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DIRECTOR'S REPORT

Ponni Sugars (Erode) Ltd.

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Market Cap. (₹) 96.39 Cr. P/BV 0.33 Book Value (₹) 340.39
52 Week High/Low (₹) 189/102 FV/ML 10/1 P/E(X) 11.43
Bookclosure 23/07/2019 EPS (₹) 9.80 Div Yield (%) 1.78
Year End :2019-03 

The Board is pleased to present the 23rd Annual Report and the audited financial statements for FY 2018/19.

2018-19

2017-18

Physical Performance

Cane crushed (tonnes)

448400

318716

Sugar recovery (%)

9.92

8.89

Sugar produced (tonnes)

44484

34102

Power produced (lakh kwh)

916

552

Financial Performance (? crores)

Total Income

187.96

198.59

Profit Before

Interest, Depreciation &Tax

22.73

22.71

Profit Before Exceptional Items & Tax

13.33

15.06

Profit Before Tax

12.00

3.80

Profit After Tax

8.43

3.34

Transfer to Reserves

Your Directors have proposed to transfer Rs. 5 crores to General Reserve.

Dividend

Your Directors recommend a dividend of Rs. 2/- per equity share of Rs. 10 each for the financial year ended 31st March 2019, subject to the approval of shareholders at the ensuing Annual General Meeting.

Global sugar scenario

World sugar production after its strong rebound during 2017-18 season, that came after two years of deficit phase, slided from the summit in 2018-19 season but still ranks the second highest on record. Strong oil prices prompted Brazil to significantly step up sucrose use for ethanol production, correspondingly cutting the sugar production and snipping global surplus. As a result, India has re-emerged as the largest sugar producer, displacing Brazil from the pedestal after a decade and more. Ethanol demand should continue to remain dynamic for Brazil in 2019-20 to maintain its ethanol mix closer to last season’s record high level of 65%. World production in 2019-20 is punctuated by lower crops in India and Thailand, stable low EU crop and modest rise in Brazil crop. Against modest surplus in 2018-19, the coming season would witness modicum of deficit.

World sugar prices stumbled and tumbled to a decadal low in April 2018, that managed to move up marginally thereafter. The projected decline in production and the return to deficit is too minimal to cause a storage in the backdrop of huge stock pile. This singularly clouds the market mood and strangles the scope for perceptible price recovery. Any supply-side shortfall caused by adverse weather could get instantly off-set by Brazil that enjoys ethanol mix arbitrage by tweaking its output. World prices for now remain largely on a neutral note, varying in a relatively narrow range between 11 & 13 c/lb. The neutral market tone has also resulted in a steady and relatively weak nominal white sugar premium that is far below the long term average.

Indian sugar overview

After recording an all time high sugar production of 325 lakh tonnes in 2017-18 season, the estimates for the current 2018-19 season at different points in time witnessed wild swings. While the initial prognosis on plummeting sugarcane yield for Maharashtra that had suffered under a short-tailed monsoon turned incorrect, further upsurge in UP’s sugar recovery more than made-up for the downside elsewhere. As a result, the three dominant sugar producing States of UP Maharashtra and Karnataka have maintained their peak in sugar production, propelling the country’s overall production to a new zenith.

Two successive years of record high sugar production, building a surplus of 160 lakh tonnes that is close to 8 months’ consumption, left the market in a damp squib. Sugar prices suffered a calamitous collapse, threatening to breach Rs. 20 per kg level. Government came in as saviour with its timely intervention through mandated Minimum Selling Price (MSP) for sugar that stemmed the slide and lifted sugar prices closer to the MSP It was first fixed at ‘29/ kg in June’18 and later revised to Rs. 31/ kg in Feb’19. While this MSP is unarguably below cost of production, it has doubtless thrown a lifeline for the industry, besides playing a crucial role in containing cane price arrears.

While the monsoon failure in the later parts of last season didn’t much impact sugarcane productivity in Maharashtra, it has deplorably dried up reservoirs and dampened fresh cane planting. It is feared Maharashtra would face a formidable fall in sugarcane area and sugar production next season, while UP looks well poised for a further rise. With little change likely from other States, Indian production next year must recede more than 10% from current high level; yet, the production would outpace domestic consumption and comes on top of current mountainous sugar stocks.

