sugar sector report - final 03 oct 13breport.myiris.com/spasl/shrrensu_20131003.pdf ·...

ETHANOL,Fuel for the futureFuel for the future

SUGARSUGAR,Finally regaining its sweetness SPA Securities Ltd.

October 03, 2013

Rohit Agarwal

Minimum Tariff

Controls on sector prior to reforms Controls after partial decontrol

[email protected]

Ph. No. 91 33 40114800/ 839

GOVT.POLICIES

Distance Criteria

betweenmills

CaneArea

Reservation

rates on

trade

40% sugar to be packed in jute bags only

GOVT.POLICIES

Minimum

Distance Criteria

betweenmills

CaneAreaReservation

Levy Sugar

Obligationon

mills

Regulated

ReleaseMechanism

Dual Cane

Pricing:

Centre/State

State Govt. Controls Central Govt. Controls

DualCanePricing:

Centre/StateCompulsorysugar packing

in jute only

Import andExport

State Govt. Controls CentralGovt. Controls

2

SUGAR SECTORStructurally poised for sweet time

Sensex: 19517 Nifty: 5780

SECTOR INITIATION REPORT

Sharp correction witnessed in sugar stocks have thrown up significant value buying opportunities for long term investors. Weinitiate coverage on Balrampur Chini Mills and Shree Renuka Sugars with an Outperformer rating, our preferred exposure in theindustry, as they remain best proxies to ride out of the current sugar cycle. We have selected the companies based on theircompetitive positioning on long-term structural factors such as size, geographical presence, operating efficiencies and we stronglybelieve that both these companies are geared to capture emerging opportunities with their integrated business models.

Domestic production to decline by 5% in 2013-14India's sugar production is expected to decline by 5% to 23.7 mt in 2013-14 after production of + 24 mt for 3 consecutiveyears (production of +20 mt for 3 consecutive years has not happened over the past many years). Sugarcane area is set to fallto the lowest in 4 years to ~4.85 million hectares, 3% lower than last year's 5.0 mh. Moreover rupee depreciation in additionto squeezing imports has turned exports viable, thereby further improving the overall demand supply scenario.

Ethanol Blending Program gains momentum - To completely transform the industryEBP in India has the potential to transform the sugar industry given significant visible demand for ethanol (~1.05 bn litresfor mere 5% blending). Sugar industry has contracted to supply 0.55 bn litre of ethanol to OMCs @ INR 35/litre by Mar 2014and bidded for supplying further 1.34 bn litre by Dec 2014. Realisations can increase further given a) the scope of enhancingethanol prices by ~INR 12/litre at the current petrol prices and b) lowest price quoted by foreign suppliers are ~INR 75/litre.Assured realisation coupled with the commitment of lifting of full potential can lead to significant improvement in profitabilityof sugar producers.

Partial decontrol of sugar - Will lead to rerating of the sectorWe expect the sector to get rerated over medium to longer term following the partial decontrol of sector. The GoI has removedthe levy obligations on sugar and abolished the regulated release mechanism in April 2013. While removal of levy obligationwould lead to ~INR 1.3/kg increase in blended realisation of sugar manufacturers, abolition of regulated release mechanismwill allow mills to capitalize on better sugar realizations and better manage their working capital requirements.

Ray of hope emerging for adoption of cane pricing formulaKarnataka government has recently enacted an Act prescribing that the sugarcane price will be based on the revenuesharing model in line with Rangarajan Committee report (70% of total revenue/75% of sugar revenue). Maharashtra is alsoreadying to consider a similar move. We view these policy changes as a game changer for the entire industry and expect thisto have a positive influence on UP government. Otherwise these two states, which account for ~49% of the country's sugaroutput, would out-price UP sugar mills due to their lower cost of production.

World sugar surplus to decline significantly to 3.5 mt in 2014The global sugar surplus is expected to narrow significantly to 3.5 mt in 2013-14 due to less supply emulating from Brazil,thereby supporting prices. Total sucrose content diverted for sugar is expected to decline from 50% in 2013 to 45% in 2014.Given the ethanol price parity coupled with several encouraging measures introduced by Brazilian Government, ethanoldemand can significantly increase in Brazil. This holds importance as 20% increase in Brazil's ethanol consumption has thepotential to completely eliminate the world sugar surplus. By 2022, OECD is expecting ethanol production in developingcountries to increase by 30 bnl to 72 bnl, with Brazil accounting for 80% of this supply increase.

Sugar prices to remain steadyWe expect global prices to bottom out and find a floor around USD 16 cents/lb, as slump in prices below these levels will spurBrazilian millers to produce more of ethanol and less of sugar. Prices are expected to edge up higher gradually in 2014-15 due tosignificant expected decline in global sugar surplus. Domestically prices are expected to remain stable and marginally improvein the short term following abatement of supply pressure with end of crushing season and an increase in import duty from 10% to15%. Depreciating Rupee has also made export realization marginally competitive thereby partly relieving pressure on stocks.

CompanyCMP MCAP APAT (INR mn) EPS P/E (x) P/BV (x) EV/EBIDTAINR INR bn FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

Balrampur Chini 43 10 1876 1820 7.68 7.45 5.58 5.75 0.73 0.67 5.13 5.25

Shree Renuka Sugars 20 13 922 1943 1.37 2.90 14.56 6.91 0.68 0.63 5.37 4.25

Valuation Summary

Source: SPA Research

World SugarStatistics

Indian SugarIndustry

Global Scenario Sugar Pricing

OutlookSugar Sector Balrampur ChiniShree Renuka

SugarsContents

3

TABLE OF CONTENTS

World Sugar Statistics ............................................................................................................................................... 4

Indian Sugar Industry ............................................................................................................................................... 5-18

Background ............................................................................................................................................... 5

Indian sugar cycle ............................................................................................................................................... 6

Domestic demand supply situation ..................................................................................................................... 7-9

Production to remain +24 mt for third consecutive year .............................................................................. 7

Production to decline by 5% in 2013-14 ........................................................................................................ 8

Acreage under Sugarcane to touch four-year low on drought ....................................................................... 8

Export & Import - Ceteris paribus, currency playing an important role ............................................................. 10

Sugar Manufacturing & Its By-products .............................................................................................................. 11

Ethanol Blending Program gains momentum - To completely transform the industry ....................................... 12

Regulatory Framework .......................................................................................................................................... 14

Partial decontrol of sugar - Leading to rerating of sector ................................................................................... 16

Trend in domestic sugar prices ............................................................................................................................ 17

Global scenario ............................................................................................................................................... 18-25

World sugar dynamics ......................................................................................................................................... 18-19

Main producing countries .............................................................................................................................. 18

Main exporting countries ............................................................................................................................... 19

Main importing countries .............................................................................................................................. 19

World Ethanol Dynamics ...................................................................................................................................... 19-21

Ethanol & Its advantages ................................................................................................................................ 19

Demand drivers & Growth potential .............................................................................................................. 19

Crude oil has little direct impact on ethanol prices ...................................................................................... 20

So with all of these benefits, is ethanol the fix-all solution? ........................................................................ 21

Ethanol from sugarcane stands out ..................................................................................................................... 22

Global demand supply situation - Sugar ............................................................................................................. 23-27

Global surplus to decline significantly in 2014 ............................................................................................ 23

Brazil - The Potential game changer ............................................................................................................... 23

Thailand - Continues to remain 2nd largest exporter .................................................................................... 25

Australia: Output to decline by 6.5% .............................................................................................................. 26

Mexico - Largest exporter to the United States ............................................................................................... 26

China becoming the 'buyer of last resort' for the world sugar market ......................................................... 26

Indonesia - Imports expected to more than double ....................................................................................... 26

Russia - Rare setback for world output prospects ......................................................................................... 27

International sugar prices at 3 years low ........................................................................................................... 27

Sugar Pricing Outlook ............................................................................................................................................... 28

Companies Section ............................................................................................................................................... 29-33

Balrampur Chini Mills .......................................................................................................................................... 30-31

Shree Renuka Sugars Ltd. ...................................................................................................................................... 32-33

Contents World SugarStatistics


Global Scenario Sugar PricingOutlook

Balrampur Chini Shree RenukaSugars

Sugar Sector

4

World Sugar Statistics

• Sugar is one of the most valuable agricultural commodities. In 2011 its global export trade wasworth $47bn, up from $10bn in 2000. Of the total $47bn, $33.5bn of sugar exports were fromdeveloping countries and $12.2bn from developed countries.

• About 80% of global production comes from sugar cane (which is grown in the tropics) and 20%comes from sugar beet (grown in temperate climates, including Europe).

• More than 123 countries produce sugar worldwide, with 70% of the world's sugar consumed inproducer countries and only 30% traded on the international market.

• Brazil plays an important role in the global sugar market, as the world's largest sugar producerwith 12-14% recovery rate, the world's major exporter (contributes 45% of world exports) andone of the highest per capita consumers, at around 55 kg a year.

• Top 5 sugar producers in the world, namely Brazil, India, the EU, China and Thailand, accountfor over 60% of total production.

Top 10 sugar producing countries between 2011-13E

Source: USDA FAS Sugar: World Markets & Trade, SPA Research

• The top five consumers of sugar use 51% of the world's sugar. They include India, the EU-27,China, Brazil and the US.

• Asia consumes 45% of world sugar production and produces approx. 36% of world production.

• World consumption of sugar has grown at an average annual rate of 2.7% over the past 50years. It is driven by rising incomes and populations in developing countries.

• Sugar cane cultivation is labour intensive and an important source of rural employment. TheBrazilian sugar cane industry employs over 1 million people, or nearly a quarter of the country'stotal rural workforce. In South Africa - Africa's largest producer - around half a million peopledepend on sugar for a living. Sugar mills employ around 15 per cent of workers in Switzerlandand two-thirds of rural workers in Mauritius.

US 4.42%

Thailand 6.10%

China 7.22%

EU 9.65%

India 16.79%

Brazil 22.15%

Mexico 3.18%

Russia 2.67%

Australia 2.39%

Pakistan 2.44%

India is the second largest producer & largestconsumer of sugar in the world

World sugar consumption growing at CAGR of2.7% over the past 50 years





SugarsContents

5

World Per Capita Consumption of Sugar (kg)

0

10203040

50607080

Braz

il

Aust

ralia

Thai

land

Russ

ia

Sout

h

USA

Paki

stan

Indi

a

Chin

a

Wor

ld

Source: ISMA

Indian Sugar Industry

Background• India is the second largest producer and the world's largest sugar consumer, consuming one-

third more sugar than the EU combined and 60% more than China.• Bulk consumers (soft drink manufacturer, bakeries, confectionary, hotel and restaurant

consumer) account for 60% of India's mill sugar demand.• Low per capita consumption at 19 kgs against 33 kgs in USA, 40 kgs in Thailand and Russia and

70 kgs in Brazil.• The industry plays a pivotal role in rural economic development, supporting over about 50

million sugarcane farmer, dependents and agricultural labourer.• About 2.4% of cultivable land is under sugar cane. Sugarcane was cultivated in over 5 million

hectares in 2011/12, with Uttar Pradesh and Maharashtra accounting for a combined 65% ofthe total acreage.

Percentage Share of Indian States in India’s Sugarcane Production (SY2012)

Source: ISMA, SPA Research

• Over 664 sugar factories in India widely dispersed with an average crushing capacity of roughly3,800 Tonnes Crushed per day (TCD). Maharashtra, the country's largest sugar producer produced9 MT sugar in 2011-12, followed by UP at 7 mt and Karnataka at 3.8 mt.

