business turned around, our ethanol business increased profits and our power generation business continued to represent the bedrock of long-term revenue visibility. Best of all, we expect this scenario to sustain across all three businesses across the foreseeable future.
Sugar: Dhampur produced 50.88 lac qntl of sugar, which was 17% higher than the previous year. We are absolutely delighted to state that our average sugar recovery increased from 9.51% in 2014-15 to 9.53% in 2015-16 on a financial year basis following a rare convergence - cane varietal improvement, better weather and corporate productivity. Total revenues from operations stood at B1,814.65 crore, which is a growth of 13% from 2014-15. We closed the financial year under review with a carry-forward stock of 33 lac quintals, which should translate into a sizeable surplus in 2016-17. Besides, renewable energy credits fetched B 17.90 crore during the year under review.
Power: We leveraged our 209-megawatt power plant (125 megawatts of saleable capacity) to generate 66.02 crore units of power in 2015-16, which was 16% higher than in the previous year. Nearly 35% of the power generated was consumed within, moderating production costs. We registered a 26% increase in revenues to earn B478.88 crore compared to B380.41 crore in the previous year. Average tariff stood at B5.05 per unit in 2015-16 compared with B4.37 per unit in the previous year. The result was that the EBITDA of power generation business increased to B202.95 crore during the year against B 173.88 crore during the previous year, an increase of 17%.
Distillery: Following an excise duty exemption on ethanol produced from molasses of SS 2015-16 and the volume and price improvements for rectified spirit, ENA and ethanol allowed Dhampur to cement its reputation as one of the key producers of ethanol.
During the year 2015-16, we majorly used molasses produced during SS 2014-15 for manufacturing ethanol and could not avail the benefit of Cenvat credit, which will be available to the Company in 2016-17. The net benefit from this will be B3.5 per litre on ethanol production.
We leveraged our 300,000 litres per day distillery capacity (Dhampur and Asmoli), to capitalize on the robust demand emanating from the market place. Revenues from the chemicals business reached a high of B413.02 crore; a 30% EBITDA from this segment increased to B73.40 crore during the current year against B54.89 crore during the previous year, a 34% increase.
We are optimistic of our sect oral and individual prospects for some valid reasons.
We expect cane output to decline for the second successive year in 2016-17. Much of this decline will come from Maharashtra and Karnataka and marginally from Uttar Pradesh. The national decline could go a long way in correcting the longstanding skew in the national sugar scenario.
Even according to the most conservative estimates, sugar realizations will remain steady. Subsequently, we expect to generate a reasonable surplus around prevailing levels based on last year''s production. The only glitch in an otherwise perfect picture is cane pricing for the 2016-17 sugar season.
Our blueprint for growth
Our focus at Dhampur will be to generate more cane than ever, crush record volumes and maintain the highest levels of efficiency.
We expect our distillery to emerge as a money spinner. We would continue to use molasses that provides a higher yield, substantially increasing our generating capacity.
We would be substantially benefited by the excise duty exemption on ethanol, gaining B5 for every litre of ethanol we sell to OMCs.
We expect to reinforce power generation operations and reap the benefits of increased tariffs.
Gaurav Goel and Gautam Goel,
Dhampur Sugar Mills Limited