Saurabh_Bhat-Yes_Bank

							Sugar Industry In India
           Saurabh Bhat
   Group Executive Vice President




           December 18, 2010


                                    1
             Industry Brief
• India is the largest consumer (~23 MnT) and second
  largest producer (~25 MnT) of sugar in the world(~157
  MnT).
• Indian Sugar consumption comes from un-organised
  bulk consumers (50%), industrial consumers as soft
  drink, biscuit, chocolate and confectionary (20%) and
  balance from households.
• The Indian sugar industry has a turnover of ~Rs. 500
  billion per annum and contributes almost INR 22.5
  billion in taxes annually.
• India has around 500 sugar factories with around 50%
  in coop sector and rest in private and public sector.
        Industry Brief (contd..)
• Bulk of Indian sugar production is Plantation white
  sugar using the double sulphitation process
   – International trend is towards refined sugar by phospho
     floatation process
• Indian refined sugar capacity is < 200,000 tonnes
  against a demand of 350-400,000 tpa. Moreover there’s a
  huge export opportunity
• Availability of activated carbon from cheaper natural
  sources (coconut kernel, pinewood as against bone
  charcoal) makes the process viable. Activated carbon is
  a imp RM cost for the filtration process in refined
  sugar.
                Demand Supply Scenario

      Million Tones        SS05       SS06       SS07       SS08       SS09 SS10(E) SS11(E) SS12(E)
Opening Stock                8.5        4.9        3.4        9.2        8.7     3.2    2.9      3.3
Production                  12.7       19.3       28.4       26.4       14.5    18.5   25.0     29.0
Imports                      2.1             -          -          -     3.0     5.0      -        -
Total Supply                23.3       24.2       31.8       35.6       26.2    26.7   27.9     32.3
Consumption                 18.5       19.6       20.8       22.0       23.0    23.8   24.6     25.3
Exports                           -     1.1        1.7        4.9          -       -      -        -
Total Demand                18.5       20.7       22.5       26.9       23.0    23.8   24.6     25.3
Closing Stock                4.9        3.4        9.2        8.7        3.2     2.9    3.3      7.0
Closing stock as month's
consumption                  3.0        2.0        5.0        4.5        1.6     1.4    1.6      3.2
    Repeat of 2007-08 Situation unlikely
• Estimated that India’s sugar production will increase to
  ~25 mn MT in SS11.
• There will be a closing stock of around 3.3 mn tones
  which is equal to only 1.6 months’ consumption, much
  lower than ~ 5 months during SS07 and SS08.
• As closing stock is estimated to be only 1.6 months’
  consumption, prices of sugar are not expected to fall
  drastically as it had in 2007-08.
   Top Sugarcane producing States

    In Million Tonnes          2008-09
            State     Production % of all India
   Uttar Pradesh            109             38%
   Maharashtra               61             21%
   Tamil Nadu                33             12%
   Karnataka                 23              8%
   Gujarat                   16              5%
   Andhra Pradesh            15              5%
   All India                  285