• Ownership of sugar sector - 55% private sector and 45% in co-operative & Govt. Sector.

• Domestically, six major states namely Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu,Gujarat and Andhra Pradesh contribute to over 85% of the sugar production in the country, withUP & Maharashtra alone contributing ~62%.

Statewise sugar production as a % of total sugar production

26.9

%

34.6

%

14.6

%

8.7%

7.5%

30.8

%

31.6

%

12.4

%

8.8%

4.0%

4.0%

8.4%3.

8%

3.8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

UP Maharashtra Karnataka TN Gujarat AP Others

SY2012 SY2013E


Other states 1.7%Haryana 1.3%

Bihar 1.4%

Uttarakhand 1.5%

AP 2.7%

Gujarat 6.3%

Tamil Nadu 6.8%

Karnataka 13.5%

UP 27.4%

Maharashtra 37.4%





Sugar Sector Contents

6

• Cane price arrears directly impact the sugar production. Cane arrears are higher in case of UPbecause of a political SAP and no relationship with returns on sugar sales.

Cane price arrears during last 5 years

0102030405060708090

SY2007 SY2008 SY2009 SY2010 SY2011 SY2012

INR

bn

Uttar Pradesh Maharashtra Industry

Source: ISMA

• The domestic sugar industry is estimated at INR 800 bn in size, supporting over 5 crore sugarcanefarmers.

Size of Indian Sugar Industry

Area under sugar cane cultivation 5 million hectares

Sugar cane production 340 million tons

Number of sugar mills 664

Average capacity of mills 3800 tons cane per day

Production of sugar 25 mt estimated for season 2012-13

Average per capita 21 kgs of sugar and 6 kgs consumption of other sweeteners

RefineryRefineries have been set up to process raw sugar subject to govt

of India's policy for import & exports. Capacity : 4.5 million tons [

season, off-season and stand alone combined ]


Indian Sugar CycleA typical feature of the sugar market in India is the cyclical nature of production, where 2-3 yearsof surplus are followed by 2-3 years of deficit. Against this backdrop of recurrent large swings inproduction, consumption growth has been linear, growing steadily at about 4% per year over thepast 10 years. This results in huge swings in overall sugar equilibrium.

The year-wise swings: Since 2000-01

Period No. of seasons Production Range (mt) Swing from previous high/low (mt) Swing %

00-01 to 02-03 3 18.5 to 20.1

03-04 to 04-05 2 12.7 to 13.5 (-) 6.6 (-)32.8%

05-06 to 07-08 3 19.3 to 28.4 (+) 14.9 (+)110.4%

08-09 to 09-10 2 14.5 to 18.9 (-) 9.5 (-) 33.5%

10-11 to 12-13 3 24.0 to 26.2 (+) 7.3 (+) 38.6%


Monsoon plays a key role in sugar production as sugarcane yields are greatly affected by the levelof rainfall, notably during the critical monsoon season. The other most important factor is thedomestic sugar policy that amplifies the cycle through its impact on incentives along the sugarvalue chain, including for farmers and sugar factories.


Maharashtra

Orissa

Gujarat

Karn

atak

a

Andhara

Tam

il Na

du

Kera

la

West Bengal

Bihar

UttarpradeshRajasthan

Punjab

Haryana

Jamu & Kashmir

Himachal

Uttaranchal

Sikkim

Madhya PradeshJharkhand

Chhattis

garh

Assam Nagaland

Arunachal Pradesh

MeghalayaManipur

TripuraMizoram

Sugar Producing States of India

High

Medium

Low

Cane price in UP has gone up by 70% in the last3 years, but sugar prices have increased by just11% in the same period

While consumption is growing @ 4% over last10 years, production is cyclical





Sugars

7

The cyclicality of sugarcane production causes large swings in the area under cultivation ofsugarcane and hence its availability to the sugar industry. During the stage of high sugarcaneproduction, profitability of sugar manufacturers decline due to lower realisations, resulting inuntimely payments to the farmers and increasing cane arrears. As a result, farmers reduce theirsugarcane acreage and opt for other crops, which can give them higher returns. Consequently, itleads to lower sugarcane production and supply deficit of sugar in the market, leading to declinein sugar prices. This again improves their profitability and enables them to clear the arrears. Asthe incidence of default declines, sugarcane cultivation becomes attractive once more, shifting thedomestic sugar balance into the upside phase of the cycle. Over a period of time there isoverproduction and the prices fall again. Thus, the infamous 'Indian Sugar Cycle' is set in motionagain. For instance, after an increase in 2006/07 to 28.4 mt, 41% over the record 2002/03 crop,sugar output declined to 14.5 mt in 2008/09 and is currently estimated at 24 mt for 2012/13.

Higher production leading to accumulation of cane arrears

18.5 18.5 20.1

13.5 12.7

19.3

14.5

18.9

24.4 26.0 25.028.4 26.4

16.728.2

51.9

12.327.2

43.2

85.7

127.0

23.29.78.820.8

30.5

0

5

10

15

20

25

30

SY20

01

SY20

02

SY20

03

SY20

04

SY20

05

SY20

06

SY20

07

SY20

08

SY20

09

SY20

10

SY20

11

SY20

12

SY20

13E

020

40

60

80100

120

140

Production (mt) Cane Arrears (INR bn) ‐ RHS

Source: ISMA, Directorate of Economics & Statistics, SPA Research

Domestic demand supply situation

Production to remain +24 mt for third consecutive yearIndia's sugar production has increased by 6.6% in 2011-12 (Oct-Sep) to 26.0 mt from 24.4 mt in theprevious year. Drought in Maharashtra, India's biggest sugar producing state, in the last year islikely to pull down India's overall sugar production by 3.8% to 25.0 mt in 2012-13. This will be thethird consecutive year that sugar production will remain more than 24 mt due to remunerativecane prices vis a vis other crops. Production of more than 20 mt for 3 consecutive years has nothappened over the past many years and only cumulative exports of 7.3 mt in 2011 and 2012 havehelped lower domestic inventory.

Domestic Sugar Balance

(Million Tones) F2006 F2007 F2008 F2009 F2010 F2011 F2012 F2013E

Opening Stock 5.7 5.4 12.2 12.7 7.7 7.7 5.0 4.5

Production 19.3 28.4 26.4 14.5 18.9 24.4 26.0 25.0

Growth YoY 51.8% 47.2% -7.0% -45.1% 30.3% 29.1% 6.6% -3.8%

Internal Consumption 18.5 19.9 20.9 21.7 22.8 23.3 23.0 23.5

Growth YoY 3.2% 7.6% 5.0% 3.8% 5.1% 2.2% -1.3% 2.2%

Exports 1.1 1.7 5.0 0.2 0.2 3.8 3.5 0.5

Imports 0 0 0 2.4 4.1 0 0 1

Closing Stock 5.4 12.2 12.7 7.7 7.7 5.0 4.5 6.5

Stock to use ratio 29.2% 61.3% 60.8% 35.5% 33.8% 21.5% 19.6% 27.7%

Source: ISMA

Up cycle

(2‐3 years)

Down cycle

(2‐3 years)

Low cane arrears/High

cane cultivation

High cane production

High sugarproduction

Decline in sugar prices

Lowerprofitability

High cane arrears

Decline in area under

Cultivation

Lower cane production

Lower sugarproduction

High sugar price/

Improved profitability

We are here

Higher production leads to depressed sugarprices, resulting in higher cane arrears

Indian Sugar Cycle






Sugar Sector

8

Production in two sugarcane growing states of Maharashtra and Karnataka (which togetheraccounted for 49% of India's sugar output), is expected to decline by 12.2% and 18.4% to 7.9 mt and3.1 mt respectively in 2012-13. Un-favourable climatic conditions have negatively impactedsugarcane acreage and sugar production in Karnataka and Maharashtra, where sugar recoveriesat 10.9% and 11.3%, respectively, are among the highest in the country. The loss in these two Statesis expected to be made up by India's top sugar producing state, Uttar Pradesh, where farmersbuoyed by higher returns last year have planted cane on an additional area of 2.2 lakh hectares(lh). Production in UP is expected to increase around 10.0% to 7.7 mt in the current season.

State wise sugar production (mt)

7.09.0

3.8 2.3 2.0

7.7 7.9

3.1 2.2 2.11.01.0 1.01.0

28.8% 33.1%

13.5%8.7%

3.9% 3.9%7.9%

0

2

4

6

8

10

UP

Mah

aras

htra

Karn

atak

a TN

Guj

arat AP

Oth

ers

0%5%10%15%20%25%30%35%

SY2012 SY2013E % of total production (Avg.)


Production to decline by 5% in 2013-14Early and above normal rains have curtailed damages to some extent and now sugar production isexpected to decline by 5% to 23.7 mt in 2013-14. Importantly some of the farmers have alreadyswitched to other crops inspite of higher cane prices due to water unavailability as unlike othercrops sugarcane production requires abundant water. Production is expected to decline by 25.3%and 12.9% to 5.9 mt and 2.7 mt in Maharashtra and Karnataka respectively in SY2014.

Acreage under Sugarcane to touch four-year low on droughtSugarcane is the India's third largest crop, next to rice and wheat. The sugar yield is not onlyrelated to the industry's manufacturing capacity but also to the availability of sugarcane. Acreageunder Sugarcane has not increased much in the last 10 years. In fact there is a huge fluctuation inarea under cultivation because of the uncertainty over payments from the millers and erraticmonsoon, which prompts farmers to shift to other crops. Area under cane cultivation was thehighest ever (5151 thousand hectares) in the year 2006-07. The yield per hectare was also thehighest that year.





Sugars

9

Area under sugarcane production & Recovery trend

Source: ISMA, Directorate of Economics & Statistics, SPA Research

The total cane area across the country is set to fall to the lowest in four years to ~4.85 millionhectares (mh), 3% lower than last year’s 5.0 mh. That's the lowest since the 2009-2010 seasonand below the government's target of 5.3 mh for this year. However, early monsoon and properdistribution of rains have eased some concerns over sugar cane acreage for sugar season2013-14.

Though India is among the largest producer of sugarcane, yield from the crop and sugar recoveryis ~66 tonne per hectare and 10.2%, respectively, which is much lower than the world average. Also,there is a high variation in the yield within the country across different regions. This is mainlybecause of variation in the climatic conditions prevailing in the country. The average cane yield intropical region is about 85.1 tonnes while in the subtropical region, it is only about 60.7 tonnes perhectare. Despite Maharashtra and Uttar Pradesh being the top two Indian states in terms of thearea under cultivation as well as their contribution to sugar production in India, Tamil Nadu hasthe highest yield of 103 tonnes per hectare in 2011-12. The second place in productivity is taken byWest Bengal, followed by Karnataka. Uttar Pradesh, with the largest area under cultivation, ranks14th in productivity.

