Avadh Sugar & Energy Ltd Management Discussions

Economic Outlook:

Global Economy

The global economy continues to exhibit resilience, navigating through several challenges including the ongoing repercussions of the COVID-19 pandemic, geopolitical tensions spurred by Russias invasion of Ukraine, and widespread cost-of-living pressures. Notably, inflation has been receding more swiftly than initially projected, thanks to favourable supply-side factors and effective central bank policies, which have helped stabilize inflation expectations. In the latter part of 2023, major economies like the United States have experienced stronger-than- expected growth, driven by robust government and private sector spending, and improvements in real disposable income. Despite these gains, economic growth in the euro area remains tepid, hampered by weak consumer confidence and other inhibiting factors. While the global inflation rate is declining, the persistence of elevated interest rates and the scaling back of fiscal stimulus are expected to moderate economic expansion in the near term.(Source:IMF)

Outlook

The Global Growth Outlook for 2024 and 2025, the global economic landscape remains resilient yet faces subdued growth prospects. The International Monetary Fund (IMF) projects global growth at 3.1% for 2024 and 3.2% for 2025, which marks a slight uptick from 2023 but remains below the long-term historical average of 3.8%. This moderated growth forecast is primarily due to high central bank rates aimed at combating inflation, the phased withdrawal of fiscal support, and ongoing sluggishness in productivity across sectors.

Advanced economies are expected to see marginal growth fluctuations, with a slight dip in 2024 followed by a rebound in 2025. This fluctuation reflects varied economic recoveries and adjustments across different regions. Despite a general trend towards stabilization, global trade growth is anticipated to linger below historical norms, pressured by rising geopolitical tensions and ongoing global trade fragmentation.

Deloitte highlights those economic conditions, particularly in Central Europe, are showing divergent trends, with some regions like Poland demonstrating robust economic resilience compared to Germany. This divergence emphasizes the localized impacts of broader economic trends, including trade relations and fiscal policies.

Overall, the global economic environment is navigating through complex challenges, with central banks playing a pivotal role in steering towards a stable yet cautious growth trajectory. As inflation expectations adjust in response to policy measures and supply-side dynamics, businesses and policymakers must remain agile, ready to respond to fast-evolving economic conditions.

Growth Outlook of Major Economies

Regional growth (%)	2025	2024	2023
World output	3.2	3.2	3.2
Advanced economies	1.8	1.7	1.6
Emerging and developing economies	4.2	4.2	4.3

(Source: UNCTAD, IMF)

Performance of major economies, 2023

United States: Reported GDP growth of 2.5% in 2023

compared to 1.9% in 2022

China: GDP growth was 5.2% in 2023 compared to 3% in 2022

United Kingdom: GDP grew by 0.4% in 2023 compared to 4.3% in 2022

Japan: GDP grew 1.9% in 2023 unchanged from a preliminary 1.9% in 2022

Germany: GDP contracted by 0.3% in 2023 compared to 1.8% in 2022

(Source: PWC report, EY report, IMF data, OECD data, Livemint)

Outlook: Asia is expected to continue to account for the bulk of global growth in 2024-25. Inflation is expected to ease gradually as cost pressures moderate; headline inflation in G20 countries is expected to decline. The global economy has demonstrated resilience amid high inflation and monetary tightening, growth around previous levels for the next two years

(Source: World Bank, International Monetary Fund : April 2024)

Indian Economy

The Indian economy demonstrated a robust recovery in FY23, positioning it as the fifth largest globally. For FY24, the IMF has forecasted a growth rate of 6.8% for India, driven by strong domestic demand and governmental capital expenditures. Service exports have also shown substantial growth, contributing to a resilient economic outlook (IMF).

