Mr. Gaurav Goel and Mr. Gautam Goel, Managing Directors, review Dhampursperformance and prospects.
Q. How would you summarise Dhampurs performance in the financial year 2009-11?
A. For the Indian sugar industry, the financial year 2009-11 was one of the mostvolatile. It wasnt just a question of cyclicality during the course of the yearunder review; it was also about the speed of change in operating fortunes. In thisrespect, the cyclical whiplash was similar to the general economic meltdown thattranspired in September 2008 unprecedented for its speed and sharp decline. Whattranspired between January and March 2010 in India was perhaps no different: Sugarrealisations crashed from a peak of Rs 40 plus per kg to a trough of Rs 24 per kg, even asthe industry was struggling to address the variance in landed cane cost from Rs 162 perquintal in sugar season 2008-09, to Rs 263 per quintal in sugar season 2009-10 and to Rs218 per quintal in sugar season 2010-11. Further, the financial year under reviewreflected an inverted V sugar realisations stood at Rs 29 per kg,peaked at Rs 40 per kg, bottomed to Rs 24 per kg and finished the financial year at Rs 28per kg.
Q. How did this volatility translate into Dhampurs performance for the financialyear 2009-11?
A. Our Companys turnover stood at Rs 2,414 crore in 2009-11 (18 months) asagainst Rs 975 crore in 2008-09 (12 months). This growth resulted from a higher sugar salecontribution, including refined sugar from imported raws and from the power and chemicalbusinesses, further leading to increased sales volumes and improved realisations.
Q. How did the other divisions perform?
A. We were satisfied with our power business performance, accounting for 21% of thetotal revenue in 2009-11 (18 months) against its contribution of 14% in 2008-09 (12months). The improvement was a result of higher cogeneration revenues, on account ofbetter realisations, higher generation and improved power export. This division accountedfor 92% of Dhampurs EBIDTA in 2009-11 (18 months) which stood at 32% in 2008-09 (12months). The power business was a major factor in reducing the cyclical impact on theCompany.
It was a challenging year for our chemicals business (ethanol and alcohol) owing to ahigher cost of molasses and other raw materials, coupled with lower realisations at thebeginning of the financial year. However, higher realisations in the later part of theyear resulted in marginal profits at the EBIDTA level.
Q. What were the highlights of the Companys performance in the financial year2009-11?
A. In the preceding paragraphs, we provided a perspective of the challenges theindustry faced during the financial year 2009-11. This could have been worse, had it notbeen for some longstanding initiatives aimed at capacity growth and productdiversification. Consider the following: The Company crushed 65.26 lac tonnes ofsugarcane, against 25.47 lac tonnes in 2008-09. Raw sugar imports processed, stood at 1.78lac tonnes, against 0.18 lac tonnes in 2008-09. This increased conversion enhanced ourasset utilisation. Additionally, the Company exported 0.31 lac tonnes of sugar under theAdvance Licence Scheme, which served as a cushion against a sharp decline in domesticrealisations in early 2010. These factors enabled the sugar division to report a lowerloss than equivalent companies during the period under review.
The proportion of revenue from the non-sugar business stood at 27% for the 18 monthperiod ending March 2011, while it stood at 18% for the 12 month period ending September2009, vindicating investments in downstream by-product utilisation. Power revenues stoodat Rs 665.05 crore for the 18 month period and Rs 155.52 crore for the 12 month period.The average per unit realisation stood at Rs 4.37 in 2009-11 and Rs 3.25 in 2008-09,facilitated by increased realisations under the Open Access
Policy announced by the U.P. State Government. The Company commenced the supply ofethanol to oil marketing companies like Indian Oil Corporation Ltd, Bharat PetroleumCorporation Ltd and Hindustan Petroleum Corporation Ltd at a selling price of Rs 27 perlitre.
Consequently, the percentage of chemical business revenues in the Companysoverall revenue mix was 6% in 2009-11 (18 months) and 4% in 2008-09 (12 months).
The big picture was that cogeneration and chemical revenues stood at 27% ofDhampurs total revenues for the 18 month period, against 18% during the 12 monthperiod ending September 2009, justifying the investments we made to reduce our cyclicalexposure.