Percentage Share of Indian States in Area under Sugarcane Cultivation

Other states 2.1%Punjab 1.4%MP 1.4%Haryana 1.8%Uttarakhand 2.3%Bihar 2.8%

AP 3.8%

Gujarat 4.6%

Tamil Nadu 7.5%

Karnataka 7.8%

Maharashtra 17.5%

UP 47.1%


01020304050607080

SY02 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11 SY12 SY13E

Sugar Production (In mt) Sugarcane Area (In lac ha) Sugarcane Production (in 10 mt)

Sugarcane Yield (In mt/ha) % Sugar Recovery

Cane plantation set to fall to the lowest in fouryears to ~4.85 mh, 3% lower than last year’s 5.0mh and below the government's target of 5.3mh for this year

Cane Yield & Sugar Recovery (2011-12)

Regions Area Cane Sugar('000 ha) Yield (t/ha) Rec.(%)

TropicalMaharashtra 940 80.1 11.3Karnataka 410 90.3 10.9Gujarat 203 70.2 10.5TN 333 102.8 9.1AP 200 82.0 9.8Sub-tropicalUP 2277 59.6 9.1Bihar 235 51.5 9.3Punjab 84 58.4 8.8Haryana 107 73.3 9.0

Source : Cooperative Sugar Journal, November, 2012 SPA Research





Sugar Sector

10

Export & Import - Ceteris paribus, currency playing an important roleIndia's status as a net importer or exporter frequently changes as a result of imbalances causeddue to cyclical nature of production, with imports exceeding 2 mt during the deficit phase of thecycle, replaced by large exports during the surplus phase.

Import & Exports across cycles

-2.00

-0.20-0.94 -1.00

-0.40 -0.12 -0.33

-2.14 -2.40

-4.08

0.000.36 0.410.01 0.06

1.020.42 0.07 0.02 0.07

0.99 1.081.77

0.27 0.00

1.111.73

4.90

0.17 0.24

2.603.50

-5

-4

-3

-2

-1

0

1

2

3

4

5

619

91-9

2

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2001

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

Import (mn tn) Exports (mn tn)


In addition to the infamous “Indian Sugar Cycle”, currency factor and global fundamentals alsoinfluences the Indian trade scenario. After exporting ~3.5 mt of sugar last year, Indian exports havesuffered drastically this season on the back of weak international prices which has made overseasshipments unviable.

Importing sugar has mostly been unviable for the domestic players as the landed cost (import dutyof 15% + freight charges+ handling charges) of sugar is largely higher that domestic prices. Howevergiven the sharp decline in global sugar prices to three years low, Indian players has alreadyimported ~0.7 mt of sugar till date in this season despite holding comfortable stocks which hasresulted in a downward pressure on domestic sugar prices. However with the increase in importduty from 10% to 15% coupled with sharp depreciation of rupee, the prospects of further importsseems limited at the moment.

Moreover rupee depreciation in addition to squeezing imports has turned exports viable. Givenlow international prices at this point in time, it is extremely favorable for export from costalmillers. In fact, Indian traders have signed deals at $ 500-501 per tonne (FOB) to export 75,000tonnes of white sugar in July, on the back of strong demand in Gulf and African states due to theIslamic fasting month of Ramadan. This in addition to already lower sugar production forecast forSY14, will lead to further tightening in domestic sugar availability, thereby presenting a bullishscenario from overall demand supply perspective.

Despite weak international prices, rupeedepreciation in turning exports viable





Sugars

11

Sugar Manufacturing & Its By-products

By-products - An integral part of industryIn sugar manufacture, the major byproducts comprise of bagasse, molasses and press-mud, whichare utilized to generate power and produce industrial alcohol/ethanol and fertilizers. The byproductsaccount for about ~40% of crushed sugar cane by weight. India has achieved considerable progressutilising these by-products.

A) BagasseThe fiber (30-33% per tonne of sugarcane crushed) derived from crushing sugarcane is known asbagasse. Bagasse is used as a combustible in furnaces to produce steam which is used togenerate power. The power generated is used in processing sugarcane and surplus power issupplied to the grids.B) MolassesMolasses is used primarily for production of rectified spirit and extra neutral alcohol. It accountsfor ~5% per tonne of sugarcane crushed. Alcohol serves as raw material for industrial manufactureof potable alcohol and fuel ethanol. Sugarcane is generally regarded as one of the most efficientsources of biomass for bio fuel (ethanol) production. The demand of ethanol is generated due to itscompulsory blending with petrol.

C) Organic manureOrganic manures accounts for around 3%-5% of the sugar cane crushed. Sulphitation press mud ismainly used as manure. The press mud organic manure is free of inorganic elements present in thetraditional form of organic manures, commonly used by the farming community. Crops yield goodresults when applied during early land preparation. It increases soil porosity and helps the cropin the uptake of chemical fertilisers (NPK).

Cane Milling / Crushing

Juice Defecation & Clarification

Juice Sulphitation

Syrup Boiling

Centrifuging

Factory Raw SugarDistillery

Alcohol Fermentation

MolassesSpent Wash

Bio-Composting

Press Mud

Cogeneration

To Factory

To Grid

Power Steam BagasseTurbines Boilers

Weighed & Prepared Cane

Sugar Plant


Production of Molasses (mt)

SY07 13.1

SY08 11.3

SY09 6.5

SY10 8.4

SY11 10.7

SY12 11.5



Sugarcane By-products

Press mud4%

Molasses5%

Sugar10%

Water51%

Bagasse30%

Manufacturing ProcessThe process of manufacturing sugar starts with pressingof sugarcane to extract the juice. It is followed by boilingthe juice resulting in thickening of the juice and sugarbegins to crystallize. The crystals are spun in acentrifuge to remove the syrup, thereby producing rawsugar.

The raw sugar is then transported to a refinery where itis washed and filtered to remove remaining non-sugaringredients and colour. It is then followed bycrystallization, drying and resultant packaging of therefined sugar.





Sugar Sector

12

A significant part of the total revenue and profits of sugar mills comes from by-products, especiallyin the case of forward integrated entities. In down-cycle these products act as a savior to bottomlinede-risking the business model. Greater the level of integration, better is the ability to wither thedownturn and de-risk the business model from cyclicality.

Most of the sugar mills are integrated having power generation and facility for alcohol production.The forward integrated model aids in generating enhanced realisations and optimum resourceutilisation.

We feel by-products will remain important part of the industry due to improving macro scenariofor these products. Prices of by-products such as bagasse and molasses continue to remainremunerative driven by healthy demand from consuming sectors such as power, paper and alcohol.Higher realizations for fuel ethanol in the current financial year will further result in improvedreturns from by-products.

Ethanol Blending Program gains momentum – To completely transform the industryIn November 2012, the Cabinet Committee on Economic Affairs (CCEA) has made it mandatory forthree major oil marketing companies (OMCs) - Bharat Petroleum, Hindustan Petroleum and IndianOil Corporation to blend 5% ethanol with petrol. Although this mandate has been there since last twoyears, it was partially implemented due to the absence of any clear directive and largely due to lowprocurement price of INR 27/litre fixed by the CCEA in August 2010. To remove this bottleneck, thecommittee has approved market-based pricing of ethanol (to be implemented from June 2013) as aresult of which sugar producers will willingly supply ENA at market determined price. This hasresulted in Ethanol Blending Program (EBP) gaining momentum and it can potentially transform theindustry given significant visible demand for ethanol (~1.05 bn litres for 5% blending with petrol).

OMCs have floated first tender for 1.1 bn litres of ethanol in Jan 13, out of which they could finaliseprocurement of only 0.55 bn litres at an average price of INR 35/litre from domestic sugar companies(to be supplied in the current sugar year ending September), as most the sugar mills have alreadycontracted for the supply of molasses and rectified spirits for producing potable achohol. Importantlyto meet the gap OMCs floated a global tender to import 0.50 bn litres, but the lowest price quoted byforeign suppliers of ethanol was about ~INR 75 a litre, double the preferred domestic quote. Thisresulted in OMCS floating second domestic tender to procure 1.34 bn litres of ethanol between theperiod 1st Dec 2013 to 30th Nov 2014, which was fully met by sugar companies. Moreover in thesecond tender prices offered might be higher because of high imported cost and 5% increase insugarcane price by central government in FRP regime. Assured realisations coupled with thecommitment of lifting of full potential will positively impact the profitability of sugar producers.

Out of the world's total ethanol production, around 80% is used for fuel purpose. However Ethanolmarket in India is driven more by beverage alcohol market rather than fuel alcohol market unlike restof the world. Newer players especially global alcohol majors are entering Indian market seeing thegrowth opportunities and the beverage alcohol investment is not showing any slow down.

Taking clues from the way the sugar industry has diversified in Brazil, it is high time that Indiastarts planning for radical shifts in the sugar – alcohol production combinations, so that we meetat least a part of the domestic requirements of petrol. This would help in saving valuable foreignexchange outgoes and in reduction of current account deficits, which have been of concern in thecountry. As indicated in table given below, there is scope for enhancement of ethanol prices by amargin of INR 11-12 per unit at the current petrol prices and more than that there is a sound casefor premium pricing on ethanol due to its renewable/green status.

By products de-risk the business model & actsas savior to the bottomline during the downcycle

Free pricing will help to implement the ethanolblending programme

Overseas players offering ethanol at INR 75/litre, double the domestic offer price

Need to change the sugar - alcohol productioncombination





Sugars

13

Price Comparison @ Rs 59 per USD as on 24th June'13 for imported Petrol and domestic Ethanol

Sr.No Particulars Unit Petrol Ethanol Remarks

1 FOB Gasoline Price at Arab Gulf $/bbl 111.79 - Calculated

2 Add: Ocean Freight from AG to Indian Ports $/bbl 2.06 -Assumed for Petrol as takenfor Diesel

3 C&F (Cost & Freight) Gasoline Price $/bbl 113.85 -Taken from IOCL website ason 16th June'13

C&F (Cost & Freight) Gasoline Price Rs/Lit 41.98 - At Rs 59 per USD

4 Import Charges Rs/Lit 0.40 -Assumed for Petrol as takenfor Diesel

5 Basic Customs Duty @ 2.575% (2.50% +Rs/Lit 1.11 -

Assumed for Petrol as taken3% Education cess) for Diesel

6 Import Parity Price (at 29.5º C)Rs/Lit 43.49 -(Sum of 3 to 5)

7 Export Parity Price (at 29.5º C) Rs/Lit 42.31 - Calculated8 Trade Parity Price (80% of (6)+20% of (7)) Rs/Lit 43.26 -

9Refinery Transfer Price (RTP)

Rs/Lit 43.26 35.00 Calculated(Price Paid by the Oil MarketingCompanies to Refineries)

10 Add: Excise Duty & Cess @ 12.36% Rs/Lit - 4.33

11 Add: Freight Rs/Lit - 2.76Freight may vary from Depotto Depot

12Add: Premium recovered for BS-IV Grade

Rs/Lit - -over BS-III Grade

13 Add: Inland Freight, Delivery Charges etc. Rs/Lit 0.95 -Assumed for Petrol as takenfor Diesel

14 Add: Marketing Cost of OMCs Rs/Lit 0.69 0.69 Calculated15 Add: Marketing Margin of OMCs Rs/Lit 0.67 0.67 Calculated

16Total Desired Price (Sum of 9 to 15)-Before Excise Duty, VAT and DealerCommission

Rs/Lit 45.57 - Calculated

17Price Charged to Dealers (17-18)-

Rs/Lit 45.57 - CalculatedExcluding Excise Duty & VAT

18Add: Specific Excise Duty & Cess

Rs/Lit 9.48 -@ Rs 9.48 per Lit- Petrol

19 Sub-Total Rs/Lit 55.05 43.45Difference b/w Petrol &Ethanol- Rs 11.60 per Lit

20 Add: Dealer Commission Rs/Lit 1.79 1.79It may vary from state tostate

21 Add: VAT Rs/Lit 11.37 11.37Tax remains same as ethanolwill be sold as petrol

22 Add: Cess & Service Tax- Ethanol Rs/Lit 1.01 1.01As per invoice taken fromHPCL petrol pump

23Retail Selling Price at Delhi -

Rs/Lit 69.21 57.62Rounded off (Sum of 18 to 24)

Source: Report of the Working Group on Sugarcane Productivity and Sugar Recovery in the Country, SPA Research

Crushing of 1 ton of sugarcane yields either a) 100kg Sugar along with 11 litres Ethanol, or only 76litres of Ethanol. This results in a price parity of 1:1.53 between Ethanol and Sugar. Hence dependingupon the prevailing prices, sugar manufacturers will enjoy the flexibility to divert sugar capacity toethanol production.