 Top six states contribute ~ 90% of country’s sugarcane production.
 Up produces more sugarcane but Maharashtra is highest sugar
producer.
             Recent Developments
• Sugarcane Fair and Remunerative Price (FRP-declared
  by Govt) for 2009-10 season stood at INR 129.84 per
  quintal.
• Sugar companies paid from INR 240-265 per Qtl
  against the above mentioned FRP.
• The govt has revised the FRP for SS 2010-11 to INR
  139.12 per quintal from INR 129.84 per quintal in last
  year
• Levy price was INR 14.0 per kg till June 2010 and
  increased to INR 18.0 per kg June onwards.
             Recent Developments
• Ethanol prices were INR 21.5/liter in SS 10. Prices have
  been increased to INR 27.0/liter from August 16, 2010
  onwards.
• Levy quota has been reduced from 20% to 10% wef Oct
  1, 2010. Levy sugar price is INR 18/kg.
• Free sugar is selling at around INR 28/kg ex- factory.
• Govt has allowed export obligation (1.1 million tones)
  to be fulfilled by companies. Also companies can buy
  from third party and meet their obligation.
• As of now total 1.45 lakh tones of sugar has been
  exported. Rest 10.5 lakh tons are to be exported by
  March 2011.
                    Profitability Estimates
                                                 INR                INR                INR
                                              (except             (except            (except
                                            mentioned           mentioned          mentioned
             Particulars                    otherwise)          otherwise)         otherwise)
 Sugarcane price per tonne (INR)               2,050               2,050              2,050
 Sugar conversion cost @INR 4/kg                380                 380                380
 Ethanol Conversion @INR 2/Litre                 20                  20                 20
 Total Cost                                    2,450               2,450              2,450
 Revenue (Sugar price) (INR/kg)                  25                  28                 30
 Total Revenue                                 2,559               2,835              3,016
 Revenue from power sales from
 cogen unit*                                     180                180                180
 Total Revenue with power sales                 2,739              3,015              3,196
 EBIDTA from power generation                    108                108                108
 Total EBIDTA                                    217                493                674
 EBIDTA without power sales%                     4%                14%                19%
 EBIDTA with power sales%                        8%                16%                21%
* Surplus power per tonne of sugarcane crushing is ~ 60 units which is assumed to be sold at
INR 3 per unit.
                      Outlook
• Current ex-factory prices are around INR 28.0-29.0/kg
  and it may remain at the same level till new sugar
  starts arriving in the market.
• Price may drop to INR 27.0/kg if current crop arrives as
  expected and export (other than obligatory export of 1.1
  million tonnes) is not open.
• Companies with export obligation will benefit as
  international prices are ~ INR 31.5/kg .
• If the production does not happen as expected (earlier
  estimate of 25.0 million tones) and export is also
  allowed, the prices may go up to INR 30.0/kg
         Sugar Inventory Valuation

• Free Sugar is valued at market price of free
  sugar or the cost of production whichever is
  lower.
• Levy Sugar is valued at the levy price (i.e.
  market price of levy sugar) or the cost of
  production whichever is lower.
• Cost of production = Cane Cost + Associated
  Variable Costs + Associated Fixed Costs –
  Sale of Molasses & Bagasse + Depreciation


                                                 11
Drawing Power Calculation for Sugar Business

• DP = Stock or Cash Deficit for the Next Month,
  whichever is lower.
• Margins:

                Stock      Margin (%)
   Levy Sugar                  10
   Free Sugar                  15
   Molasses                    20
   Stores & Spares             25
   Sugar in Process            25
   Molasses in Process         25
   Raw Sugar Stock             25

                                                   12
     Cash Budget Method for DP Calculation
                                                                           Forecast 2011

                                        Oct           Nov        Dec            Jan        Feb       Mar       Apr

                                              A. Cash Receipts

Total Sales                                    -             -         -              -          -         -         -

Credit Sales                                   -             -         -              -          -         -         -

Cash Sales Collection                          -             -         -              -          -         -         -

Total receipt (A)                              -             -         -              -          -         -         -

                                          B. Cash Payments

Purchases                                      -             -         -              -          -         -         -

Operating Expenses                             -             -         -              -          -         -         -

Administrative Expenses                        -             -         -              -          -         -         -

Interest                                       -             -         -              -          -         -         -

Advance Tax                                    -             -         -              -          -         -         -

Total Payment (B)                              -             -         -              -          -         -         -

                                              C. Cash Balance

Net Cash Balance (A) – (B)                     -             -         -              -          -         -         -

Total Cash                                     -             -         -              -          -         -         -

Beginning of Month Borrowings                  -             -         -              -          -         -         -

Interest on Borrowings                         -             -         -              -          -         -         -

Repayment of Borrowings                        -             -         -              -          -         -         -

Total End of Month Cash Balance (Cash          -             -         -              -          -         -         -
deficit/Surplus)

