Kothari Sugars & Chemicals Ltd Management Discussions

Industry Structure and Development World Sugar

The global sugar production during the year 2023 - 24 SS is expected to be around 181.8 million metric tons as against 180.4 million metric tons reported in the previous year. The consumption during 2023 - 24 SS is expected to be around 179.1 million metric tons against 176.2 million metric tons in the previous year. 2024 - 25 SS is expected to be a balanced year in terms of production and consumption.

Sugar production in Brazil is expected to increase during the year 2023 - 24 SS due to the diversion of more cane juice to sugar production than the earlier estimate. The industry is focusing on increasing sugar production to take advantage of better sugar prices and demand in the international market.

In Thailand the production is estimated to be around 8.1 million metric tons which will be lower by around 2.9 million metric tons than the previous season. EUs sugar production during 2023 - 24 is expected to increase by 7% than previous season, to 15.6 million metric tons.

El Nino began in June 2023, which brought warmer weather, dry conditions to many parts of Asia, Australia, West Africa and heavy rainfall to Brazil and USA. This has impacted sugar production in India and Thailand, where unseasonal weather and lack of rainfall have led to reduced sugarcane production.

The sugar price in the international market has improved significantly, making exports from India very attractive. However, exports from India are restricted to protect domestic consumers.

Indian Sugar

Indias sugar production during the sugar year 2023 - 24 is expected to be around 32.0 million metric tons as against the previous sugar years production of 32.8 million metric tons. Though there is a marginal decrease in production in Karnataka, Tamilnadu and Uttar Pradesh, Maharashtra just surpassed the previous seasons production. The sugar consumption in 2023 - 24 is expected to be around 29.0 million metric tons, against previous years 27.5 million metric tons.

It is pertinent to note that around 2.5 million metric tons of sugar is expected to be diverted to ethanol production, which is excluded from the current sugar years estimated production of 32 million metric tons.

In the beginning of the year 2023 - 24, the opening stock of sugar was 5.7 million metric tons, as against the previous years stock of 6.8 million metric tons. The expected closing stock at the end of the sugar year 2023 - 24 would be around 8.7 million metric tons. Considering the expected higher closing stock, ISMA is seeking permission from GOI for sugar export.

For the sugar season 2023 - 24, the Government of India has fixed the Fair and Remunerative Price (FRP) for Sugarcane, linked to 10.25% recovery at 3,150 per ton. A premium / rebate @ 30.70 / ton of sugarcane is applicable for the increase / decrease in recovery of every 0.1% from 10.25% recovery. However, for sugar factories having recovery of 9.5% or less, the FRP is fixed at2,819.75 / ton. GOI has announced FRP for the sugar season 2024 - 25 as 3,400 / ton linked to 10.25% recovery. A premium / rebate @ 33.20 / ton of sugarcane is applicable for the increase / decrease in recovery of every 0.1% from 10.25% recovery. However, for sugar factories having recovery of 9.5% or less, the FRP is fixed at 3,151 / ton. Though, the sugarcane procurement price has increased year on year, the Minimum Selling Price (MSP) of Sugar, which was fixed at 31/Kg in February 2019 has not been increased. However, the actual selling price is market driven.

The sugar price in the international market is reasonably good and export from India is profitable. However, since the Government of India has banned exports, industry in the country could not take advantage of it.

India has achieved an average ethanol blending rate of 60 per cent in the first four months of 2023 - 24 supply year that started from November, against the 15 percent target set by the government for the whole year. By 2025 supply year, the government has set the target of blending 20 percent ethanol with petrol

Government Policies

Government of India (GOI) has taken the following measures:

(a) GOI is continuing the monthly release mechanism for sugar which was re-introduced from Jan 2019.

(b) Sugar export is banned.

(c) For the marketing year 2023 - 24, the Ethanol procurement price has been fixed as 56.28 per litre for the Ethanol produced from C-molasses, 60.73 per litre for the Ethanol produced from BH-molasses and 65.61 per litre for the Ethanol produced from 100% sugarcane juice / syrup.

(d) GST on molasses sales is reduced from 28% to 5% from October 23.

(e) GST council recommended to keep ENA sold to the IMFL units outside the purview of GST and it is open to the state govt to fix tax if any. However, a clear G.O is yet to be released on this issue.

Ethanol policy:

In December23 GOI has banned the diversion of syrup / B-Heavy to ethanol production, anticipating a shortfall in sugar production than the estimated figures. However based on the revised sugar production estimate of 32 million metric tons, the Government has permitted the conversion of B-Heavy molasses already produced and kept in stock.

Tamil Nadu Government has taken the following measures:

The Government of Tamilnadu has disbursed a production incentive at the rate of 195 / ton directly to the farmers for the sugarcane supplied during crushing season 2022 - 23. For the crushing season 2023 - 24 also, Government has announced in the budget that 215 / ton of cane will be paid to the farmers.