Scope for enhancement of ethanol prices by amargin of INR 11-12/Lit remains





Sugar Sector

14

Regulatory FrameworkThe Indian sugar industry is one of the most regulated industries. Till few months back, its entiregamut of activities starting from procurement of sugarcane and ending with the sale of sugar weregoverned by Indian government. However after years of deliberation, Indian government has finallydecontrolled the sugar sector albeit partially, in April 2013. The major pertinent regulations andpolicies still adopted by the Government are given below:

Source: SPA ResearchDual sugarcane pricing (FRP/SAP)The industry is subject to fair and remunerative price (FRP) for sugarcane fixed by the CentralGovernment from year to year, taking into account cost of production of sugarcane, return togrowers from alternative crops, fair consumer price of sugar, etc.

In addition to the FRP, 5 States in the country viz. UP, Haryana, Punjab, Uttarakhand and Tamil Nadu(together accounting for ~38% of total sugar production), fixes a price (generally higher then FRP)known as the State Advised Price/SAP (on political considerations, without any transparent laiddown criteria and no relation to sugar price). Dual cane pricing distorts cane and sugar economyand is contributing majorly to cane price arrears and cyclicality. This is very unlike than all themajor sugar producing nations in the world like Brazil, Australia and Thailand, where there is adirect linkage between sugarcane and the sugar prices. Sugarcane grower’s revenue share in thetotal industry revenue is 62-67% in Australia; 56-61% in Brazil and 70% plus in Thailand.

A look at the sugar economy and growth of sugar sector, including investments in the farm and factory,will clearly distinguish states following SAP from the others like Maharashtra, Karnataka, Gujarat etc,which have never followed the system of SAP. The sugar sector therein has grown in leaps and boundsin comparison to the SAP States, where either the growth is flat or negative. A higher price for cane issustainable only if the sugar recoveries compensate for the high costs, like for Maharashtra or Karnataka,but not if the recoveries are the lowest in the country, as for example in UP.

Share of cane price as percentage of ex‐mill sugar price

48.5

66.5 64.857.1

81.4

81.277.3

64.7

75.968.8

86.496.4

83.7 79.1

70.9 73.0

40

50

60

70

80

90

100

SS05 SS06 SS07 SS08 SS09 SS10 SS11 SS12

%

UP MAHARASTRA

Source: Committee report on sugar deregulation, SPA Research

Controls on sector prior to reforms Controls after partial decontrol

GOVT.POLICIES

Minimum Distance Criteria

between mills

Cane AreaReservation

Dual CanePricing:

Centre/StateCompulsory

sugar packingin jute only

Levy SugarObligation on

mills

RegulatedRelease

Mechanism

Import andExport


GOVT.POLICIES

Minimum Distance Criteria

between mills

Cane AreaReservation

Dual CanePricing:

Centre/State

Tariff rates on

trade

40% sugar to be packed in jute bags only


Dual pricing contributing largely to cane arrears& cyclicality in sugar industry





Sugars

15

The SAP in UP has been increased from INR 165 per quintal of cane in 2009-10 sugar season to INR280 per quintal in 2012-13, which has meant:

• An increase of INR 115 per quintal in just 3 years (@ INR 40 per quintal yearly).

• It has increased the average cost of production of sugar in UP from INR 24 per kg in 2009-10 toINR 35 per kg in 2012-13 season.

• As compared to these very high costs, the sugar prices which were INR 28 per kg in 2009-10increased to only INR 31 per kg in 2012-13.

• Cane price in UP has gone up by 70% in the last 3 years, but sugar prices have increased by just11% in the same period.

Sugarcane Production & Price trend

050

100

150

200250

300

350

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

UP Sugarcane Prod. (mt) TN Sugarcane Prod. (mt) Sugarcane FRP (INR)

TN SAP (INR) UP SAP (INR)


Import-export of sugarDepending on mill-wise monthly production and stocks, local production levels and world marketconditions, the Government regulates the import (through import duty) and export [through opengeneral license (OGL) and advance license scheme (ALS)].

Minimum distance criteria and Cane area reservationEach sugar mill is allocated a command area in its vicinity (which usually varies from 15 km to 25km radius, depending on the state). The mill is obligated to purchase sugarcane from cane farmerswithin the cane reservation area, and conversely, farmers are bound to sell to the mill. This isintended to serve the twin purposes of giving a minimum assured supply of the highly-perishableraw material to a mill, while committing the mill to procure at a minimum price (FRP/SAP).

Jute Packaging mandate for sugarJute Packaging Materials Act mandates that sugar be packed only in jute bags. It is estimated by thesugar industry that this leads to an increase in cost by about ~40 paise per kg of sugar besidesadversely impacting quality on account of ingress of jute fibers of jute bags. Further there is oftena shortage of jute bags. However this has now been relaxed for 60% of production.

Controls on sale of by-productsThere are several regulatory hurdles in respect of the by-products of sugar industry. In respect ofmolasses, these are at the state level, in terms of state government decisions relating to fixation ofquotas for different end uses of molasses, restrictions on movement (particularly across stateboundaries), etc.

Political Agenda destroying UP's sugareconomy





Sugar Sector

16

Partial decontrol of sugar - Leading to rerating of sectorThe expert committee headed by Dr. Rangarajan submitted its recommendations on the deregulation ofthe sugar sector to the government in Oct 2012. The key proposals suggested were a) abolition of levysugar, b) doing away with monthly/quarterly release mechanism of non-levy sugar, c) sugarcane price tobe linked to 70% of realized value from sugar, molasses and bagasse with FRP forming a floor and nostate-wise SAPs, d) removal on quantitative restriction on sugar exports and imports, e) removal ofcontrols on sale of by-products, and f) gradual phasing away of cane area reservation and minimumdistance criteria for mills.

The GoI accepted the Rangarajan Committee report on April 4, 2013 and announced a partial decontrol ofthe sugar industry by:-

a) Removing the levy obligation to supply part of the sugar production at subsidized prices - Earlier,central government used to procure 10% of the sugar production at subsidised price of INR 19.7/kg,which resulted in financial burden to the tune of ~INR 30 bn on the sugar industry. The removal of levyobligation will have a substantial impact on profitability as it would lead to ~ 1.3/kg increase inblended realisation of sugar manufacturers.

b) Abolishing the regulated release mechanism to sell non-levy sugar in the market - The abolition of themonthly release mechanism will facilitate the free play of market forces for the commodity. It will benefitsugar mills in the medium to long-term by enabling them to manage their working capital requirementsbetter while also enabling financially stronger sugar mills to capitalize on better sugar realizations.

Importantly other key recommendations of Rangarajan Committee namely, the revenue sharing formulafor sugar cane pricing, the minimum distance between factories and the reservation of area for factoriesetc, have been delegated to the State Governments to take a considered view.

The revenue sharing formula for sugar cane pricing entails that 70% of revenues (sugar, molasses andbagasse)/75% of revenues for non-integrated mill, should be shared with farmers and payment would bemade in 2 stages; FRP within 14 days of cane purchase and balance on half yearly basis on ex-mill pricedeclared by respective states. It has been gathered that the Government of Karnataka has already enactedan Act in May 2013 deciding to form a sugar board and prescribing that the sugarcane price will be basedon the revenue sharing model. Maharashtra is also readying to consider a similar move prior to the startof the next season. This is a remarkable initiative taken by these two State Governments and we hope thatthis will have a positive influence on the Government of UP. Otherwise these two states, which account for~49% of the country's sugar output, would out-price UP sugar due to their lower cost of production. Weview these policy changes as a step in the right direction and expect the sugar industry to get transformedand re-rated in the coming years.

Financial burden before decontrolProduction for 2012-13 25.0 mtLevy share 2.4 mtFinancial burden on companyLevy Price INR 19.7Market price of sugar INR 32.0Loss on levy quota INR 12.3Total Burden INR 29.52 mn


Karnataka & Maharashtra finally showinginterest for adopting revenue sharing formulafor cane pricing





Sugars

17

Significantly beneficial for sugar mills, particularly UP based

Units Uttar Pradesh Maharashtra

Cane crushed mt 8.0 8.0

Sugar

Recovery rate 9.5% 11.0%

sugar prodn/sales mt 0.76 0.88

sugar realisation (Ex-mill) INR/tn 32000 32000

Sugar revenue INR mn 24320 28160

Molasses

Recovery rate % 5.0% 5.0%

Production mt 0.40 0.40

Realisation (assumed) `/t 3200 3200

Molasses Revenue INR mn 1280 1280

Bagasse

Recovery rate 30.0% 30.0%

Production mt 2.40 2.40

Captive cons 30% 0.72 0.72

Exportable surplus mt 1.68 1.68

Realisation (assumed) INR/tn 800 800

Bagasse Revenue INR mn 1920 1920

Cane price estimation

Total revenue (sugar+molasses+bagasse) INR mn 27520 31360

Cane cost (% of total revenue) % 70% 70%

Total Cane cost INR mn 19264 21952

Cane crushed mt 8.0 8.0

Cane cost per tonne INR/tn 2408 2744

as % of sugar realisation % 75.3% 85.8%

Trend in domestic sugar pricesIndia has been witnessing higher sugarcane price over the last few years, however sugar priceshave not risen in direct proportion leading to severe margin pressure on the industry. Sugar pricesduring 2011-12 did not increase sharply and ranged between INR 29 to INR 31 per kg, due to anexpected rise in sugar production and more than sufficient availability of stocks.

Prices have inched northward in early 2012-13 between May 2012 to November 2012 (peaking ataround INR 36/kg, due to expectation of lower sugarcane production in Maharashtra and Karnatakain current sugar year. However with consumption remaining at ~23.5 mt in addition to higher globalproduction and subdued global prices (restricting export attractiveness), sugar prices has remainedunder pressure since H2FY13.

There were several other factors also that led to decline in prices. While the initial decline in the periodJanuary- March 2013 was driven mainly by seasonal supply pressure from new production and sale ofsugar in the domestic market by shore based refiners having access to cheap raw sugar, the continueddecline since April 2013 has been driven mainly by the announcement of partial decontrol in April2013, which resulted in large scale releases of sugar by financially weak mills with large cane dues. Inaddition, competition from sugar produced by processing raw sugar (whose prices remained weakglobally because of supply pressures) also continued to prevent any rally in sugar prices.

Sugar prices at NCEDX declined around 18% and touched a low of INR 29.8/kg in the month of April2013 and has finally stabilized at ~INR 31/kg on concerns over lower cane acreage.