There is hence imminent and imperative need to destock sugar to address surplus stockpile. Exports despite prescriptive quotas backed by subsidies repeatedly fall short of set targets owing to inherent uncompetitiveness caused by the cane cost that is the highest amongst large exporters. In this context, it is gratifying to observe the new and path breaking policy initiative to promote ethanol production in substitution of sugar, incentivizing the switch through premium pricing depending on the degree of sugar substitution. Concurrently, financial assistance through interest subvention is being offered for creating fresh and expanded capacities in ethanol production. While this may not bring immediate succour to current sagging sugar prices, it is bound to be a game changer in the next couple of years and reassure long term sustainability of Indian sugar industry.

Amidst aforesaid adversities, sugarcane price arrears has peaked to Rs. 20,000 crores causing considerable anguish and distress to farmers. While some of the current and contemporaneous moves of the Government towards mandatory inventory norms, monthly sale quota, export quota and minimum sugar price are well meant and seen inevitable to bail the industry out and protect cane farmers, it clearly tends to put the clock back on sugar industry reforms.

The long term remedy for this malaise lies only in linking sugarcane price to realization from sugar and primary byproducts as recommended in Dr Rangarajan Committee Report and reiterated in successive reports of CACP on sugarcane pricing. The formula might just need a bit of tweaking and refining for the emerging ethanol switch model. This would at once obviate the need for endless Government intervention, often times costing the exchequer quite heavily and yet leaving every stakeholder unhappy in the end.

Sugar in Tamil Nadu

Government of Tamil Nadu having discontinued the State Advised Price (SAP) for sugarcane from 2017-18 season has enacted ‘The Tamil Nadu Sugarcane (Regulation of Purchase Price) Act, 2018.’ This provides for a minimum price for sugarcane equivalent to the Fair and Remunerative Price of Central Government. However, this law further mandates sugar mills to bear the full cost of transportation of sugarcane, putting them at a considerable cost disadvantage compared to peers in other States. Sugarcane suppliers would get additional cane price through the revenue sharing formula.

In order that farmers’ interest is protected, the State has offered a transitional subsidy to protect the current level of cane price. Towards this, the State has already disbursed Rs. 200/ tonne of cane for 2017-18 season by way of direct credit to sugarcane farmers. It has offered a similar measure of subsidy at Rs. 137.50/ tonne for 2018-19 season. The State Government deserves high praise for implementing the overdue reform in sugarcane pricing.

There is perceptible progress in the development of new sugarcane variety for Tamil Nadu, thanks to the collaborative efforts between SISMA-TN and Sugarcane Breeding Institute. In particular, Co 11015 has proved successful in trial plots promising higher recovery, improved yield and lower maturity time. It is intended to enhance planting of this variety on wider areas during 2019-20 season with the fond hope that the success in trials would transcend to commercial scale cultivation.

Company’s performance

At the start of the year, we were weary of recurring monsoon failure in our region, wary of depressive sugar price outlook and deeply worried over the dystopian prospects for the year. We are indeed glad to be proved wrong. Our committed efforts to shore up operating performance buttressed by the fortuitous turn of events have in the end gleefully infused desired positivity in our financial results.

SW monsoon was bountiful in the neighbouring State of Karnataka that led to improved flow in river Cauvery and filled Mettur reservoir to its near full capacity in many years. The resultant improved water source and access enthused farmers, expanded cane area, enhanced cane yield and ensured higher sucrose content in cane. The one-time settlement reached with our cane farmers on SAP involving huge upfront payout helped in instant restoration of harmonious relationship and motivated more number of farmers to willingly come forward and supply sugarcane to our mill. Indeed, spot registration of standing cane on this score has sizeably supplemented cane availability for current year, besides committing the ratoon crop for the coming year.

We also re-doubled our efforts on power production. For the first time, we operated our Cogen plant on standalone mode during off-season, using disparate varieties of bio-fuel. As a result, our power production touched the maximum permissible 55% Plant Load Factor (PLF) eligible for preferential tariff. While this significantly helped in achieving higher topline and healthier bottomline for the Company, the inordinate delay by TANGEDCO in paying our power bills has come to squeeze our liquidity besides egregiously eroding margins because of higher interest cost.

