Dollex Agrotech Ltd Management Discussions

GLOBAL ECONOMIC

Overview: The global economic growth was estimated at a slower 3.2% in 2022, compared to 6% in 2021 (which was on a smaller base of 2020 on account of the pandemic effect). The relatively slow global growth of 2022 was marked by the Russian invasion of Ukraine, unprecedented inflation, pandemic induced slowdown in China, higher interest rates, global liquidity squeeze and quantitative tightening by the US Federal Reserve. The challenges of 2022 translated into moderated spending, disrupted trade and increased energy costs. Global inflation was 8.7% in 2022, among the highest in decades. US consumer prices increased about 6.5% in 2022, the highest in four decades. The Federal Reserve raised its benchmark interest rate to its highest in 15 years. The result is that the world ended in 2022concerned that the following year would be slower.

The global equities, bonds, and crypto assets reported an aggregated value draw down of US$ 26 trillion from peak, equivalent to 26% of the global gross domestic product (GDP). In 2022, there was a concurrently unique decline in bond and equity markets; 2022 was the only year when the S&P 500 and 10-yearUS treasuries delivered negative returns of more than 10%.

Gross FDI inflows equity, reinvested earnings and other capital declined 8.4% to US$ 55.3 billion in April-December. The decline was even sharper in the case of FDI inflows as equity: these fell 15% to US$ 36.75billion between April and December2022. Global trade expanded by 2.7% in2022 (expected to slow to 1.7% in 2023).

The S&P GSCI TR (Global benchmark for commodity performance) fell from a peak of 4,319.55 in June 2022 to3,495.76 in December 2022. There was a decline in crude oil, natural gas, coal, lithium, lumber, cobalt, nickel and unreal realizations. Brent crude oil dropped from a peak of around US$ 120 per barrel in June 2022 to US$ 80 per barrel at the end of the calendar year following the enhanced availability of low-cost Russian oil.

THE EMERGING MARKETS AND DEVELOPING ECONOMIES ARE ESTIMATED TO HAVE GROWN THEIR GROSS DOMESTIC PRODUCT (GDP) AT AN AVERAGE OF 4.0% IN 2022 COMPARED TO 6.9% IN 2021.

Regional Growth	FY 2023	FY 2022
World Output	3.2	6.1
Advanced Economies	2.5	5.0
Emerging and Developing Economies	3.8	6.3

PERFORMANCE OF MAJOR ECONOMIES

United States: Reported GDP Growth of 2.1% compared to 5.9% in 2021. China: GDP growth was 3% in 2022 compared to 8.1% in 2021. United Kingdom: GDP grew by 4.1% in 2022 compared to 7.6% in 2021.

Japan: GDP grew 1.7% in 2022 compared to 1.6% in 2021.

Germany: GDP grew 1.8% compared to 2.6% in 2021.

OUTLOOK

The global economy is expected to grow2.8% in 2023, influenced by the ongoing Russia-Ukraine conflict. Concurrently, global inflation is projected to fall marginally to 7%. Despite these challenges, there are positive elements within the global economic landscape. The largest economies like China, the US, the European Union, India, Japan, the UK, and South Korea are not in are cession. Approximately 70% of the global economy demonstrates resilience, with no major financial distress observed in large emerging economies. The energy shock in Europe did not result in a recession, and significant developments, including China’s progressive departure from its strict zero-Covid policy and the resolution of the European energy crisis, fostered optimism for an improved global trade performance. Despite high inflation, the US economy demonstrated robust consumer demand in 2022. Driven by these positive factors, global inflation is likely to be still relatively high at 4.9%in 2024. Interestingly, even as the globa economy is projected to grow less than3% for the next five years, India and China are projected to account for half the global growth. (Source: IMF)

INDIAN ECONOMIC OVERVIEW

OVERVIEW: Even as the global conflict remained geographically distant from India, ripples comprised increased oil import bills, inflation, cautious government and a sluggish equity market. India’s economic growth is estimated at 6.8% in 2022-23. India emerged as the second fastest-growingG20 economy in 2022-23. India overtook UK to become the fifth-largest global economy. India surpassed China to become the world’s most populous nation