Looking ahead, the growth is expected to continue being supported by significant government spending on infrastructure, enhancements in the digital and tax infrastructure, and a boost in consumer spending linked to the growing middle class. Despite these positive indicators, challenges such as rising household debt and potential inflationary pressures due to volatile oil and food prices could pose risks to the sustainability of growth (IMF) (Deloitte United States)

Growth of the Indian economy

	FY 21	FY 22	FY23	FY24
Real GDP growth (%)	-6.6%	8.7	72 :	8.2

E: Estimated Growth of the Indian economy quarter by quarter, FY 2023-24

	Q1FY24	Q2FY24	Q3FY24	Q4FY24
Real GDP growth (%)	8.2	8.1	8.4	7.8

(Source: Budget FY24; Economy Projections, RBI projections, Deccan Herald)

The Interim Union Budget for FY 2024-25 in India remains focused on capital expenditure with significant investments in infrastructure, solar energy, tourism, medical ecosystems, and technology. The Ministry of Defence received the highest allocation at Rs.6,21,541 crore, representing 13% of the central governments total budgeted expenditure, with other major allocations including Road Transport and Highways (5.8%), Railways (5.4%), and Consumer Affairs, Food and Public Distribution (4.5%). Overall, the top 13 ministries accounted for 54%

of the total expenditure, underlining the governments strategy to bolster economic growth through targeted spending in crucial sectors. (Source: Ministry of Finances official documents)

Indias strong economic performance is attracting increased investor confidence, positioning it as a promising destination for global investments. The emphasis on digitalization and reform in tax systems is expected to further bolster economic resilience and efficiency, ensuring sustained growth in the coming years.

Global Sugar Industry Overview

The global sugar market is experiencing growth, primarily driven by increasing consumption in the food and beverage sector, alongside rising demand in the pharma and personal care industries. White sugar dominates the market due to its versatility in various culinary applications, while brown sugar is gaining popularity for its perceived health benefits and unique flavour, appealing to healthconscious consumers. The Asia-Pacific region leads in consumption, substantial demand in countries like India and China, fuelled by rising incomes and changing dietary patterns.

In terms of production, sugarcane remains the predominant source, especially in tropical regions, benefiting from ideal growing conditions. Technological advancements in agriculture are enhancing sugarcanes yield and quality, bolstering supply to meet the robust global demand. The sugar market is also seeing a trend towards sustainability, with major producers investing in more environmentally friendly practices and exploring organic and non-GMO sugar options to cater to consumer preferences for natural products.

Source: Grand View Research, Expert Market Research and IMARC

Particulars	2023/24	2022/23	Change in Mn Tonne	Change in %
Production	179.749 T	178.165	1.584	0.89
Consumption	180.438 T	177.857	2.581	1.45
Surplus/Deficit	-0.689 T	0.308
Import demand	67.359 T	66.518	0.841	1.26
Export availability	67.077 T	66.639	0.438	0.66
End Stocks	98.581 \	98.988	-0.407	-0.41
Stocks/Consumption ratio in %	54.63 \	55.66

Source: ISO - Quarterly Market Outlook, February 2024

Production

The global sugar production for the 2023-24 season is projected to increase, reaching 179.794 million tonnes, marking a rise of 1.584 million tonnes from the previous season. This uptick is primarily driven by a significant increase in production in Brazil, along with notable gains in the EU and Russia. Conversely, Thailand is facing a notable decline in production. The overall production from beet-growing countries, particularly in the EU, Russia, Ukraine, and Turkey, is expected to rise. However, cane sugar production is facing downward revisions, largely due to the significant reduction in Thailand. Despite Brazils production boost, the total output from net-exporting countries is experiencing a slight decline. Import requirements remain substantial across the globe, reflecting a continued reliance on imported sugar to meet international demand, with a net import figure of 51.675 million tonnes. These dynamics highlight the complex interplay of regional and global factors affecting the sugar market for the 2023/24 season (ISOSugar).

