Sugar Sector - Sector Initiation Report - SPA Sec

ETHANOL,
Fuelforthefuture
SUGAR, SUGAR
Finallyregainingitssweetness Rohit Agarwal
rohit.agarwal@spagroupindia.com Ph.No.913340114800/839
SPASecuritiesLtd.
October03,2013
Controls onsectorpriortoreforms
Controls afterpartialdecontrol
Minimum DistanceCriteria betweenmills
LevySugar Obligationon mills
M inimum DistanceCriteria betweenmills
Tariff rates on trade
GOVT.
CaneArea Reservation
GOVT.
POLICIES
Regulated Release Mechanism CaneArea Reservation
POLICIES
40% sugar to be packed in jute bags only
DualCane Pricing: Centre/State
Import and Export Compulsory sugarpacking injuteonly
Dual Cane Pricing: Centre/State
StateGovt. Controls
CentralGovt. Controls
StateGovt. Controls
Central Govt. Controls
SECTOR INITIATION REPORT
SUGAR SECTOR
Sensex: 19517
Structurally poised for sweet time

Nifty: 5780
Sharp correction witnessed in sugar stocks have thrown up significant value buying opportunities for long term investors. We initiate coverage on Balrampur Chini Mills and Shree Renuka Sugars with an Outperformer rating, our preferred exposure in the industry, as they remain best proxies to ride out of the current sugar cycle. We have selected the companies based on their competitive positioning on long-term structural factors such as size, geographical presence, operating efficiencies and we strongly believe that both these companies are geared to capture emerging opportunities with their integrated business models.
Domestic production to decline by 5% in 2013-14

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

EBP in India has the potential to transform the sugar industry given significant visible demand for ethanol (~1.05 bn litres for mere 5% blending). Sugar industry has contracted to supply 0.55 bn litre of ethanol to OMCs @ INR 35/litre by Mar 2014 and bidded for supplying further 1.34 bn litre by Dec 2014. Realisations can increase further given a) the scope of enhancing ethanol 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 profitability of sugar producers.
Partial decontrol of sugar - Will lead to rerating of the sector

We expect the sector to get rerated over medium to longer term following the partial decontrol of sector. The GoI has removed the levy obligations on sugar and abolished the regulated release mechanism in April 2013. While removal of levy obligation would lead to ~INR 1.3/kg increase in blended realisation of sugar manufacturers, abolition of regulated release mechanism will allow mills to capitalize on better sugar realizations and better manage their working capital requirements.
Ray of hope emerging for adoption of cane pricing formula

Karnataka government has recently enacted an Act prescribing that the sugarcane price will be based on the revenue sharing model in line with Rangarajan Committee report (70% of total revenue/75% of sugar revenue). Maharashtra is also readying to consider a similar move. We view these policy changes as a game changer for the entire industry and expect this to have a positive influence on UP government. Otherwise these two states, which account for ~49% of the country's sugar output, would out-price UP sugar mills due to their lower cost of production.
World sugar surplus to decline significantly to 3.5 mt in 2014

The 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, ethanol demand can significantly increase in Brazil. This holds importance as 20% increase in Brazil's ethanol consumption has the potential to completely eliminate the world sugar surplus. By 2022, OECD is expecting ethanol production in developing countries to increase by 30 bnl to 72 bnl, with Brazil accounting for 80% of this supply increase.
Sugar prices to remain steady