 

(Source: IMF, World Bank)

Growth of the Indian Economy

	FY 20	FY 21	FY 22	FY 23
Real GDP Growth	3.7	-6.6%	8.7	6.8
(%)

Growth of the Indian Economy Quarter by Quarter, 2022-23

	Q1FY 23	Q2FY 23	Q3FY 23	Q4FY 23
Real GDP Growth	13.1	6.3	4.4	4.9
(%)

 

(Source: Budget FY24, Economy Projections, RBI Projections)

According to the India Meteorological Department, the year 2022 delivered8% higher rainfall over the long-period average. Due to unseasonal rains, India’s wheat harvest was expected to fall to around 102 million metric tons (MMT) in 2022-23 from 107 MMT in the preceding year. Rice production at 132 million metric tons (MMT) was almost at par with the previous year. Pulses acreage grew to 31 million hectares from 28 million hectares. Due to a renewed focus, oilseeds area increased 7.31% from 102.36 lakh hectares in 2021-22 to 109.84 lakh hectares in 2022-23.

India’s auto industry grew 21% in 2023; passenger vehicle (UVs, cars and vans) retail sales touched a record 3.9 million units in 2023, crossing 3.2 million units in 2019. The commercial vehicles segment grew 33%. Two-wheeler sales fell to a seven-year low; the three-wheeler category grew 84%.

Till the end of Q3FY23, total gross non performing assets (NPAs) of the banking system fell to4.5% from 6.5% a year ago. Gross NPA for 2023 was expected to be4.2% and a further drop is predicted to3.8% in 2023-24.

As India’s domestic demand remained steady amidst a global slowdown, import growth in 2023 was estimated at 16.5%to US$ 714 billion as against US$ 613billion in 2022. India’s merchandise exports were up 6% to US$ 447 billion in2023. India’s total exports (merchandise and services) in 2023 grew 14 percent to a record of US$ 775 billion in 2023and is expected to touch US$ 900 billion in 2024. Till Q3FY23, India’s current account deficit, a crucial indicator of the country’s balance of payments position, decreased to US$ 18.2 billion, or 2.2% of GDP. India’s fiscal deficit was estimated in nominal terms at ~ H17.55 lakh crore and 6.4% of GDP for the year ending March 31, 2023.

 

(Source: Ministry of Trade & Commerce)

India’s headline foreign direct investment (FDI) numbers rose from US$ 74.01 billion in 2021 to a record US$ 84.8 billion in 2021-22, a 14% Y-o-Y increase, till Q3FY23. India recorded a robust US$ 36.75 billion of FDI. In 2022-23, the government was estimated to have addressed 77% of it dis investment target (H50,000 crore against a target ofH65,000 crore).

India’s foreign exchange reserves, which had witnessed three consecutive years of growth, experienced a decline of approximately US$ 70 billion in 2022, primarily influenced by rising inflation and interest rates. Starting from US$606.47 billion on April 1, 2022, reserves decreased to US$ 578.44 billion by March 31, 2023. The Indian currency also weakened during this period, with the exchange rate weakening fromH75.91 to a US dollar to H82.34 by March31, 2023, driven by a stronger dollar and increasing current account deficit. Despite these factors, India continued to attract investable capital.

The country’s retail inflation, measured by the consumer price index (CPI), eased to 5.66% in March 2023. Inflation data on the Wholesale Price Index, WPI (calculates the overall price of goods before retail) eased to 1.3% during the period. In 2022, CPI hit its highest of7.79% in April; WPI reached its highest of 15.88% in May 2022. By the close of the year under review, inflation had begun trending down and in April 2023declined below 5%, its lowest in months.

India’s total industrial output for FY23, as measured by the Index of Industrial Production or IIP, grew 5.1% year-on year as against a growth of 11.4% in2021-22.

India moved up in the Ease of Doing Business (EoDB) rankings from 100th in2017 to 63rd in 2022. As of March 2023, India’s unemployment rate was 7.8%.

In 2022-23, total receipts (other than borrowings) were estimated at 6.5%higher than the Budget estimates Tax-GDP ratio was estimated to have improved by 11.1% Y-o-Y in RE 2022-23.