Consumption

The global sugar consumption for the 2023-24 season has reached a significant milestone, surpassing 180 million tonnes for the first time. This marks a notable increase from previous years, where consumption hovered around 170 million tonnes with minimal fluctuations. The last three seasons have seen a dramatic surge in consumption, growing at an average annual rate of approximately 1.45%. This surge is partly attributed to the recovery and changes in consumption patterns following the COVID-19 pandemic. The latest forecasts highlight that global consumption continues its upward trend, driven by population growth and increased sugar requirements across various regions

Export

In the 2023/24 sugar export market, global exports are anticipated to rise to 67.077 million tonnes, with Brazil playing a pivotal role in this increase. Brazils sugar exports are expected to jump to 32.4 million tonnes, up from 30.618 million tonnes in the previous cycle. This increase is primarily due to a larger surplus of exportable sugar and enhanced production capabilities. Brazil continues to focus predominantly on raw sugar exports, utilizing bulk loading methods to manage logistical challenges effectively.

Among the worlds top sugar exporters, Brazil is the only one projected to increase its exports significantly this season. Other major exporters like Australia and South Africa are also concentrating on raw sugar, while many are opting to export bagged white sugar, reflecting differing market strategies based on regional demands and logistical considerations. Despite these increases, the market for white sugar remains tight, suggesting a strained global balance compared to the availability of raw sugar (USDA Foreign Agricultural Service) (USDA Foreign Agricultural Service) (USDA Foreign Agricultural Service).

Global Sugar Price Scenario:

Global sugar prices have risen to near-decade highs, influenced by a mix of lower production forecasts in key producing countries like India and trade uncertainties, including speculation about Indias export restrictions for the 2023-24 sugar season. The production decreases are partly attributed to adverse weather conditions, which have impacted sugar yields. Furthermore, the Indian governments cautious stance on sugar exports to ensure domestic availability has contributed to the tightness in global sugar supply, adding upward pressure on prices. These dynamics are echoed by reports from the International Sugar Organization and Chini Mandi, highlighting a globally tight sugar market due to decreased production and potential export restrictions from major producers like India

Source: Investing.com

Domestic Sugar Industry Overview

Indias leadership role as the chair of the International Sugar Organisation (ISO) for 2024 highlights its substantial influence in the global sugar market. India is the largest consumer and the second-largest producer of sugar globally, which positions it uniquely to guide international sugar policies and practices. During its tenure as chair, India aims to promote sustainable practices across the sugar industry, reflecting its commitment to green energy and effective resource management.

The domestic sugar industry in India has demonstrated significant growth and resilience, especially noted during the COVID-19 pandemic. The country has managed to maintain stable sugar prices domestically despite global price hikes, attributing to its efficient market regulation and support to the farming community. India also leads in ethanol production, having achieved a 12% ethanol blending rate in 2022-23, up from 5% in 2019-20, which showcases its progressive shift towards reducing reliance on fossil fuels.

For the 2023-24 sugar season, India projects a significant production surplus. This surplus management is facilitated by an increase in ethanol production, supported by favorable government policies that have helped stabilize sugar prices and clear cane dues efficiently. These efforts are part of a broader strategy to enhance the sustainability and profitability of the sugar industry while supporting the economic interests of farmers.

Indias proactive global engagement and leadership in sugar and ethanol production underscore its pivotal role in shaping future trends in the sugar sector worldwide.

Production: As of the end of March 2024, the number of sugar mills that have closed their crushing operations in India stands at 322, down from 346 the previous year. This change reflects a more efficient operation across the remaining 532 active mills. The total sugar production for the season as of March 2024 is approximately 302.02 lakh tonnes, indicating a slight increase compared to the previous seasons figures 300.77 lakh tonnes (ISMA).

Production: As of the end of March 2024, the number of sugar mills that have closed their crushing operations in India stands at 322, down from 346 the previous year. This change reflects a more efficient operation across the remaining 532 active mills. The total sugar production for the season as of March 2024 is approximately 302.02 lakh tonnes, indicating a slight increase compared to the previous seasons figures 300.77 lakh tonnes (ISMA).