Sugar Sector

18

Prices stabilising

Source: Bloomberg, SPA Research

Global Scenario

World sugar dynamicsWorld consumption of sugar has grown at an average annual rate of 2.7% over the past 50 years.Sugar consumption has been declining in developed countries - partly due to the availability ofsubstitutes and concerns about obesity and health. At the same time, it has been increasing indeveloping countries, which now account for around 70% of world sugar consumption, driven byrising incomes, population growth and changes in diet.

Sugar crops in many parts of the world are projected to expand in response to rising demand forsugar and other uses. World sugar production is expected to increase by 30 mt to reach over 210mt in 2020-21. The bulk of the additional sugar production will come from the developing countriesand the main burden of growth will continue to fall on Brazil. Brazil has expanded productionrapidly in the past two decades, but a slowdown in investment in new mills occurred after thefinancial crisis of 2008, slowing the overall growth in the following years.

The use of sugar in the development of ethanol as an alternative fuel is also an important factor inthe sugar supply-and-demand equation. Brazil is both the largest exporter of sugar and the largestproducer and consumer of ethanol. Any decision that Brazil takes to expand ethanol production -for example, when a large sugar crop is forecast - can affect the balance of supply and demand inthe global sugar market.

Main producing countriesRaw sugar is derived from both sugar cane and sugar beet. Brazil and India are the world's twolargest sugar producers. Together, they have accounted for over half the world's sugar caneproduction for the past 40 years. The EU is the third-largest producer and accounts for around halfthe world's sugar-beet production. World production of raw sugar has increased by 2% YoY to174.5 mt in 2011-12. By 2018, production is projected to reach 202 mt - slightly higher than theprojected consumption of 198 mt.

Source: USDA, SPA Research

CAGR in sugar consumption to 2021

0.00.51.01.52.02.53.03.54.0

Afri

ca

Asia

Sout

h Am

eric

a

Oce

ania

N&

C Am

eric

a

Euro

pe

Wo

rld

Source: Rabobank 2013

Major sugar producing countries contribution (%) in total world sugar production

22.66

14.49

10.428.23

4.532.74

4.59 3.31 2.39 2.20

24.44

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Braz

il

Indi

a EU

Chin

a

USA

Aust

ralia

Thai

land

Mex

ico

Paki

stan

Russ

ia

Rest

of

wor

ld





Sugars

0500

10001500200025003000350040004500

Aug‐

07

Jan‐

08

Jun‐

08

Nov

‐08

Apr‐

09

Sep‐

09

Feb‐

10

Jul‐1

0

Dec

‐10

May‐1

1

Oct‐1

1

Mar‐1

2

Aug‐

12

Jan‐

13

Jun‐

13

INR

per

tonn

e

19

Main exporting countriesWorld exports of raw sugar increased by 1% YoY to 58 mt in 2011-12 led by Brazil (24.6 mt) andThailand (9 mt).

Largest exporters of Raw sugar as a % of total exports by volume, 2007-12

EU 4%

UAE 3%

Guatemala 3%

Mexico 2%

Columbia 1%

Cuba 1%

Others 19%

India 5%

Australia 6%

Thailand 12%

Brazil 44%

Source: USDA FAS Sugar: World Markets & Trade, SPA Research

Main importing countriesImport of raw sugar stood at 49 mt in 2011-12. The EU, US and Indonesia are the leading importers,at around 3 mt each per year.

World Ethanol DynamicsEthanol & Its advantagesWith ever-rising cost of petrol, global warming, peak oil and so on, there has been a growing needfor sourcing alternative sources of energy and ethanol seems to be a product that many economiesare putting much of their hopes into.

The use of ethanol as a blended fuel component in gasoline is steadily increasing. Ethanol's mainattraction comes from the fact that it burns cleaner than petroleum oil, and that it is more cost andfuel-efficient. Ethanol is also a renewable energy resource, an important factor considering ourhigh dependence on petroleum, being non-renewable, which is entering into a stage of scarcity, orpeak-oil, driving the price of petrol up. Furthermore, the production of ethanol may have a role ineasing the global economic crisis. The financial worth of ethanol producing crops will drive up theprices of vegetation such as corn, so farmers can enjoy a significant profit. These same crops needto processed, meaning there will be an increased need for factories and workforces.

Demand drivers & Growth potentialThe US, Brazil and to a smaller extent, the European Union, together dominates global productionof fuel ethanol producing ~89% of the world's output. The US product is largely distilled from corn,while Brazil makes ethanol from its sugar cane crop. Production and use in the United States andthe European Union are mainly driven by the policies in place (i.e. Renewable Fuels Standard(RFS2) and the Renewable Energy Directive (RED), respectively). The growing use of ethanol in Brazilis linked to the development of the flex-fuel industry (FFVs) and the import demand of the UnitedStates to fill the advanced biofuel mandate as well as to their increase in blending minimums.

Global ethanol production has fallen in CY12 for the first time since 2000, due to declines in theUnited States and in Brazil. With lower prices of maize and sugar anticipated in 2013-14, a largeincrease in production is anticipated in both countries. In addition to the pivotal 3 markets - the

USA59.22%

China2.39%

Canada1.93%

Other Countries9.94%

India2.53%

Brazil23.99%

Global Ethanol Production in 2012






Sugar Sector

20

US, Brazil and the EU -rising transport fuel demand in other countries, together with additionalgovernments expressing mandates and targets for ethanol inclusion in gasoline, point toconsiderable potential for fuel ethanol demand over the remainder of this decade.

Renewable Energy & Nuclear Power are fastest growing sources of energy consumption

Source: EIA, International Energy Outlook 2013, SPA Research

By 2022, OECD is expecting world ethanol production to increase by almost 70% compared to theaverage of 2010-12 and reach some 168 bnl. Out of this, production in developing countries isprojected to increase from 42 bnl in 2012 to 72 bnl. in 2022, with Brazil accounting for 80% of thissupply increase and a large part of the rest coming from China, where less than half of theirethanol production is consumed in the fuel market, the rest is consumed as alcohol in many foodand nonfood preparations.

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

250

200

150

100

50

0

7%

15%

23%

27%28%

5%

11%

22%

28%

34%

History Projections2010

Liquid fuels (including biofuels) Coal

Natural gas

Renewables (excluding biofuels)

Nuclear

Production to grow at 6% CAGR

0

50

100

150

200

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

World ethanol production (bnl) World ethanol trade (bnl)

Production

Brazil28%

EU7%

China6%

Thailand1%

India2%

USA48%

Consumption

China6%

India2%

Thailand1%

Other8%

EU10%

USA52%

Brazil21%

wor

ld e

nerg

y con

sum

ptio

n by

fuel

qua

drill

ion

btu

Shar

e of

wor

ld t

otal

Regional distribution of world ethanol production and use in 2022

Source: OECD-FAO Agriculture Outlook 2013, SPA Research

Crude oil has little direct impact on ethanol pricesIncreasing gasoline prices lead to surge in demand of ethanol because it makes ethanol morecompetitive. Ceteris paribus, blending ethanol is cost effective as long as ethanol price is at 30%discount to the price of gasoline due to its lower energy content. Demand for crude oil has a minimalimpact on the price of ethanol. In the world market for crude oil, an individual country's supply anddemand decisions are small relative to the market as a whole-even for a country the size of the US. Toput this into perspective, the US consumes roughly 20% of world oil. Roughly half of the US oilconsumption goes toward gasoline and ethanol comprises roughly 10% of gasoline-blend fuel. Thus,on a volumetric basis, US ethanol constitutes about 2% of world oil use. Crude-oil supply anddemand would need to be very inelastic before such a quantity had a noticeable effect on price.





Sugars

21

CBOT Ethanol Nearest-Futures versus NYMEX RBOB Gasoline Nearest-Futures


OECD is expecting the world gasoline price to increase in real terms by 7% between 2012 and 2022,as a result of which ethanol will become increasingly competitive with petrol. This will lead to anincrease in demand and consumption of ethanol by owners of flex-fuel cars thereby putting upwardpressure on the world price of ethanol in the medium-term. As a result OECD is expecting anincrease of 8% in the world price of ethanol in real terms between 2012 and 2022.

So with all of these benefits, is ethanol the fix-all solution?Unfortunately, it is not as production of ethanol has many negative points working against it in itspotential role as the next major source of fuel. The most important is the fact that creating ethanolis thought to consume more energy than its overall output. The amount of crops needed to fuel a carfor only one day could go a long way towards feeding a person for considerably longer. Also,although ethanol is being advocated as environmentally friendly, the amount of farmland neededto satisfy the global thirst for fuel is staggering. This need for fuel means that more farmlands mustbe created, resulting in considerable deforestation. There would also be less of an incentive forfarmers to grow other crops, when ethanol-producing harvest would fetch more of a price, or evenusing vegetation, such as corn, for food products instead of as fuel. The result would be over-inflated prices on all food products, an expense that could further damage populations alreadydealing economic distress. Earlier this year the USDA reported the largest corn planting in history.Yet record temperatures and drought throughout the country means this year's crop could be farlower than originally expected. Weather is uncontrollable, but we can influence demand for cornsupplies. Government incentives for corn ethanol increase demand at a time when corn is expectedto be in short supply and that has made global hunger advocates worried.

CBOT Ethanol Nearest-Futures versus CBOT Corn Nearest-Futures


Hence instead of relying entirely on ethanol as alternate fuel, it can be used to take strain off of theenvironment by being implemented in ethanol-gasoline, or ethanol-electric cars.

7% CAGR in world gasoline prices to result in 8%CAGR in world ethanol prices





Sugar Sector

22

Ethanol from sugarcane stands out

The development of ethanol in Brazil has helped the country overcome a historical dependence onforeign oil while curbing its greenhouse gases emissions and diminishing local air pollution. Theoverall success of Brazil's ethanol program has resulted in calls for its replication abroad, includingin the United States. However, reproducing Brazil's ethanol success in other countries would not bethat easy.

Ethanol can be produced from corn, sugar cane, and other starchy agricultural products, as well ascellulosic materials in agricultural wastes (e.g., waste woods and corn stalks). The most importantdifferentiation between Brazil and other countries is that Brazil produces ethanol from sugarcane,while other large producers produce ethanol from other primary agriculture crops. Brazil has vastlands available and suitable for planting sugarcane without displacing other crops. Thus it caneasily increase its ethanol production. However for other countries to do so, they have to divertsubstantial portion of their primary agriculture crops to ethanol production, which will almostcertainly affect food prices. Thus mass production of ethanol from sugarcane does not cause thesame impact on food markets in Brazil as ethanol from other food products does.

Ethanol from sugarcane is cheaper and more energy efficient than from others. Further the cost ofproducing sugarcane ethanol is also much cheaper, which allows Brazilian ethanol to competewith gasoline without the substantial subsidies generally provided to other countries to makeethanol competitive.

For all of these reasons, if other countries were to pursue ethanol as a substitute for gasoline onthe same scale as Brazil did, and if it were to do so with an eye toward real environmental gainsand minimizing impacts on the food supply, it would have to seek source plants other than corn.

According to agroecological zoning In Brazil:

- Sugarcane (for sugar & ethanol) occupies 9.8 mnha out of 65.0 mn ha possible for cane,

- Sugarcane for ethanol occupies 5.1 mn ha or 1.6%of total arable land.