We expect global prices to bottom out and find a floor around USD 16 cents/lb, as slump in prices below these levels will spur Brazilian millers to produce more of ethanol and less of sugar. Prices are expected to edge up higher gradually in 2014-15 due to significant expected decline in global sugar surplus. Domestically prices are expected to remain stable and marginally improve in the short term following abatement of supply pressure with end of crushing season and an increase in import duty from 10% to 15%. Depreciating Rupee has also made export realization marginally competitive thereby partly relieving pressure on stocks.
Valuation Summary
Company Balrampur Chini Shree Renuka Sugars
Source: SPA Research
CMP INR 43 20
MCAP INR bn 10 13
APAT (INR mn) FY14E FY15E 1876 1820 922 1943
FY14E 7.68 1.37
EPS FY15E 7.45 2.90
P/E (x) FY14E FY15E 5.58 5.75 14.56 6.91
P/BV (x) FY14E FY15E 0.73 0.67 0.68 0.63
EV/EBIDTA FY14E FY15E 5.13 5.25 5.37 4.25
Sugar Sector
Contents
World Sugar Statistics
Indian Sugar Industry
Global Scenario
Sugar Pricing Outlook
Balrampur Chini
Shree Renuka Sugars
TABLE OF CONTENTS
World Sugar Statistics ............................................................................................................................................... Indian Sugar Industry ............................................................................................................................................... Background ............................................................................................................................................... Indian sugar cycle ............................................................................................................................................... Domestic demand supply situation ..................................................................................................................... Production to remain +24 mt for third consecutive year .............................................................................. Production to decline by 5% in 2013-14 ........................................................................................................ Acreage under Sugarcane to touch four-year low on drought ....................................................................... Export & Import - Ceteris paribus, currency playing an important role ............................................................. Sugar Manufacturing & Its By-products .............................................................................................................. Ethanol Blending Program gains momentum - To completely transform the industry ....................................... Regulatory Framework .......................................................................................................................................... Partial decontrol of sugar - Leading to rerating of sector ................................................................................... Trend in domestic sugar prices ............................................................................................................................ Global scenario ............................................................................................................................................... World sugar dynamics ......................................................................................................................................... Main producing countries .............................................................................................................................. Main exporting countries ............................................................................................................................... Main importing countries .............................................................................................................................. World Ethanol Dynamics ...................................................................................................................................... Ethanol & Its advantages ................................................................................................................................ Demand drivers & Growth potential .............................................................................................................. Crude oil has little direct impact on ethanol prices ...................................................................................... So with all of these benefits, is ethanol the fix-all solution? ........................................................................ Ethanol from sugarcane stands out ..................................................................................................................... Global demand supply situation - Sugar ............................................................................................................. Global surplus to decline significantly in 2014 ............................................................................................ Brazil - The Potential game changer ............................................................................................................... Thailand - Continues to remain 2nd largest exporter .................................................................................... Australia: Output to decline by 6.5% .............................................................................................................. Mexico - Largest exporter to the United States ............................................................................................... China becoming the 'buyer of last resort' for the world sugar market ......................................................... Indonesia - Imports expected to more than double ....................................................................................... Russia - Rare setback for world output prospects ......................................................................................... International sugar prices at 3 years low ........................................................................................................... Sugar Pricing Outlook ............................................................................................................................................... Companies Section ............................................................................................................................................... Balrampur Chini Mills .......................................................................................................................................... Shree Renuka Sugars Ltd. ...................................................................................................................................... 4 5-18 5 6 7-9 7 8 8 10 11 12 14 16 17 18-25 18-19 18 19 19 19-21 19 19 20 21 22 23-27 23 23 25 26 26 26 26 27 27 28 29-33 30-31 32-33
Sugar Sector
Contents
Global Scenario
Balrampur Chini
Shree Renuka Sugars

Sugar is one of the most valuable agricultural commodities. In 2011 its global export trade was worth $47bn, up from $10bn in 2000. Of the total $47bn, $33.5bn of sugar exports were from developing 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 in producer 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 producer with 12-14% recovery rate, the world's major exporter (contributes 45% of world exports) and one of the highest per capita consumers, at around 55 kg a year.
India is the second largest producer & largest consumer of sugar in the world
Top 5 sugar producers in the world, namely Brazil, India, the EU, China and Thailand, account for over 60% of total production.
Top 10 sugar producing countries between 2011-13E
Brazil 22.15% India 16.79%
EU 9.65% China 7.22% Thailand 6.10% US 4.42% Mexico 3.18% Pakistan 2.44% Australia 2.39% Russia 2.67%
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 sugar consumption growing at CAGR of 2.7% over the past 50 years
World consumption of sugar has grown at an average annual rate of 2.7% over the past 50 years. It is driven by rising incomes and populations in developing countries. Sugar cane cultivation is labour intensive and an important source of rural employment. The Brazilian sugar cane industry employs over 1 million people, or nearly a quarter of the country's total rural workforce. In South Africa - Africa's largest producer - around half a million people depend on sugar for a living. Sugar mills employ around 15 per cent of workers in Switzerland and two-thirds of rural workers in Mauritius.
Sugar Sector
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Global Scenario
Balrampur Chini
Shree Renuka Sugars