Sl. State No.	No. of Working Factories		Actual Sugar Production (after Diversion into ethanol)
	2023-24	2022-23	2023-24	2022-23
1 Uttar Pradesh	75	97	97	89
2 Maharashtra	67	11	107	104
3 Karnataka	4	4	50	55
4 Others*	64	75	48	51
Total	210	187	302	301

Indian Sugar Balance Sheet

Particulars	2023-24 (E)
Opening balance as on October 1 (LMT)	56
Sugar Production (LMT)	320
Domestic consumption (LMT)	285
Sugar exports (LMT)	0
Closing balance as on September 30 (LMT)	91

Source: ISMA, *after verification of stocks by the Government.

Export: At the beginning of the 2023-24 sugar season, India had imposed export restrictions, anticipating a tight supply. However, recent developments suggest an unexpected surplus in sugar production. Despite this excess, the potential for converting surplus sugar into ethanol is Limited due to existing production configurations. Additionally, the government has imposed monthly sales quotas for mills, which has further complicated the ability to expedite exports. As the season concludes, the focus may shift to managing the surplus, either through storage or cautious export strategies to prevent market oversupply.

Sugar Price Scenario: The surge in global sugar prices has affected the Indian market as well, where sugar prices have seen significant fluctuations. Concerns over lower production in key sugar-producing countries, including India, combined with potential export restrictions, have led to a rise in domestic sugar prices. This situation is compounded by Indias considerable influence in the global sugar market as one of the largest producers.

Uncertainties about the governments decision on sugar exports for the 2023-24 season have further exacerbated price volatility, reflecting the tight global supply scenario. Reports from sources like the International Sugar Organization and Chini Mandi highlight these trends, indicating a challenging period for sugar pricing in both the international and Indian markets.

Policy And Market Developments

Recent policy developments in Indias sugar industry highlight a multifaceted government strategy aimed at bolstering this critical sector, with a significant focus on the Ethanol Blending Program (EBP). The EBP seeks to achieve a 20% blending of ethanol in petrol by 2025-26, promoting the use of ethanol derived from sugarcane. This initiative is designed not only to enhance the viability of the sugar sector but also to align with environmental objectives by reducing the reliance on fossil fuels and lowering greenhouse gas emissions.

Beyond ethanol production, the governments support includes various incentives such as subsidies for the sugar sector, especially for cane farmers, to stabilize income and cushion against market fluctuations. Additionally, the government has enforced regulatory measures to ensure fair practices and promote efficiency within the sector. These comprehensive strategies demonstrate a robust framework to foster growth and sustainability in the sugar industry, reflecting its integral role in Indias agricultural and energy sectors.

In response to the financial challenges faced by sugarcane farmers and rising cultivation costs, the Commission for Agricultural Costs and Prices (CACP) has introduced a dual pricing policy for sugarcane, encompassing both the Fair and Remunerative Price (FRP) and the State Advised Price (SAP). These adjustments in SAP are part of a broader effort by state and central governments to bolster the agricultural sector and provide significant support to farmers navigating the complexities of sugarcane production.

To address specific economic pressures:

FRP Hike for Sugarcane: For the sugar season 2023-24, the FRP has been increased to H315 per quintal from the previous seasons H305, with a further increase to H340 per quintal planned for 2024-25. This adjustment aims to support approximately 5 crore sugarcane farmers and their families across India.

SAP Hike for Sugarcane: Several Indian states have updated their State Advised Prices (SAP) for the 2023-24 sugar season to align with economic objectives and support sugarcane farmers. Likewise, Uttar Pradesh, for instance, has increased the SAP for early maturing sugarcane varieties from H350 to H370 per quintal, for common varieties from H340 to H360 per quintal, and for unsuitable varieties from H335 to H355 per quintal. Similarly. These adjustments are part of a coordinated effort to ensure that sugarcane pricing policies are responsive to the evolving needs of the farming community, thereby contributing to their financial stability and security.