Ethanol yields per ha

0 2000 4000 6000 8000

USA (corn)

Brazil (cane)

France (beet)

Production (lt/ha)

Gross feedstock costs per litre of fuel ethanol

0 10 20 30

USA (corn)

Brazil (cane)

France (beet)

Costs (US Cents/litre)

Energy balance by feedstock

0 2 4 6 8 10

RME (Biodiesel)

Wheat

US corn

Sugar beet

Biomass

Sugar cane

Energy output/Energy input






Sugars

23

Global demand supply situation - SugarGlobal surplus to decline significantly in 2014Production deficits in 2008-09 and 2009-10 were followed by surpluses in 2010-11 and 2011-12as sugar crop areas expanded on the back of higher prices. The International Sugar Organisationhas forecast a 10.1 mt global supply surplus in 2012-13 on account of more supplies from majorexporting countries like Brazil (+6.8%), Australia (+9.0%), Thailand (although -2.9% on YoY butsubstantially higher than previous estimates) and high production in major importing countrieslike China (+17%). Global production is projected to rise to a record high of 184.2 mt in 2012-13,while consumption is expected at 174.1 mt, leading to a surplus of 10.1 mt, more than 8.5 mtanticipated earlier.

Importantly the global sugar surplus is expected to decline significantly in 2014 with ISO estimatesindicating 3.5 mt of surplus for the period 2013-14. Sugar price declines in recent years havecreated incentives for a new equilibrium in the sector. On the demand side, cheaper prices boostconsumption. On the supply side, lower prices squeeze profit margins, causing farmers to opt forother crops and to invest less in the remaining sugarcane plantations. World sugar output isexpected to decline by 2.8% to 178.5 mt while consumption is expected to grow by around 0.8% to175.5 mt in 2013-14.

The expected global sugar surplus for the fourth consecutive year can totally be eliminated alsodepending on the amount of cane that is used in Brazil for ethanol. A 20% increase in Brazil’sethanol consumption has the potential to completely eliminate the world sugar surplus.

Demand Supply Dynamics10.48.2

(14.0)(10.6)

(0.1)

7.810.1

3.5

0

50

100

150

200

FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E(20)

(15)

(10)

(5)

0

5

10

15

Production Consumption Surplus/Deficit


Brazil - The Potential game changerBrazil - Sugar production to cross 40 mt in 2013-14Brazilian cane production increased by 5.4% to 591.1 mt in 2012-13 season while sugar productionsurged by 6.8% to 38.6 mt YoY, showing a strong upturn of the cane crop from a sharp drop in yieldsin 2010-11 & 2011-12 resulting from adverse weather conditions.

In 2013-14, Brazilian sugarcane production is expected to increase by 8.3% to 640 mt, while sugarproduction is expected to surge by 4.7% to 40.4 mt. The center-south (CS) region is expected toharvest 585 mt of sugarcane (+9.8% YoY) and crush 36.4 mt sugar (+6.6% YoY) in 2013-14, due toexpected higher agricultural yields as a result of good weather conditions and adequate renewalof sugarcane stocks.

Brazilian sugar exports are expected to increase by 6.0% to 29.3 mt in 2013-14 to meet projectedinternational demand. Raw sugar should account for 23.0 mt, whereas the remainder representsexports of refined sugar.

Most important factor for the world sugar & ethanolmarket

Positioned in the world as (2012):

- No. 1: sugarcane producer (35% of world)

- No. 1: sugar producer (23% of world)

- No. 2: ethanol producer (28% of world)

- No. 1: sugar exporter (49% of world)

- No. 1: ethanol exporter (55% of world)

World sugar surplus to decline significantly to3.5 mt in 2013-14

20% increase in Brazil’s ethanol consumptioncan completely eliminate the world sugarsurplus.





Sugar Sector

24

2000

2001

2002

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2005

2006

2007

2008

2009

201 0

2011

2012

2013

2014

2015

2 016

2017

2018

2019

2020

202 1

2022

2023

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Brazil Ethanol & Sugar Production

27.0 26.0 25.0 23.0 23.426.8

26.031.0 31.0

36.2 38.6 40.4

0

10

20

30

40

50

2009 2010 2011 2012 2013 2014E

Ethanol (bn lt) Sugar (mt)


Mills are seen to be allocating much more of the cane they harvested to ethanol production thanthey did last year. Total ethanol production is forecast to increase by 14.9% to 26.8 bn liters (12.6bn liters of anhydrous ethanol and 14.2 bn liters of hydrated ethanol).

Forecast of Brazil's Sugar+Ethanol Demand (in mt)

Source: Datagro 2013, SPA Research

Relative prices favouring Ethanol production over Sugar


Higher Ethanol Prices over Sugar might eliminate world sugar surplusBrazil has a unique system of producing competing tradable products - sugar andethanol - from non-traded sugarcane. Modern "flex-plants" produces either sugaror ethanol from sugarcane based on the prevailing respective prices.

Throughout 2012, relative prices favored sugar output. But in the early months of2013, the drop in international sugar prices led relative prices to favor theproduction of ethanol, pushing a greater part of the harvested sugarcane intoethanol production. This is expected to result in higher production of biofuel overthe sweetener in the current season. Total sucrose content diverted for sugar andethanol production is forecast at 45% and 55%, respectively, as opposed to anequal split of 50/50 in 2012-13.

If ethanol prices continue rising, millers may well prefer to produce ethanol andsell it in the domestic market, which will provide them with cash quicker.

29

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15Jan-12 May-12 Sep-12 Jan-13





Sugars

25

The Government of Brazil recently introduced two measures that have the potential to divert agreater share of sugarcane output into ethanol. First, it increased the mandatory amount of ethanolto be blended into gasoline back to 25% beginning in May 2013. The blending rate had been cut to20% in October 2011, following a poor 2011/12 sugarcane harvest. Second, after keeping gasolineprices unchanged since 2006 to check inflation, it has raised them by 6.6%, a move that improvesthe competiveness of ethanol against gasoline at the pump. Brazil also plans to reduce taxes onethanol to boost production and use of the biofuel. If Brazil cuts tax, the ethanol parity to sugarmay rise and thus the share of cane directed to sugar production in the 2013-14 season may belower than 45%.

The expected global sugar surplus for the fourth consecutive year may be eliminated within 18months depending on the amount of cane that is used in Brazil for ethanol. A 20% increase inBrazil's ethanol consumption has the potential to completely eliminate the world sugar surplus.

Ethanol share set to be higher

520

540

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2009 2010 2011 2012 2013 2014E

46%

48%

50%

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58%

Production (mt) % Ethanol


Thailand - Continues to remain 2nd largest exporterThailand continues to maintain its status as the second largest exporter of sugar in the world afterBrazil. Thailand's total production is expected to decline from the record 10.2 mt produced in2011-12 to 9.9 mt in 2012-13 (Nov-Oct) after an early drought threaten yield. Production is thenexpected to rebound to a record 10.5 mt in 2013-14. Consequent to larger supplies, exports areforecast to increase to 7 mt in 2013-14 on growing Asian demand, particularly in Indonesia.

Thailand Demand Supply Situation (mt)

9.6 10.2 9.9 10.5

6.67.8 8.0 8.5

0

2

4

6

8

10

12

FY11 FY12 FY13E FY14E

Production Consumption






Sugar Sector

26

Australia: Output to decline by 6.5%Sugar output in Australia, the world's third-biggest raw sugar exporter, is expected to decline by6.5% to 4.25 mt in in 2013-14 season (July to June) due to heavy rainfall in early 2013 and diseasethat attacked the crop in Queesland, the country's largest sugar producing state. Sugar exports areexpected to remain flat at ~3 mt. The Australian Sugar Milling Council forecasts this year’s sugarcane harvest at about 30.6 mt, down from expectations of as much as 33 mt.

Mexico - Largest exporter to the United StatesMexico produced a record 6.98 MT of sugar in the first 41 weeks of the current 2012-13 season(Nov-Oct), which is an increase of 36.5% from the average production in the same period duringlast five years on account of higher area and productivity. Sugar exports also reached to record 2.5mt, which is an increase of 166% from 0.94 mt in the last year. Moreover, production for the nextcrushing cycle which starts in November is forecasted at 6 mt. With consumption forecast to rise,both exports and ending stocks are expected to decline. Mexico remains the largest exporter to theUnited States.

China becoming the 'buyer of last resort' for the world sugar marketProduction increase not offsetting importsChinese sugar production, the world's second largest consumer after India, has increased by13.5% to 13.1 mt in 2012-13 (Sep/Aug) and is close enough to consumer demand. By 2014-15, Chinatargets sugar production of 16 mt, which would be enough to cover around 85% of the country'ssugar demand. China's sugar import needs have increased off late due to increasing domesticdemand, spurred by growing prosperity, prompting more buying. Sugar is gaining market shareover high-fructose corn syrup, an alternative sweetener, because sugar prices have dropped.

Imports continue to increaseA more than doubling of imports to a record 4.2 mt in 2011-12 had led many to expect that Chinawill sharply reduce imports in 2012-13 but imports now look set to exceed expectations. Chinaimported 2.5 mt from October through July 13 and is expected to import ~3.5 mt in 2012-13compared with an earlier forecast of about 2 mt.

Chinese imports are climbing as a government policy to stockpile local sweetener pushed domesticprices above the international market, prompting more buying. A drop in the global raw sugar priceto less than $ 20 cents/lb has created a huge gap between domestic prices in China and the cost ofimports. China has among the highest sugar production costs in the world at ~$ 30 cents/lb,compared with roughly $ 18-19 cents/lb in Brazil. Cane costs ~$ 75/tonne in China, compared witharound $ 30/tonne in Brazil and Thailand.

There are 1.9 mt of duty free imports allowed and tariffs are payable on additional supplies of "outof quota" sugar. Private buyers continue to import out-of-quota sugar that the country does notneed. This opens up the possibility of China becoming the 'buyer of last resort' for the world sugarmarket.

Indonesia – Imports expected to more than doubleIndonesia, the world's largest raw sugar importer has abandoned its goal of being self-sufficientin white sugar production by 2014 after struggling to boost output due to land license red-tape,competition for land and under-investment. Raw sugar imports are expected to more than doubleto 5.4 mt in 2013 from 2.5 mt last year after heavy rains hit domestic output. Indonesia, whoseconsumption accounts for about 3% of global output, imports raw sugar from Brazil, Thailand andAustralia.

Sharp drop in global sugar prices resulting inincreasing market share of sugar over high-fructose corn syrup, an alternative sweetener.

China has among the highest sugar productioncosts in the world at ~$ 30 cents/lb, comparedwith roughly $ 18-19 cents/lb in Brazil

Abandoned plans to become self sufficient insugar production, imports to more than doublein 2013





Sugars

27

While sugar production is expected to stand flat at 2.6 mt in 2013, consumption is forecasted to risearound 12% to 5.7 mt in 2013 from 5.1 mt in 2012 due to increased demand from the snack industry.

Russia - Rare setback for world output prospectsRussia which was the world's top raw sugar importer a decade ago, had moved towards self-sufficiencyin sugar in the last few years as its production costs grew more competitive with Brazilian mills whichstruggled to find sufficient cane to crush. Due to falling demand and increasing costs, Russian farmersare reducing beet planted areas in 2012-13 (Oct - Sept) by 21% YoY to 905,000 hectares and further by15%-20% in 2013-14. Sugar production from the beet harvested this year is forecasted to decline by17% YoY to 4 mt in 2012-13 and further to 3.85 mt in 2013-14. The USDA currently estimates Russianimports in 2013-14 at a three-year high of 1.03m tonnes.