Q. What were the challenges addressed by Dhampur during the period under review?
A. Cane pricing continued to be our biggest challenge. Even though the CentralGovernment stipulated a Fair and Remunerative Price (FRP) of Rs 129.84 and 139.12 perquintal in 2009-10 and 2010-11 respectively and the actual price stood to Rs 248 perquintal for the 18 month period, which could not be covered by the realisations. Thisresulted in a loss for the sugar division. However, we were able to limit our downside,owing to effective business integration the end product of one business representedthe raw material for another. This integration made it possible for us to set off thesugar division losses with the improved revenues of the power division. The outlook isoptimistic: Sugar production is anticipated to increase in 2011-12, following a highercane output, coupled with increased biomass generation for our power business and highermolasses for ethanol production.
Q. What cost optimisation measures helped arrest divisional losses?
A. Our cost optimisation initiatives comprised:
Processing 1.76 lac tonnes of raw sugar during the period under review and runningsugar operations during the off season, resulting in superior absorption of fixed costs.Repayment of long-term debt worth Rs 104.16 crore (net).
Q. How does the Company expect to capitalise on emerging opportunities?
A. Sugar: Sugar production is expected to rise to 24.5 million tonnes on the back ofimproved cane acreage and higher yield in 2010-11; international sugar prices touched a30-year high owing to heavy rainfall and cyclones in Australia, adverse climaticconditions in Brazil, Thailand and China. These factors have created export opportunitiesfor India. Power: India is a power-deficient country and Uttar Pradesh is one of itsworst-affected states, providing an opportunity for our power division. We securedbusiness viability by venturing into Power Purchase Agreements (PPA) with the U.P.
Government. With the projected higher rate of sugarcane crushing, bagasse availabilitywill improve and the power division could run throughout the year. Purchase of a certainminimum percentage of renewable energy by the states has been made mandatory, which givesus an added opportunity. Ethanol: The 5% (E5) ethanol blending program is part of theGovernments objective of reducing the countrys dependence on fossil fuels andcrude oil imports. The earlier ethanol blending program could not take off in spite of E5being made mandatory due owing to the non-remunerative pricing of Rs 21.50 per litre.However, the current price of Rs 27 effective from October 2010 provides an incentive torevive the ethanol blending program. Cane production and molasses availability areexpected to increase, resulting in higher ethanol production. With E10 (10% blending) onthe horizon, a shift in the sugar economy from a situation of shortage to self-sufficiencywill ensure adequate ethanol availability for blending with petrol. Our focus will be toimprove the production of chemicals as well, while capitalising on the ethanol blendingprogramme, thereby strengthening realisations.
How does the Company expect to perform in 2011-12?
Going ahead, we will concentrate on increasing our capacities in the power and chemicalbusinesses to offset sugar business cyclicality, helping us earn profits during sugardownturns. We expect a better performance on account of higher sugar production and betteraverage realisations, which should help us emerge with a stronger balance sheet.
| raw material (sugarcane) costs that mills must pay farmers || even out the sugar cyclicality |
| end product (sugar) realisations regulated through the monthly release mechanism || ensure remunerative cane prices |
| size of production through control of the quantity of cane that a mill can crush || lead to capacity consolidation and economies of scale |
| sugar availability for the domestic market through control of exports and imports || double ethanol production and replace 3% of Indias gasoline consumption |
| which sugar mill a farmer may sell his cane to || generate close to 8,000 MW of green power against todays 900 MW |
| || make India a consistent sugar exporter |
What is the basis of this optimism?
Our optimism is well supported by various positive trends:
Sugar industry decontrol is anticipated, which will be beneficial for theindustry in the long run as it will result in a larger quantum of sugar being sold in theopen market at relatively higher realisations.
Higher cane production will result in adequate feedstock for the cogenerationand ethanol businesses, countering sugar cyclicality.
Indias growing appetite for automobiles will enhance fuel demand and boostethanol requirements.
The current Power Purchase Agreements with the U.P. Government will be in effectfor a period of 20 years, providing a remunerative offtake for this renewable power.
What message do you want to give your shareholders?
We will continue to focus on higher margins across all three divisions bottomline-accretive revenue from cogeneration, value-added chemicals, especially ethanol,and higher sugar production. In doing so, we expect to report an attractive bottomline in2010-11 and emerge as the most efficient integrated sugarcane products company in thecountry.
*(The year 2008-09 refers to the 12 month period ending September 2009, and 2009-11refers to the 18 month period ending March, 2011)