The total gross collection for 2023 wasH18.10 lakh crore, an average of H1.51lakh crore a month and up 22% from2021-22, India’s monthly goods and services tax (GST) collections hit the second highest ever in March 2023to H1.6 lakh crore. For 2022 23, the government collected H16.61 lakh crore in direct taxes, according to data from the Finance Ministry. This amount was17.6% more than what was collected in the previous fiscal.

Per capita income almost doubled in nine years to H172,000 during the year under review, a rise of 15.8%over the previous year. India’s GDP per capita was 2,320 US$ (March2023), close to the magic figure of US$ 2500 when consumption spikes across countries. Despite headline inflation, private consumption in India witnessed continued momentum and was estimated to have grown 7.3% in2022-23.

OUTLOOK

There are green shoots of economic revival, marked by an increase in rural growth during the last quarter and appreciable decline in consumer price index inflation to less than 5% in April 2023. India is expected to grow around 6-6.5% (as per various sources) in 2024, catalysed in no small measure by the government’s 35% capital expenditure growth by the government. The growth could also be driven by broad-based credit expansion, better capacity utilisation and improving traded elicit. Headline and core inflation could trend down. Private sector investments could revive. What provides optimism is that even as the global structural shifts are creating a wider berth for India’s exports, the country is making its largest infrastructure investment. This unprecedented investment is expected to translate into a robust building block that, going ahead, moderates’ logistics costs, facilitates a quicker transfer of products and empowers the country to become increasingly competitive. This can benefit India’s exports in general, benefiting several sectors. The construction of national highways in2022-23 was 10,993 km; the Ministry of Road Transport and Highways awarded highway contracts of 12,375 km in the last financial year

 

(Source: IMF)

UNION BUDGET 2023-24 PROVISIONS

The Budget 2022-23 sought to lay the foundation for the future of the Indian economy by raising capital investment outlay by 33% to H10 lakh crores, equivalent to 3.3% of GDP and almost three times the 2019-20 outlay, through various projects like PM Gati shakti, Inclusive Development, Productivity Enhancement& Investment, Sunrise Opportunities, Energy Transition and Climate Action, as well as Financing of Investments. An outlay of H5.94lakh crore was made to the Ministry of Defence (13.18% of the total Budget outlay). An announcement of nearlyH20,000 crores was made for the PM Gati Shakti National Master Plan to catalyse the infrastructure sector. An outlay of H1.97 lakh crore was announced for Production Linked Incentive schemes across 13 sectors. The Indian government intends to accelerate road construction in 2023-24 by 16-21% to12,000-12,500 km. The overall road construction project pipeline remains robust at 55,000 km across various execution stages. These realities indicate that a structural shift is underway that could strengthen India’s positioning as a long-term provider of manufactured products and its emergence as a credible global supplier of goods and services.

GLOBAL SUGAR SECTOR REVIEW

As per the data published by ISO in February, 2023 in Sugar Season 2022-23, global production is expected to reach 180.431 MT, downgrading from a previous revision of 182.14 MT, due to a number of factors such as unsatisfactory European Union harvest, truncation of the UK beet harvest owing to extremely cold temperatures, snow fall in mid-December and lower sugar yield from India. Global sugar consumption is expected to reach 176.280 MT, owing to an increasing population. According to the latest report by S&P Global, the projected surplus for SS 2022-23 is further trimmed and the sugar production and consumption may be virtually balanced, compared to an estimated surplus of around 1 million tons a month ago and an estimated surplus of 3.77 million tons a few months ago. This is owing to a reduction in sugar production in Asian countries.

The southern hemisphere harvests extended beyond their usual ending dates leading to extra supply for the Sugar Season 2022-23 balance; however, it did not have a significant impact on global trade flows. The Indian government’s reluctance to commit to further export licensing dampened the prospects of export availability for Sugar Season 2022-23.

The faster-than-average drop in the crushing rate in India and Thailand have reduced output expectations from these two countries in the next season as well. There is a 50% probability of El-Nino event in the second half of 2023, which may result in drier weather in Asia and wetter weather in Brazil.