International sugar prices at 3 years low

World sugar prices have been volatile for many years with rapid spikes immediately followed byequally rapid falls. This volatility is largely as a result of changes in production - especially by largeplayers such as Brazil and India - and also due to the nature of the industry. Apart from being the majorsugar producers, Brazil and India are also major sugar consumers, and their export volumes aresecondary to the needs of domestic processors. Growing trends in the production of sugar basedbiofuel reduce exports, too.

Sugar prices have remained in the negative territory and touched its three year's low in the month ofJune 2013 as a result of third consecutive year of surplus production. Prices have been on a downwardtrajectory due to significantly higher Brazilian cane harvest in 2013-14 season along with better-than-anticipated crop production figures in India, Thailand, Australia, China and Mexico. The ISO hasinfact forecast a fourth straight year of surplus, at 3.5 mt in 2013- 14, down from a surplus of around10.1 mt in 2012-13.

A key influence in this year's negative sugar price trend has been the Brazilian currency, which hasrecently tanked to four-year low to ~2.3 against the US dollar. Brazil being the largest producer andexporter of the commodity, the recent depreciation of the Brazilian real has made their export competitiveresulting in the US dollar price to fall.

Depreciating BRL moving sugar prices lower

0.00.51.01.52.02.53.03.54.0

Jul-9

8

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99

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-00

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0.05.010.015.020.025.030.035.040.0

BRL/USD USc/lb (RHS)


ICE Raw Sugar futures declined around 17.5% since October 2012 and touched a low of 16.02 cents/lbin June 2013. Prices although recovered marginally in the month of June amidst wet weather in Brazilduring the first half of the month hampering sugarcane crushing, but were unable to sustain at higherlevels. Although much weaker than the 30-year highs posted in 2011 (36 cents), prices remain abovetheir decade average of 14.90 cents/lb.

Large players like Brazil & India impacting overallindustry pricing

Sharp depreciation in Brazilian currency furtherimpacting world sugar prices





Sugar Sector

28

Significant decline in global sugar surplus toprovide a breather to declining sugar prices

Export of sugar from India to result in reducedsurplus, thereby impacting domestic pricepositively

Ethanol vs Sugar profitability holds key to overglobal output

ICE Sugar (raw sugar prices)

05

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cen

ts/l

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Liffe Sugar (White sugar prices)

0100200300400500600700800900

Feb-

98O

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/ton

ne


Sugar Pricing OutlookLong-term prices are largely dependent on domestic and international demand supply trends. These, inturn, would depend on agro climatic conditions in major producing countries and crude oil pricetrends, which determine the diversion of cane crop to ethanol. As the 2012-13 international crop yearenters its last quarter, international sugar prices should be increasingly driven by the sentiment andperspectives for the 2013-14 season. The global sugar surplus is expected to narrow significantly to3.5 mt in 2013-14 from expected 10.1 mt surplus in 2012-13, as demand accelerates in developingnations from China to Indonesia, the world's largest raw sugar importers.

We expect the domestic sugar prices to remain stable and marginally improve from hereon in the shortterm following abatement of supply pressure with end of crushing and an increase in import duty from10% to 15% which together with sharp devaluation in rupee renders imports uncompetitive. In addition,rupee depreciation has also made export realization marginally competitive for South and West basedsugar mills and we anticipate some sugar exports which will partly relieve pressure on stocks. Althoughan early and above normal monsoon so far has eased the supply side threat for SY14, proper distributionof rainfall in the remaining part of the monsoon season and timely withdrawal of the same will have asignificant impact on the cane yield.

Apart from the domestic fundamentals, prices will also take cues from the progress of Brazilian canecrushing and their impact on the global sugar prices. International sugar prices have declined sharplyover the past few months and touched three year's low in June due to three back to back years of sugarsurplus coupled with supplies from Brazil. Supply outlook is expected to deteriorate marginally withless supplies from Brazil, world's largest sugar producer. World sugar output is expected to decline by1.92% to 178.5 mt while consumption is expected to grow by around 2% to 175.5 mt in 2013-14.

One factor that can completely eliminate the global sugar surplus within 18 months is the amount ofcane that is used in Brazil for ethanol. It remains to be seen how the "ethanol vs sugar profitability" willimpact sugar production in Brazil and therefore world sugar prices. A 20% increase in Brazil’s ethanolconsumption has the potential to completely eliminate the world sugar surplus. The Government ofBrazil has recently introduced two measures that have the potential to divert a greater share of sugarcaneoutput into ethanol. In addition it also plans to reduce taxes on ethanol to boost production and use ofthe biofuel. If brazil cuts tax the ethanol parity to sugar may rise and thus the share of cane directed tosugar production in the 2013-14 season may be lower than 45% expected.

We expect global prices to find a floor around USD 16 cents/lb, as slump in prices below these levelswill spur Brazilian millers to make more biofuel and less of the raw sweetener from cane (ethanol/sugar price parity). International sugar prices are expected to consolidate at these levels and edge uphigher gradually in 2014-15. Weather development in 3Q 2013 in Brazil (peak harvest season) holdsimportance as adverse (overly wet) conditions can reduce the efficiency of local millers and potentiallytrigger cuts to crushing estimates which could have an impact on market sentiment.





Sugars

29

Summary

Company MCAP CMP Target(INR bn) (INR) (INR)

Balrampur Chini 10 43 71

Shree Renuka Sugars 13 20 32

CompaniesSection





Sugar Sector

30

Balrampur Chini Mills

Balrampur Chini Mills is one of the largest sugar producers in India with an annual output of ~0.9 mt of sugar and aninstalled capacity of 76,500 TCD for cane crushing. It has 10 mills all located in the north Indian state of Uttar Pradesh. Inaddition to sugar it also produces alcohol and power as by-products. It has an installed capacity of 320KLPD for alcohol and180MW for power out of which 128 MW is saleable.

Investment RationaleLargest integrated sugar manufacturerBalrampur Chini is the largest sugar manufacturer in Eastern UP,with its catchment areas being within radius of 200 km from theproduction facilities. Balrampur Chini has 3 distilleries, 8 powerplants and 5 integrated manufacturing facilities, thereby havingone of the largest integrated facilities in the industry.

Derisked Business ModelThe company's business model is complimented by the productionof ethanol, industrial and potable alcohol, organic manure andpressmud. BCML's cogeneration division is bolstered by dual fuelpower production (viz. coal and bagasse), which helps thecompany to mitigate the risk arising out of the cyclical nature ofthe sugar business. These by products contribute ~15% to thetopline of the company, and help the company to better utilise itsmanufacturing facilities.

Ethanol buying program to aid distillery segment growthUP based mills are expected to supply 0.21 bn litre of ethanol @INR 34-35/litre. BCML is expected to offer ~26.8 mn litre of ethanol@ INR 35/litre and the quantity has to be supplied during Jul 13-Mar 14 period. This would lead to 20.5% CAGR in revenue ofdistillery segment over FY13-15E.

Shareholding (%) Jun-13

Promoters 40.93

FIIs 17.18

DIIs 15.38

Others 26.51

Relative Price Performance

Key Data

BSE Code 500038

NSE Code BALRAMCHIN

Bloomberg Code BRCM IN

Reuters Code BACH.BO

Shares O/S (mn) 244.30

Face Value 1

Mcap (INR bn) 10.47

52 Week H/L 74.50/34.60

2W Avg. Qty, NSE 273439

Free Float (INR bn) 6.18

Beta 0.55

Y/E Mar (INR mn) FY12 FY13 FY14E FY15E

Net Sales 23095 32748 36797 38869

Growth (%) -22.41% 41.80% 12.36% 5.63%

EBIDTA Margin (%) 10.30% 12.82% 12.74% 11.67%

APAT 4 1619 1875 1820

Growth (%) -99.77% 40375.00% 15.84% -2.97%

EPS 0.02 6.63 7.68 7.45

P / E NA 6.46 5.58 5.75

P / BV 1.15 0.80 0.73 0.67

EV/EBIDTA 12.75 5.72 5.13 5.25

Net Debt-Equity Ratio 1.63 1.20 1.07 0.98

RoACE (%) 4.58 11.25 12.78 12.24

RoAE (%) NA 12.81 13.64 12.10

New investment plans on the anvilBCML has announced some fresh investments plans. It plans toadd 12.7 MW cogeneration capacity with an investment of INR520 mn and acquire a sick sugar mill, Khalilabad Sugar Mills Ltd(KSMPL), in UP which has a crushing capacity of 2,500 TCD andhas ~INR 1 bn debts on its books.

Strong balance sheetBalrampur Chini has one of the strongest balance sheets in theindustry with Net D/E ratio of 1.2x in FY13. BCML's long term debtstood at INR 5 bn with long-term debt-equity ratio at 0.4x. BCML hasalready expanded its capacity aggressively over FY2005-08 and doesnot have any major capex plans now. Thus, going ahead, the companyhas no need to raise a significant amount of long term debt.

Outlook & ValuationBCML being one of the largest and most efficient sugar producersin the country is best placed to capitalize on the positive structuralchanges witnessed by the industry. Improving ethanol dynamicsand robust balance sheet will aid profitability. Sharp rise in caneprices (SAP) for SS14 remains the biggest risk for BCML. The stockat 0.67x FY15E BV of INR 64.5 adequately factors in the concernsarising from the global oversupply supply of sugar and subdueddomestic prices. We recommend a BUY on the stock with a targetof INR 71, based on 1.1x FY15E BV, over a period 18 months.

CMP - INR 43 Target - INR 71





Sugar Sector

0

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BCML Sensex

31

Financial Summary

Income statementYear E

Y/E March (INR mn) FY12 FY13 FY14E FY15ENet Sales 23095 32748 36797 38869Growth (%) -22.41% 41.80% 12.36% 5.63%Cost of goods sold 17755 25190 26807 29537Employees Cost 1177 1295 1472 1555Other Mfg. Expenses 1054 1170 1656 1555Total Expenditure 20716 28551 32109 34333EBIDTA (without OI) 2380 4198 4687 4536Growth (%) -53.85% 76.42% 11.66% -3.22%EBITDA Margin % 10.30% 12.82% 12.74% 11.67%Depreciation 1155 1084 1105 1121EBIT 1225 3114 3582 3416EBIT Margin % 5.30% 9.51% 9.73% 8.79%Interest Expenses 1474 1439 1321 1283Other Income 265 423 346 387EBT 16 2098 2607 2520Tax Expenses 12 485 732 700PAT 4 1613 1875 1820Extraordinary Items 0 (6) 0 0Net Profit 4 1619 1875 1820Growth (%) -99.77% 40375.00% 15.84% -2.97%Net Profit Margin (%) 0.02% 4.94% 5.10% 4.68%EPS 0.02 6.63 7.68 7.45Growth (%) -99.74% 40375.00% 15.83% -2.97%

Balance SheetY/E March (INR mn) FY12 FY13 FY14E FY15E

SOURCES OF FUNDS

Share Capital 244 244 244 244

Reserves 11877 12916 14101 15489

Total Networth 12121 13161 14345 15733

Total Debt 19905 17669 16287 15787

Total Liabilities 32026 30829 30631 31519

APPLICATION OF FUNDS

Fixed Asset 16151 15283 14655 15305

Investments 422 422 422 422

Total Current Assets 25494 26528 27441 27826

Total Current Liabilities 7796 9097 9580 9729

Net Current Assets 17698 17431 17861 18097

Net Deferred Tax (2245) (2306) (2306) (2304)