Amidst multitude of measures to help the industry, the Central Government has also brought back monthly sugar sale quota through inventory control norms. While this measure might seem necessary in moderating supplies from surplus producing regions, it is ill-conceived and manifestly unwarranted for a deficit region like Tamil Nadu (TN). With abysmally low sugar sale quota choking cash flows and stoking cane price arrears, most sugar companies from the State including our Company had to approach the Hon’ble High Court of Madras for relief. The interim order staying relevant Government order has come to immensely help our Company manage its working capital and service sugarcane payment obligations in time.

The Central Government has also imposed Minimum Indicative Export Quota (MIEQ) but the formula followed in fixing mill-wise quota is felt adversarial to TN sugar mills. Accordingly, SISMA-TN, the industry body, represented to the Central Government for appropriate relaxation in quota, considering the acute adversity faced by TN mills under drought. Pending response, there has been little export from TN mills, including ours. While non-fulfilment of MIEQ could disentitle the concerned sugar mills from access to various Government promotional and incentive schemes, it is hoped that the Government would give due weightage to the current plight of TN sugar industry and take a just and equitable view.

We have achieved considerably higher sugar production with better recovery in the current year. While our power production has peaked, we have concurrently cut down on fuel cost by switching to lower cost biofuels and optimising bagasse sale. Sugar sale volume however slipped and slumped due to Government intervention measures as well as sluggish market. The single most negative factor eclipsing our otherwise strong operating performance was the disconsolate decline in sugar prices by 16%. Despite same, our PBIDT has been sustained. Interest costs have soared on account of higher working capital availment. While we have had to reckon with the huge impact of cane price settlement last year, exceptional items for the current year are nominal. As a result, our PBT for the year has tripled. In all, our performance for the year may not sound commanding but is undoubtedly commendable and comforting under extant external challenges.

Outlook for FY 2019-20

Monsoon failure is fast turning ‘business usual’ feature for our region, going by yet another abysmal failure of the last NE monsoon. Indeed, Government of Tamil Nadu has declared most parts of the State, that includes our region, as affected by hydrological drought. While IMD has forecast a normal SW monsoon at 96% of LPA this year, there are private and overseas forecasts underpinning El Nino threat. Accordingly, sugarcane availability and quality could again pose severe strain and stress. Sugar prices must move up but only moderately, weighed by supply overhang.

Ethanol is becoming increasingly relevant for managing country’s sugar surplus. Government policies of late are being directed towards incentivizing sugar industry for supporting sugarcane price payments through the ethanol route. While we have initiated steps to closely evaluate the financial feasibility for setting up an ethanol production facility in our factory, we are daunted by low volume of feedstock availability due to recurring drought in our region. Further, long lead time involved in securing slew of State Government clearances remains a key challenge. Your Board is currently weighing the options and in due course will take the call.

We are doubtless faced with host of hostile challenges during FY 2019-20. We however remain sanguine that on the strength of our committed employees, farmer relationship, cost optimisation thrust, low debt gearing and marginally improved market conditions, we would successfully weather these adversities.

Management Discussion and Analysis Report

A detailed discussion on the industry structure (dealing with world sugar and Indian sugar) as well as on the financial and operational performance is contained in the ‘Management Discussion and Analysis Report’ that forms an integral part of this Report (Annx-1).

Corporate Governance

Pursuant to Regulation 34(3) of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, Corporate Governance Report together with the certificate from the company’s auditors confirming the compliance of conditions on Corporate Governance is given in Annx-2. The Corporate Governance Report also includes contents and disclosures required under Section 134(3) of the Companies Act, 2013 at relevant places that forms an integral part of this report.

Extract of Annual Return

The details forming part of the extract of the Annual Return in Form MGT-9 is given in Annx-3. This is also placed on the company’s website - www.ponnisugars.com.

Directors’ Responsibility Statement

Pursuant to Section 134(3)(c) of the Companies Act,2013 with respect to the Directors Responsibility Statement, your Board confirms that:

(a) in the preparation of the annual accounts, the applicable accounting standards have been followed and there are no material departures from the same;

(b) the directors have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit of the company for that period;

(c) the directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

(d) the directors have prepared the annual accounts on a going concern basis;

(e) the directors have laid down internal financial controls to be followed by the company and that said internal financial controls are adequate and were operating effectively; and

(f) the directors have devised proper systems to ensure compliance with the provisions of all applicable laws and such systems were adequate and operating effectively.