Minimum Selling Price for Sugar: Due to the lack of shelf life, sugar mills are compelled to sell their produce at prevailing market prices during the cane-crushing season, often disregarding the forces of demand and supply. To address this, the central government introduced a Minimum Selling Price (MSP) for sugar in 2018. This measure ensures that sugar mills receive at least the minimum cost of sugar production, enabling them to settle the sugarcane dues owed to farmers. Despite regular increases in the Fair and Remunerative Price (FRP) and State Advised Price (SAP) for sugarcane, the MSP for sugar has remained stagnant over the years. This discrepancy has led to a situation where sugar is often sold at prices below production costs, affecting the financial viability of sugar mills.

Capex Incentives for Ethanol Production: These government policies encourage capital expenditure in ethanol production, featuring subsidies and tax benefits to enhance the EBP and reduce reliance on imported oil.

Export Duty on Molasses: Imposed starting January 18, 2024, a 50% export duty on molasses aims to retain more for domestic ethanol production, supporting the governments blending targets.

These policy initiatives are structured to ensure that the sugar industry remains economically viable while contributing to broader national goals related to energy security and environmental sustainability.

Ethanol Industry

The Ethanol Industry in India is progressing towards an ambitious target set by the Government of India to achieve 20% ethanol blending with petrol by 2025-26. To meet this goal, India needs to significantly enhance its ethanol production capabilities. As of late 2023, the countrys ethanol production capacity stood at approximately 1380 crore liters, with a strategic aim to increase this capacity to cater to the projected demand for ethanol, which includes around 1016 crore liters required solely for blending purposes.

The government has implemented several ethanol interest subvention schemes from 2018 to 2022, facilitating the establishment and expansion of both molasses-based and grain-based distilleries. These schemes offer financial incentives, including interest subvention, to encourage investments in ethanol production infrastructure.

For the Ethanol Supply Year (ESY) 2023-24, spanning from November 2023 to October 2024, the Oil Marketing Companies (OMCs) issued a tender inviting bids for 825 crore liters of ethanol, aiming to increase the blending percentage to 15%. This initiative demonstrates the governments commitment to reducing import dependency on fuel, enhancing energy security, supporting the domestic agriculture sector, and addressing environmental concerns.

These efforts have also resulted in improved cash flows for sugar mills, enhancing their capacity to make prompt payments to cane farmers. This financial stability is crucial for the sustainability of the sugar sector and the livelihood of farmers. The increased production of ethanol has concurrently led to a reduction in petrol or crude oil imports, saving a significant amount in foreign exchange for the country and further securing Indias energy needs.

Company Performance

Overview

Avadh Sugar & Energy Limited, a vibrant entity within the prestigious K. K. Birla Group of Sugar Companies, embodies over seven decades of industry expertise. The companys foundations trace back to 1932, with its formal inception occurring in 2015 through various strategic mergers and demergers. As an integrated sugar player, Avadh is involved in the production of sugar, spirits, ethanol, and other by-products including cogeneration and sanitizer. Strategically situated in Uttar Pradesh, Indias largest sugarcane-producing state. Avadh operates four advanced sugar mills with a combined licensed crushing capacity of 39000 TCD. Additionally, the company maintains distilleries with a total capacity of 325 KLPD and cogeneration facilities capable of producing 87 MW, solidifying its status for exceptional efficiency and recovery rates across India for the last two years.