Total Assets 32026 30829 30631 31519

Cash FlowY/E March (INR mn) FY12 FY13 FY14E FY15E

EBT 16 2098 2607 2520

Depreciation 1155 1084 1105 1121

Interest 1474 1439 1321 1283

Inc./Dec. in working capital (1136) 2049 (1395) (760)

Tax paid (16) (424) (730) (706)

Other Income (265) (423) (346) (387)

Cash flow from operations (a) 1228 5823 2562 3070

Inc./Dec. in investments (406) (0) 0 0

Change in Fixed Assets (94) (142) (178) (550)

Change in CWIP 57 (47) (299) (100)

Others 149 170 170 195

Cash flow from investing (b) (295) (19) (307) (455)

Inc./Dec. in capital (12) 0 0 0

Inc./Dec. in debts (212) (2236) (1382) (500)

Dividend paid 0 (489) (488) (368)

Interest paid (1474) (1439) (1321) (1283)

Others (688) 141 (29) (989)

Cash flow from financing ( c ) (2385) (4022) (3220) (3140)

Opening cash balance 1584 131 1912 948

Cash Flow during the year (a+b+c) (1453) 1781 (965) (524)

Closing cash balance 131 1912 948 423

Key RatiosY/E March FY12 FY13 FY14E FY15E

Per Share Data (INR)

Adjusted EPS 0.02 6.63 7.68 7.45

CEPS 4.73 11.32 12.21 12.01

DPS 0.00 2.00 2.00 1.50

BVPS 49.61 53.87 58.72 64.40

Return Ratios

RoACE (%) 4.58 11.25 12.78 12.24

RoAE (%) 0.03 12.81 13.64 12.10

Balance Sheet Ratios


Current Ratio 3.27 2.92 2.86 2.86

Interest Cover Ratio 1.01 2.46 2.97 2.96

Efficiency Ratios

Total Asset Turnover 0.71 1.04 1.20 1.25

Inventory Days 307 248 222 219

Debtors Days 19 18 18 18

Creditors Days 63 85 82 76

Valuations

P / E NA 6.46 5.58 5.75

P / BV 1.15 0.80 0.73 0.67

Dividend Yield (%) 0.00 4.67 4.66 3.51

Market Cap / Sales 0.60 0.33 0.28 0.27

EV/EBIDTA 12.75 5.72 5.13 5.25





Sugars

32

Shree Renuka Sugars Ltd.

SRSL, promoted by Murkumbi family, is one of the largest sugar producers in the world with a combined crushing capacityof 22 mt across 11 cane mills globally. It is also the largest sugar refiner globally with refining capacity of 5500 tpd in WestBengal (2500 tpd) & Gujarat (3000 tpd). The company's plants are fully forward integrated with ethanol capacity of 4,160klpd and Co-Generation capacity of 271 MW in India and 313 MW in Brazil, with exportable power surplus of 371 MW.

Investment RationalePresence in top 2 sugar producing regions ensures stabilityBeing the only sugar company in the world having manufacturingoperations in top two sugar producing regions i.e India & Brazil(40% and 60% respectively), SRSL is well placed to benefit fromthe growth opportunities in the world sugar market. Moreoverhaving a diversified geographical presence also ensures continuityin crushing operations almost throughout the year due tocomplementary seasons in India and Brazil.Locational advantageSRSL enjoys significant locational advantage as all its 7 mills inIndia are located in Maharashtra and Karnataka, that are regionswhere operating environment are less regulated, have highrecovery rates (~10% higher than other states), long crushingseason and relatively flexible FRP based cane price regime. BesidesSRSL is also the largest exporter of sugar in India as its Refiningand Milling assets are close to the port, which gives the sugargiant easy access to the overseas market like Middle-East andAsia Pacific.Unique and derisked business modelBesides being one of the largest sugar manufacturers in the world,SRSL is one of the first mills to be fully forward integrated into distilleryand co-generation operations thereby de-risking the core sugarbusiness. This flexible operating model aids SRSL to grow acrosssugar cycles as co-products support profitability during a downturn,while sugar and refining help in leveraging up-cycle benefits.Further it has a unique business model in the sense that it uses acombination of owned and leased mills for its capacity expansion,which aids the company in using its capital efficiently. Out of its11 mills, 5 are leased mills acquired from loss making co-operatives at very low costs.

Shareholding (%) Jun-13

Promoters 38.36

FIIs 15.55

DIIs 8.42

Others 37.67

Relative Price Performance

Key Data

BSE Code 532670

NSE Code RENUKA

Bloomberg Code SHRS IN

Reuters Code SRES.BO

Shares O/S (mn) 671.29

Face Value 1.00

Mcap (INR bn) 13.43

52 Week H/L 38.80/14.50

2W Avg. Qty, NSE 4975965

Free Float (INR bn) 8.28

Beta 1.35

Y/E Mar (INR mn) FY12 FY13 FY14E FY15E

Net Sales 123691 103576 115187 127155

Growth (%) 61.28% -16.26% 11.21% 10.39%

EBIDTA Margin (%) 14.58% 14.53% 13.68% 14.13%

APAT (384) (818) 922 1943

Growth (%) PL-313.03% LP 110.82%

EPS (0.57) (1.22) 1.37 2.90

P / E NA NA 14.56 6.91

P / BV 1.13 1.03 0.68 0.63

EV/EBIDTA 6.12 7.63 5.37 4.25


RoACE (%) 8.92 6.16 7.72 10.91

RoAE (%) NA NA 5.38 9.47

Extending sugar season through refining operationsIn India, the sugar season lasts for ~150 days. In order to extendthis sugar season, SRSL invested in multi-feed sugar refineriesand is one of largest sugar refiners globally with a capacity of 2.3mtpa. During the season it uses sugarcane juice to produce sugarand during off season it uses raw sugar, thereby doubling theasset utilization rate against peers.

Debt to decline slowlySRSL is carrying a consolidated debt of ~INR 84.7 bn (Brazil - INR51 bn) in its books, resulting in Net D/E ratio of ~5.6x. It expectsoverall debt to decline in coming years aided by stabilizingBrazilian operations, which would lead to generation ofsubstantial cash flows. Its earlier plan of deleveraging itsbalance sheet through sale of Brazilian assets is put on hold asof now. It was earlier looking to sell its Brazilian cogen plant of295 MW. Replacement cost of setting up a power plant in Brazilis ~$1.5 mn/MW.

Outlook & ValuationSRSL remains one of best integrated sugar business models inIndia with the ability to operate throughout the year coupled withsubstantial in-house refinery capacity. Improving industrydynamics domestically in addition to likely turnaround ofBrazilian operations in next couple of years provides some respiteto the company. Any success in balance sheet deleveragingactivities will lead to rerating of the company.The stock at 0.63x FY15E BV of INR 31.9 adequately factors in theconcerns arising from the global oversupply of sugar andsubdued domestic prices. We recommend a BUY on the stockwith a target of INR 32, based on 1x FY15E BV, over a period 18months.

CMP - INR 20 Target - INR 32





Sugar Sector

20

40

60

80

100

120

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

SRSL Sensex

33

Financial Summary

Income statementYear E

Y/E March (INR mn) FY12 FY13 FY14E FY15ENet Sales 123691 103576 115187 127155Growth (%) 61.28% -16.26% 11.21% 10.39%Cost of goods sold 89665 78194 86415 95449Power & Fuel Cost 3819 2865 3456 3815Employees Cost 3920 2585 2764 2925Total Expenditure 105281 91511 99431 109181EBIDTA (without OI) 18410 12065 15756 17973Growth (%) 40.83% -34.46% 30.59% 14.07%EBITDA Margin % 14.58% 14.53% 13.68% 14.13%Depreciation 10223 8868 8599 8713EBIT 8187 3197 7157 9260EBIT Margin % 6.62% 3.09% 6.21% 7.28%Interest Expenses 10381 8683 7205 6467Other Income 1522 583 351 821EBT (672) (4903) 303 3613Tax Expenses (370) (1160) 50 1126PAT (302) (3744) 253 2487Exceptional/Extraordinary Items 74 (2923) (671) 536Minority Interest 8 (3) 2 8APAT (384) (818) 922 1943Growth (%) PL -313.03% LP 110.82%APAT Margin (%) NA NA 0.80% 1.53%

Balance SheetY/E March (INR mn) FY12 FY13 FY14E FY15E

SOURCES OF FUNDS

Share Capital 671 671 671 671

Reserves 18149 13926 19003 20718

Total Networth 18820 14597 19674 21389

Minority Interest 36 33 35 43

Total Debt 101578 84769 75339 68378

Total Liabilities 120435 99398 95048 89810

APPLICATION OF FUNDS

Net Block 88376 84149 81365 75652

Capital Work in Progress 3647 2815 500 500

Investments 1935 2354 2354 2354

Total Current Assets 60741 66784 73381 71257

Total Current Liabilities 32709 56431 62234 59605

Net Current Assets 28033 10353 11148 11652

Misc. Expenses not written off 0 0 1 1

Net Deferred Tax (1556) (272) (319) (349)

Total Assets 120435 99398 95048 89810

Cash FlowY/E March (INR mn) FY12 FY13 FY14E FY15E

EBT (672) (4903) 303 3613

Depreciation 10223 8868 8599 8713

Interest 10381 8683 7205 6467

Inc./Dec. in working capital (24338) 20121 (1807) (743)

Tax paid (557) (297) (97) (1156)

Other Income (1522) (583) (351) (821)

Cash flow from operations (a) (6486) 31889 13852 16074

Inc./Dec. in investments (746) (419) 0 0

Change in Fixed Assets (16157) (726) (5815) (3000)

Change in CWIP 3369 832 2815 0

Others 7 24 12 15

Cash flow from investing (b) (13527) (289) (2988) (2985)

Inc./Dec. in capital 28 0 0 0

Inc./Dec. in debts 36499 (16810) (9429) (6962)

Dividend paid (1343) (336) 0 (671)

Interest paid (10381) (8683) (7205) (6467)

Others (10043) (3330) 4757 773

Cash flow from financing ( c ) 14760 (29159) (11877) (13327)

Opening cash balance 6019 767 3209 2196

Cash Flow during the year (a+b+c) (5252) 2442 (1013) (238)

Closing cash balance 767 3209 2196 1958

Key RatiosY/E March FY12 FY13 FY14E FY15E

Per Share Data (INR)

Adjusted EPS (0.57) (1.22) 1.37 2.90

DPS 1.00 0.50 0.00 1.00

BVPS 28.04 21.74 29.31 31.86

Return Ratios

RoACE (%) 8.92 6.16 7.72 10.91

RoAE (%) NA NA 5.38 9.47

Balance Sheet Ratios


Current Ratio 1.86 1.18 1.18 1.20

Interest Cover Ratio 0.94 0.44 1.04 1.56

Efficiency Ratios

Total Asset Turnover 1.18 0.94 1.18 1.38

Inventory Days 88 147 149 131

Debtors Days 12 10 9 9

Creditors Days 78 126 126 102

Valuations

P / E NA NA 14.56 6.91

P / BV 1.13 1.03 0.68 0.63

Dividend Yield (%) 3.16% 2.24% 0.00% 5.00%

Market Cap / Sales 0.17 0.14 0.12 0.11

EV/EBIDTA 6.12 7.63 5.37 4.25





Sugars

34

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