Particulars of Loans, Guarantees or Investments

The company did not give any Loan or Guarantee or provide any security or make investment covered under Section 186 of the Companies Act, 2013 during the year.

Particulars of contracts or arrangements with Related Party

The Corporate Governance Report contains relevant details on the nature of Related Party Transactions (RPTs) and the policy formulated by the Board on Material RPTs. Particulars of contracts or arrangements with related parties referred in Section 188(1) of the Companies Act, 2013 is furnished in accordance with Rule 8(2) of the Companies (Accounts) Rules, 2014 in Form AOC-2 (Annx-4).

Material changes and commitments

There is no change in the nature of business of the company during the year.

There is no material change or commitment affecting the financial position of the company that has occurred since 31st March 2019 to the date of this report.

Conservation of Energy etc.

Information relating to conservation of energy, technology absorption and foreign exchange earnings and outgo as required under Section 134(3)(m) of the Companies Act, 2013 read with Rule 8 of the Companies (Accounts) Rules, 2014 is given in Annx-5.

Corporate Social Responsibility (CSR)

The company is covered under the mandate of Section 135 of the Companies Act, 2013 for FY 2018-19. The CSR report in the prescribed form is given in Annx-6 that forms part of this report.

Particulars of Employees

The Statement of Disclosure of Remuneration under Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 (“Rules”) is appended as Annexure -7 to this Report.

The information as per Rule 5(2) of the Rules forms part of this report. However as per first proviso to Section 136(1) of the Act and second proviso of Rule 5(2) of the Rules, the Report and Financial Statements are being sent to the members of the Company excluding the statement of particulars of employees under Rule 5(2) of the Rules. Any member interested in obtaining a copy of the said statement may write to the Company Secretary.

Adequacy of Internal Financial Control with reference to financial statements

1) The company maintains all its records in ERP system developed in-house and the work flow and approvals are routed through this system.

2) The company has laid down adequate systems and well drawn procedures for ensuring internal financial controls. It has appointed an external audit firm as internal auditors for periodically checking and monitoring the internal control measures.

3) Internal auditors are present at the Audit Committee meetings where internal audit reports are discussed alongside of management comments and the final observation of the internal auditor.

4) The Board of Directors have adopted various policies like Related Party Transactions Policy and Whistle Blower Policy and put in place budgetary control and monitoring measures for ensuring the orderly and efficient conduct of the business of the company, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records and the timely preparation of reliable financial information.

Directors

Mr N R Krishnan opted not to seek reappointment considering his advanced age and his tenure ended at close of 31.03.2019. The Board wishes to place on record the valuable contribution received during his tenure as director.

M/s L M Ramakrishnan, Nanditha Krishna, V Sridar and K Bharathan, independent directors were reappointed for a second term by special resolution passed through postal ballot and the details are given in the Corporate Governance Report.

Mr Arun G Bijur retires by rotation at this meeting and being eligible offers himself for reappointment.

Auditors

M/s S Viswanathan LLP (Firm Regn.No.004770S/S200025) were appointed as statutory auditors by shareholders in the 21st AGM for a term of five years till the conclusion of the 26th Annual General Meeting of the company on such remuneration as may be fixed by the Board of Directors on the recommendation of Audit Committee from time to time. There is no fraud reported by auditors under Section 143(12) of the Companies Act, 2013.

Particulars of statutory auditors, cost auditors, internal auditors and the secretarial auditor have been given in the Corporate Governance Report that forms an integral part of this report. Secretarial Audit Report as required by Section 204(1) of the Companies Act, 2013 is attached (Annx-8).

Acknowledgement

Your company wishes to thank the Central and State Governments, Banks, customers and suppliers for the understanding shown and support received. It commends the continuing commitment of large number of cane growers in growing and supplying cane under extreme drought and challenging conditions.

Your company desires to acknowledge the involvement and commitment shown by employees at all levels during current tough times. Above all, the Board wishes to place on record the continuing patronage received from its shareholders.

For Board of Directors

Chennai N Gopala Ratnam

24th May 2019 Chairman

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