Segmental Performance

Particulars	Sugar
	FY24	FY23
Sugar cane Crushed (Lakh tonnes)	61.90	56.90
Sugar Recovery (%) (C Equivalent)	11.24	11.23
Segmental Revenue (H Crore)	2502	2713
PBIT (H Crore)	160	122
Production Qty (In Lakh tonnes)	6.40	5.32
Sales Qty (In Lakh tonnes)	5.09	5.73
Average Realisation (Rs/ Lakh tonnes)	373	348

Segmental Performance

Particulars	Distillery (Ethanol)
	FY24	FY23
Segmental Revenue (H Crore)	586	560
PBIT (H Crore)	123	113
Production Qty (In Lakh Litres)	990.75	929.79
Sales Qty (In Lakh Litres)	950.71	900.64
Average Realisation (Rs)	61.58	62.16

Segmental Performance

Particulars	Co-Generation (Power)
	FY24	FY23
Segmental Revenue (H Crore)	201	208
PBIT (H Crore)	10	(2)
Production Qty (In Lakh Units)	2695	2437
Sales Qty (In Lakh Units)	1741	1607
Average Realisation (Rs)	3.40	3.19

Ratio Analysis

Key Financial Ratios and details of significant changes therein (i.e. change of 25% or more in comparison to the previous financial year).

Ratio	FY 24	FY 23	Reason for change of 25% or more
Debtors Turnover	44.71	35.34	26.53% Due to increase in average Trade Receivable
Inventory Turnover	1.65	2.13
Interest Coverage Ratio	3.41	3.07
Current Ratio	1.05	1.00
Debt Equity Ratio	1.28	1.20
Operating Profit Margin (%)	0.12%	0.09%	33.33% Due to increase in Operating Profit
Net Profit Margin (%)	0.05%	0.04%	32.74% Due to increase in Net Profit
Return on Net worth	0.12%	0.11%

Risk Management

Risk management at Avadh Sugar & Energy Limited is a comprehensive and integral part of the companys operations. The Risk Management Committee, established under the Board of Directors, is responsible for setting risk

policies and overseeing the process of risk evaluation and mitigation. This committee ensures that risk management, internal controls, and assurance processes are deeply embedded in all company activities, allowing for effective identification and mitigation strategies across all business segments.

Internal auditors play a crucial role in monitoring the effectiveness and adequacy of the companys internal control systems. They assess compliance with legal and regulatory requirements, evaluate the efficacy of operating systems, and ensure adherence to accounting procedures and policies across all company offices. Their findings are directly reported to the Audit and Risk Management Committee, ensuring transparency and accountability.

To address structural risks such as sugar price volatility, low sugar recovery, and the State Advised Price fixation by the government, Avadh employs a variety of strategies. These include conducting research and development, organizing seminars to educate farmers on efficient harvesting practices, and enhancing operational efficiency at their facilities. These measures help increase cane yields, improve sugar recovery rates, and equip the company to effectively navigate industry risks and challenges. Through these proactive approaches, Avadh Sugar & Energy Limited continuously strengthens its risk management framework, enhancing its resilience against potential disruptions and ensuring sustained business growth.

Human Resources and Industrial Relations

The Company believes that its employees are crucial to its success and is dedicated to equipping them with

the necessary skills to keep up with technological advancements. In the past year, it held various training programs covering technical, behavioral, business, leadership, customer service, safety, and ethical skills. The Company had a workforce of 2020 as of March 31, 2024.

Corporate Social Responsibility

We demonstrate environmental and social responsibility at every step. We aim to benefit the communities around us - workforce, public and environment. We organise regular medical camps, give free medicines and also any emergency medical equipment required by the deprived. We are sowing the seeds for a budding nation by providing education to the underprivileged children and giving them access to free books. We consider ourselves responsible for the environment around us and consciously take efforts for its upliftment.

Cautionary Statement

The Management Discussion and Analysis section of our report includes several statements that outline the Companys objectives, predictions, and expectations, as well as our assessments of macroeconomic conditions. These statements are considered "forward-looking" and are based on the current forecasts and assumptions of management. However, actual results may vary from these projections due to a range of uncertainties and factors. These factors include but are not Limited to fluctuations in global supply and demand, changes in macroeconomic policies, new regulatory impacts, and variations in pricing strategies. The Company does not assume responsibility for any discrepancies between projected and actual outcomes, as these forward-looking statements may be subject to change based on subsequent developments and events.