The continued Russia-Ukraine war led to the materialisation of export opportunities for Indian for white sugar. In Sugar Season 2021-22, Indian exports totaled 11.058 million tons and an increase in the adjustment for unknown net trade was introduced, with a total of 0.951 million tons in 2021-22and 0.600 million tons in 2022-23.

INDIAN SUGAR INDUSTRY OVERVIEW

According to the first estimate drawn by ISMA, Indian sugar yield was pegged at36.5 million tons during SS 2022-23, after considering sugar sacrifice of 4.5 million tons, taking the gross sugar production to nearly 41 million tons. However, this estimate further reduced to 34 million tons of sugar with a sugar sacrifice level at 4.5 million tons, owing to the declining yield and recovery from the States of Maharashtra and Karnataka.

This estimate was downgraded to 33.6million tons of sugar by trade bodies and Government of India, with some independent trade houses expecting the year’s yield to remain below the33 million ton-mark. As per the latest update, ISMA trimmed sugar production estimate to 32.8 million tons from the earlier 34 million tons. The decrease in tail-end crushing in Maharashtra and Karnataka have lowered the production estimate in Maharashtra to less than 11million tons and less than 5.6 million tons respectively. Many mills in Maharashtra and Karnataka concluded their crushing operations even before

March 31, 2023 due to lower yields caused by unseasonal rainfall, which led to a lower availability of sugarcane in these two States. This, in turn, could reduce exports, strengthening global sugar realisations and providing Brazil and Thailand an opportunity to address the void created by India.

Under the Maximum Admissible Export Quantity (MAEQ) for SS 2022-23, the government announced the first tranche of export of 6 million tons; out of which around 5 million tons were exported. Most of the sugar mills in U.P. traded deals with mills in Maharashtra and swapped their export quotas with domestic quotas. Raw sugar exports decreased year-on-year to Malaysia, Bangladesh, Far East and also the Middle East with a large part of the Indian surplus already exported.

Total Indian acreage under sugarcane was placed at nearly 59 lakh hectares in2022-23 Sugar Season (SS), 6% higher than the 2021-22 sugar season’s cane area of nearly 55 lakh hectares. Sugar consumption was expected to increase on account of the appetite coming from India’s largely unorganized catering segment, one of its largest consumers. India’s unorganised grocery segment was expected to report positive growth due an increasing population and disposable incomes.

Uttar Pradesh, Maharashtra and Karnataka accounted for 80% of India’s total sugar production. Within India, sugarcane area in Uttar Pradesh was placed at 23.08 lakh hectares compared to 23.01 lakh hectares in SS 2021-22. Cane area in Maharashtra increased to 14.41 lakh hectares in SS 2022- 23as against 13.50 lakh hectares in the previous year. Sugar production in U.P. was estimated at ~100 lakh tons.

Sugar production in Maharashtra was initially estimated at ~124 lakh tones in 2022-23 SS after diversion towards ethanol. This estimation is expected to witness a significant downwards revision due to lower yield. Karnataka’s sugarcane area marginally increased to 6.5 lakh hectares in SS 2022-23compared to 5.11 lakh ha in SS 2021-22. The monsoon in 2022 was considered to be above normal, adequate water reservoir levels and standing crop conditions were expected to drive Karnataka’s sugarcane production.

The states of Tamil Nadu, Haryana, Madhya Pradesh, Bihar, Uttarakhand, Andhra Pradesh, Telangana, Punjab, Chhattisgarh, Rajasthan and Odisha were estimated to collectively produce about 70 lakh tons of sugar in the2022-23 SS (after ethanol diversion). India is expected to retain its position as the largest consumer, one of the largest sugar producers and one of the largest sugar exporters.