Opportunities and Threats

The Central Governments push to produce more ethanol, by granting subsidies to build more ethanol plants and increasing procurement prices of ethanol produced from B-Heavy molasses is helping the industry in a big way by absorbing a significant portion of surplus sugar production. In the long run, India will have the option of balancing both sugar and ethanol production based on market requirements. The Govt. Policies like MSP and the monthly sugar release mechanism would help in stabilisation of the sugar price.

The reduction in the availabilty Agricultural labour force in Tamilnadu and the sharp increase in labour cost have serious impact on the sugarcane cultivation. Most of the factories could not get adequate cane supply to its rated crushing capacity. Therefore, mechanisation of sugarcane cultivation is to be expedited.

Vagaries in the monsoon pattern will have an impact on the availability of sugar cane which is the major raw material. Compared with 2022 - 23 crushing season, sugarcane availability for the 2023 - 24 crushing season is lower by around 20% and sugar recovery is lower because of failure of the monsoon rain. This will have a cascading effect during 2024 - 25 and 2025 - 26 crushing seasons. Also, there is no water flow in the Cauvery River during 23 - 24 season, which has led to a reduction in water table in most parts of central Tamilnadu.

Segment-wise or product-wise performance of the

Company

Sugar:

In 2023-24 financial year, 8,35,208 tons of sugarcane was crushed, as against the previous years 10,87,693 tons. This decrease of 23.2% in crushing volume is mainly due

V to the decreasein cane planting area and yield. Failure of North East Monsoon in the factorys command area and continuance of pest and disease incidence in the sugarcane crop are the major reasons for the reduction in planting area as well as yield.

Power:

Power generation in the financial year 2023 - 24 was 714.25 lakh units against previous years 882.5 lakh units. This decrease in power generation is due to lesser cane crushing compared to the previous season. The Long term PPA with TANGEDCO continues for Sathamangalam unit with a tariff of 4.837/Kw-hr. From Kattur unit, power is being sold to open access consumers and IEX.

Alcohol:

During the financial year 2023 - 24, the total alcohol production was 19,853 KL against previous years total production of 17,822 KL. This is the highest production ever achieved in your distillery. As the availability of own molasses was inadequate, the company had procured 55,043 metric tons of molasses from other factories in the state and operated distillery for the maximum possible number of days.

Quantitative Performance details:

The Company is engaged in three major segments, namely Sugar, Cogeneration of power (Cogen) and Distillery. The segment wise performance for the year is as under:

Particulars	Sugar (Tonnes)	Power & Other (Lakh Units)	Distillery (Lakh litre)
Production	74,688	714	199
Sales	76,663	364	178
Revenue	28,518	10,543	11,212
Operating Profit	(2,035)	2,670	5,398

Out Look:

Indias Sugar production for the sugar season 2023 - 24 is estimated to be around 32 million metric tons after considering the diversion of sugarcane juice / syrup / B-Heavy molasses. This will result in surplus sugar availability in the market and hence the price of sugar is likely to be under pressure. Global sugar production is expected to be around 182 million metric tons and consumption is estimated to be around 179 million metric tons. The predictions of LANina setting during the southwest monsoon period in India during 2024 is expected to have an impact on the rainfall and weather pattern.

Risk and Concerns Industry Risk

Whenever there is surplus sugar production in the country the selling price falls below the cost of production. Most of the times when India produces surplus sugar, the Global sugar production also becomes surplus. Hence, exports also become unviable.

Risk Mitigation

Ethanol production capacity should be increased to absorb surplus sugar available in the market for stabilisation of the sugar price in the long run. The development of alternate usage of sugar and positive and proactive policies by the Government are the key drivers. The monthly sugar release mechanism and minimum selling price for sugar introduced by the Central Government help in stabilisation of sugar price.

Risk specific to the Company

Failure of Northeast Monsoon (NEM) rainfall during 2023 at your factorys command area will adversely affect raw material availability for the company and in turn the overall capacity utilization. Compared with 2022 - 23 crushing season, sugarcane availability for the 2023 - 24 crushing season is lower by around 47% and sugar recovery is lower because of the failure of monsoon rain and subsequent\ summer rains. Further, pest and disease incidence in sugarcane crops in the central part of Tamilnadu and in particular, in your companys command area forced the farmers to go for alternative crops as a crop rotation measure. Also, competitive crops like Paddy, topiaco, banana, gingelly etc., fetch better revenue compared to sugarcane. All these will have a cascading effect during 2024 - 25 and 2025 - 26 crushing seasons.

Risk Management

Your company gives top priority to the development of sugar cane in the command area by optimizing utilisation of all resources.

A few major initiatives taken by the company are given below.