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     Risks in Sugar Financing
• Availability and Price of Cane
    – Significant political risk in terms of support price
    – High dependence on monsoon
    – Highly cyclical with acreage under cultivation demonstrating yearly
      swings
    – Cane diversion to other uses (esp in states like UP and Bihar)
• Recovery
    – Monsoon
    – Time of harvest
• High degree of regulation - Govt policies including
    – Price and quota of levy sugar
    – Export / import policy – quantity and duties
•   Capital costs
•   International Demand supply and Prices of raw sugar
•   Ethanol, Molasses and Bagasse price and Power Tariff
•   Off season availability of fuel



                                                                            14
           Viability of Sugar Plant

   INR Crores       2500 TCD          5000 TCD
Revenue                    145.0             295.0
Cost                       115.0             225.0
EBITDA                         30.0              70.0
EBITDA     Margin         20.0%             23.0%
(%)
Interest                       23.0              33.5
Depreciation                   13.0              17.0
PBT                            -6.0              19.5
PAT                            -6.0              14.0
NCA                             7.0              31.0
DSCR                            0.5              0.85
Debt : Equity              60:40             60:40


                                                        15
                             Parameters

                  Capacity           2500 TCD      5000 TCD
Total Project Cost (INR Crores)            260.0        350.0
Distillery (KL)                           25 KL        50 KL
Cogen (MW)                                25 MW       25MW
Debt (INR Crores)-60%                      156.0        210.0
Equity (INR Crores)-40%                    104.0        140.0
Working Capital Requirement (INR            30.0         60.0
Crores)
Annual interest on WC (INR Crores)           3.7          7.5
@12.5%
Annual Interest on Term Loan (INR           19.5         26.0
Crores) @ 12.5%
Annual Term Loan Repayment (INR             31.2         42.0
Crores) –Five year term


                                                                16
                     Assumptions

                 Particulars           Amount (INR)
Cost of Sugarcane (INR per Tonne)               2,050.0
Recovery (%)                                           9.5
Levy Sugar (%)                                        10.0
Free Sugar (%)                                        90.0
Molasses (Liters/Tonne of sugarcane)                  40.0
Ethanol (Liters/Tonne of sugarcane)                   10.0
Sugar Conversion Cost (INR/Kg)                         4.0
Ethanol Conversion Cost (INR/Liter)                    2.0
Sale Price of Levy Sugar (INR/Kg)                     18.0
Sale Price of Free Sugar (INR/Kg)                     30.0
Sale Price of Ethanol (INR/Liter)                     27.0


                                                             17
Analysis of a 10,000 tpa sugar refining
                  unit
                 Particulars            Amount (INR)
  Project cost                                   120 Mn
  Cost/tpa                                        12,000
  Gross Margin (Rs/kg)                                 3.0
  Fixed Cost (Rs/kg)                                   2.0
  EBITDA (Rs/kg)                                       1.0
  EBITDA                                          12 Mn
  D:E                                                  2:1
  Debt                                            80 Mn
  Annual Interest Cost @ 12%                      9.6 Mn
  Cash Profit                                     2.4 Mn
  ADSCR (assuming debt repayment in 8              <0.7x
  years)
  Breakeven Capacity                           25,000 tpa
                                                             18
                 Global Trends
• Integrated sugar plants in developing countries
   – Mali: sugar project financed by African Dev Bank comprises
      • 14,000 hectares to produce 1.45 mn tonnes of cane
      • 200,000 tonnes per annum (7500 tcd) of sugar unit
      • 15 mn litres p.a. of Ethanol and 30 MW of cogen
• Brazil will continue to be dominant supplier , however
  production in Mexico, China and other South Asian
  countries like Thailand expected to grow (source: Mott
  Mcdonald)
• Prices expected to be in the 25c/lb to 29c/lb band over
  next year (source: ISO)
• Greater shift to refined sugar



                                                                  19