 

(Source: Economic Times, Statista, gov)

Indian Sugar industry Balance Sheet

(In Lakh tones)

Sr.	Particulars	2018-19	2019-20	2020-21	2021-22	2022-23
No.
a.	Opening Stock as on 1st Oct	107	146	107	82	55
b.	Production during the season	332	274	312	358	340
c.	Imports	-	-	-	-	-
d.	Total Availability	439	420	419	439	395
e.	Off Take
	i)Internal Consumption	255	253	266	273	275
	ii) Exports*	38	60	72	111	62
	Total offtake	293	313	337	384	337
f.	Closing stock as on 30th Sept.	146	107	82	55	59
g.	Stock as % Off take	57%	42%	31%	20%	21%

The weather was favorable for the growth of sugarcane since the beginning of 2023, resulting in an increase in the estimated availability of sugarcane for the 2023-24 season. The total sugarcane crush is estimated to be 590 MMT, higher than the previous forecast of 581 MMT from a survey conducted in November 2022, while sugar production is expected to reach 36.7 MMT.

There was a marginal decrease in the harvested areas, owing to the switch from sugarcane to soybeans and corn production. There was a marginal change in Brazil’s sugar/ethanol production at 45% sugar and 55%ethanol as producers are likely to keep focusing on sugar production.

Despite expectations of a large crop yield in CS Brazil in SS 2022-23, sugar supplies remain limited in the short term. Whereas, production risks linger in North Northeast Brazil, the upcoming SS 2023-24 is expected to be a season of bumper sugar production for Central South Brazil.

THAILAND

The total sugarcane crush for the year could reach 81 MMT, increasing by 7 MMT from the previous year. There is a possibility of achieving a record high industrial sugar yield of117 kg per MT of sugarcane for the2022-23 season, exceeding the current assumption of 114.5 kg per MT. This increase in yield could result in an additional 250,000 to 300,000 metric tons of sugar production and a corresponding increase in raw sugar exports for the 2022-23 season.

Cumulative sugar exports from Thailand for the period of October to January reached 1.79 MMT a 3% increase from the previous year. The cane estimate for upcoming SS 2023-24 is expected to be on the lower side.

USA

Estimated sugar production is expected to remain at 8.2 million tons; imports could decline 6% to 3.1million tons, based on the anticipated minimum levels under World Trade Organization and free-trade agreements, imports from Mexico, re-exports and high-tier tariff imports. Consumption is expected to remain unchanged, but stocks are expected to decline following a decline in production and imports.

CHINA

China’s sugar production was estimated at 4 million tons, due to rising cane sugar and beet sugar production. Consumption is expected to rise as COVID-related restrictions ease and imports could taper following high global sugar prices encouraging a drawdown of stocks. These factors suggest a relatively stable sugar market in China. While the numbers are still uncertain, China is expected to remain a dominant sugar importer.

THE EUROPEAN UNION AND THE UK

European Union production is expected go down by 329,000 tons to 16.2million as farmers brought down sugar beet plantings in favour of more lucrative crops like corn and sunflower. In 2022-23, the EU-

27 could import 2 MMT of sugar - the highest in six years, as even imports under the full duty are almost profitable due to high local prices. The lower planted area is expected to translate in to production cut.

RUSSIA

As of 20 February 2023, Russia produced 5.9 MMT of sugar, with only two factories in operation. In comparison, last years sugar beet processing had already ended by the same time, resulting in a lower sugar production of 470,000 MT.

CATALYSTS OF SUGAR DEMAND IN INDIA

FAVOURABLE DEMOGRAPHICS:

India has emerged as the most populous country in 2023. This population growth will catalyse demand for food, fuel and power sectors, among others, where sugarcane is an essential resource.

EXPORTS

There is a growing traction for sugar in developing economies like India, China and Middle East owing to increased disposable incomes, urbanisation and evolving food habits.

ECONOMICAL ALTERNATIVE

Sugar is the most preferred among other alternatives, across all socioeconomic age groups, due to its affordability and easy availability across retail formats (convenience stores, departmental stores, supermarkets, hypermarkets, etc.)

TRACTION IN CONFECTIONERY AND SNACK SEGMENT

The volume of Indian confectionery and snack segment (valued at US$ 110.90 billion) is expected to grow at a CAGR of 7.55%during 2023-27.