(i) Working on the development of new sugar cane clones having characteristics like higher yield, high sugar recovery, early maturing, drought tolerant, pest & disease resistant etc., in association with SISMA, TNAU and Sugar cane Breeding Institute, Coimbatore.

(ii) Bulk planting of high yield and high sugar varieties like Co-86032, CoV-09356, Co -11015, COG-7 etc., in both the units command areas.

(iii) Educating farmers on modern cultivation practices by organising technical seminars, providing technical support, demonstrating modern practices in Demo plots, etc.

(iv) Providing technical and financial support to the farmers on the development of irrigation infrastructure such as well deepening, lift irrigation, installation of new bore/ pumps etc.

(v) Promoting water conservation systems like micro irrigation systems in association with the State Agriculture Department.

(vi) Mechanization of cane cultivation, right from ploughing to harvest to the possible extent to reduce the cultivation cost to the farmers and to reduce the dependency on labour.

Discussion on Financial Performance with respect to Operational Performance Operational Review and State of Affairs

Production No. Performance	2023 - 2024	2022 - 2023
(i) No of crushing days: Kattur Unit	151	184
Sathamangalam Unit	165	187
(ii) Cane Crushed (tons)	8,35,208	10,87,693
(iii) Sugar Recovery (%)	8.88	9.57
(i ) Sugar Produced from ( ) cane (Quintals)	7,46,880	10,38,540
Alcohol Produced (v) (KL)	19,854	17,822
Power Produced (vi) (lakh kwh)	714	882

Due to decrease in cane availability, the sugarcane crushing has decreased by over 23% compared to the previous year and sugar production is down by over 28% due to pest infection and scanty rainfall, leading to a lower recovery. The FRP (Fair and Remunerative Price) has risen by 3%, Chemicals have etc. increased by 4%. This resulted in the sugar segment posting a higher loss. In the distillery segment, profitability marginally increased due to higher production by 11% and sales by 1% with the average selling price / litre increasing by over 8%. In the power segment, the export of power to the grid has declined by over 20% consequent to lower crushing and lower sales volumes of bagasse.

The finance cost marginally decreased by around 10% compared to the previous year due to the repayment of term loans, despite higher interest cost reset and higher usage of short-term borrowings.

Internal Control Systems and their adequacy

The Company has established a system of internal control across all its business operations and for safeguarding the Assets. The functions of Internal Audit are carried out by an Independent firm of Chartered Accountants, who submit their Reports on a quarterly basis to the Management. These Reports are placed before the Audit Committee at its meetings for review.

The Board, Audit Committee and the Management ensure that the internal financial control system operates effectively, and they periodically review the effectiveness of internal control system in order to ensure due and proper implementation and due compliance with applicable laws, accounting standards and regulatory norms.

The Internal Auditors review the adequacy of internal control systems and suggest necessary checks and balances to ensure and increase the effectiveness of the system and that the policies are in place for approval and control of expenditure.

Human Resources / Industrial Relations

Human resources are the most important resources in an organization and need to be used efficiently, because the success, stability and growth of an organization depend on its ability in acquiring, utilizing and developing human resources for the benefit of the organization. Employees attend a series of training sessions on Technical and soft skills as part of the Employee Development Program. Special Onsite Program and In-house Training program were conducted on safety. During the year, industrial relations have continued to be cordial, conducive, and mutually productive.

The Human Resources Department created an Internal Complaint Committee for the prevention and redressal of sexual harassment of women at workplace as per the requirement of Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act 2013. There were no incidents of sexual harassment reported during the year under review, in terms of the provisions of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.

The total number of employees as on 31^st March 2024 was 512 in respect of sugar and allied operations.

Key Financial Ratios

Description	u/m	2023-24	2022-23	Remarks
Debtors Turnover	Days	18	16	Barring EB dues rest of the sales are on cash and carry basis.
Inventory Turnover	Days	117	85	Lower Sales to Quota mechanism implemented by Govt. of India.
Interest coverage ratio	Times	12.89	15.09	Lower earnings and Higher working capital borrowings.
Current ratio	Times	1.76	1.74	Lower sales and higher inventory buildup due to sugar sales quota release mechanism implementation post vacation of our stay in High Court.
Debt Equity ratio	Times	0.73	0.68	Increase in borrowings (cash credit) to meet vendor payments due lower sales volume due to Quota system.
Operating Profit Margin	%	5.98	7.64	Higher cane cost / lower yields.
Net Profit Margin	%	5.87	6.87	Lower due to product volume and margin mix and higher tax provisioning.
Return on Net worth	%	11.00	17.56	Lower retained earnings due to product volume and margin mix and Dividend payout of 10%.

 

	On behalf of the Board
	for Kothari Sugars and Chemicals Limited
Place : Chennai	Nina B. Kothari
Date : May 17, 2024	Chairperson