FOOD AND BEVERAGE DEMAND GROWTH

The food and beverages market size increased globally from US$ 6,729.54billion in 2022 to US$ 7,221.73 billion in 2023, growing at a compound annual growth rate (CAGR) of 7.3%, catalyzing sugar demand.

DIVERSE APPLICATIONS

Sugar is widely used in the pharmaceutical and skin care industry as well as the manufacturing of scrubs due to its exfoliating properties.

SWOT ANALYSIS

STRENGTHS

India is the largest sugar producer in the world, can address the needs of its domestic as well as export market.

The sugar industry is among India’s largest agricultural employers. The bagasse from sugarcane manufactures co-generated power (captive consumption and merchant sale).

India enjoys a vast and rich arable land availability. India is one of the world’s most economical sugar producers. The industry supports rural communities.

OPPORTUNITIES

Sugar demand is increasing in India due to a population growth. There is a large headroom to address the ethanol demand. There is large headroom for further product diversification.

WEAKNESSES

Sugar manufacturing technologies used by most companies are obsolete. India’s plantation white sugar demand is relatively low in global market. India relies largely on monsoon rainfall for cane growth.

THREATS

The domestic players may be affected by conservatively priced sugar imports.

The excessive dependence on rainfall and rising transportation costs could impact sugarcane growing.

Higher production without exports can depreciate sugar realizations

OPERATIONAL PERFORMANCE

	YEAR ENDED
	31.03.2023	31.03.2022
Number of Days	113	87
Cane Crushed (in Qtl)	3061485	16285880
Recovery (%)	8.77	9.72
Sugar Production	268776	158299
Average Selling Price of Sugar*	3333	3332

INTERNAL CONTROL SYTSTEMS AND THEIR ADEQUACY

Dollex Agrotech Limited believes that safeguarding of assets and business efficiency can be prolonged by exercising adequate internal controls and standardizing operational processes. The Company processes a robust internal control system to review performance, track operations and gauge liquidity. The system also ensures that all transactions are duly reported and all assets are properly safeguarded. Timely review of operations and recommendations of auditors allow the company to make corrections whenever and wherever necessary.

HUMAN RESOURCE MANAGEMENT

Fostering healthy linkages, for consistent improvement in productivity, quality, competitiveness and efficiency.

Implementing continuous improvements across work areas for greater competitiveness and customer focus.

Reviewing employee performance, strengths and weakness and providing relevant feedback.

Introducing the right talent with a positive attitude and potential, irrespective of caste, religion or any other criteria.

Breaking down complex challenges by focusing on major issues and promoting a streamlined organizational structure.

INDIAN ETHANOL SECTOR OVERVIEW

Ethanol is a key by-product for integrated sugar mills enjoying downstream applications in oil marketing companies (that blend ethanol with fuel). Sugar plants in India increased ethanol production to 4.6 billion litres in 2022 compared to 3.35 billion litres in 2021.The country imported around 87.3%of its fuel needs and is seeking ways to increase ethanol blending to moderate its dependence on imports. In 2021, the ethanol production capacity in India through molasses-based distilleries was 426 crore litres while that from grain-based distilleries stood at 258 crore litres.

India’s fuel ethanol consumption is expected to reach 6 billion litres in the marketing year 2022-23 compared to 4.59 billion litres in the marketing year 2021-22, enhancing blending to 12%.

India’s efforts to increase ethanol blending in petrol have multiple benefits such as reducing oil imports, lowering carbon emissions and bolstering sugar mill profitability. The country set a target of 20% ethanol blending with petrol by 2025, which would require around12 billion litres of installed ethanol production capacity. This includes 6-6.5 billion litres from sugarcane and 5-5.5 billion litres from grain or corn side interventions. Some sugar companies have already established dual-feed ethanol plants to utilize multiple sources for ethanol production. Improved blending will lead to moderation of sugar production, rationalization of fuel imports and reduction of carbon footprint.

CAUTIONARY STATEMENT

The Statement in the Management discussion and analysis section with regard to projections, estimates and expectations have been made in good faith. The Achievement of results is subject to risks, uncertainties and even less than accurate assumptions. Market Data and information are gathered from various published and unpublished reports. Their accuracy, reliability and completeness cannot be assured.