Background
India is the second largest producer and the world's largest sugar consumer, consuming onethird 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% of the total acreage.
Percentage Share of Indian States in Indias Sugarcane Production (SY2012)
World Per Capita Consumption of Sugar (kg)

80 70 60 50 40 30 20 10 0 South USA Australia Thailand Russia Pakistan World India China Brazil
Source: ISMA
Maharashtra 37.4% UP 27.4%
Karnataka 13.5% Tamil Nadu 6.8% Gujarat 6.3% AP 2.7% Uttarakhand 1.5% Bihar 1.4% Haryana 1.3% Other states 1.7%
Source: ISMA, SPA Research
Over 664 sugar factories in India widely dispersed with an average crushing capacity of roughly 3,800 Tonnes Crushed per day (TCD). Maharashtra, the country's largest sugar producer produced 9 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, with UP & Maharashtra alone contributing ~62%.
40% 35% 30% 25% 20% 15% 10% 5% 0% UP
Statewise sugar production as a % of total sugar production
34.6%
26.9%
30.8%
31.6%
14.6%
12.4%
8.7%
8.8%
3.8%
4.0%
3.8%
4.0%
7.5%
Maharashtra
Karnataka
TN SY2012 SY2013E
Gujarat
AP
Others
Sugar Sector
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Global Scenario
Balrampur Chini
Shree Renuka Sugars
8.4%
Cane price in UP has gone up by 70% in the last 3 years, but sugar prices have increased by just 11% in the same period
Cane price arrears directly impact the sugar production. Cane arrears are higher in case of UP because of a political SAP and no relationship with returns on sugar sales.
90 80 70 60 50 40 30 20 10 0 SY2007 Canepricearrearsduringlast5years
INR bn
SY2008
SY2009 Uttar Pradesh
SY2010 Maharashtra Industry
SY2011
SY2012
Source: ISMA
Jamu & Kashmir
Sugar Producing States of India

Himachal Punjab
Haryana
The domestic sugar industry is estimated at INR 800 bn in size, supporting over 5 crore sugarcane farmers.
Size of Indian Sugar Industry
Arunachal Pradesh
Uttaranchal Sikkim Uttarpradesh
Rajasthan Bihar
Assam Meghalaya
Nagaland Manipur
Gujarat
and Jharkh
Madhya Pradesh
tt ha Ch
West Bengal
Tripura Mizoram
h ar isg
Orissa
Maharashtra High Andhara

Ka rn a ta ka
Area under sugar cane cultivation Sugar cane production Number of sugar mills Average capacity of mills Production of sugar Average per capita Refinery
Medium Low
Tam il N adu
5 million hectares 340 million tons 664 3800 tons cane per day 25 mt estimated for season 2012-13 21 kgs of sugar and 6 kgs consumption of other sweeteners Refineries 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 ]
Kera
la
Indian Sugar Cycle

A typical feature of the sugar market in India is the cyclical nature of production, where 2-3 years of surplus are followed by 2-3 years of deficit. Against this backdrop of recurrent large swings in production, consumption growth has been linear, growing steadily at about 4% per year over the past 10 years. This results in huge swings in overall sugar equilibrium.
The year-wise swings: Since 2000-01
While consumption is growing @ 4% over last 10 years, production is cyclical
Period 00-01 to 02-03 03-04 to 04-05 05-06 to 07-08 08-09 to 09-10 10-11 to 12-13
No. of seasons 3 2 3 2 3
Production Range (mt) 18.5 to 20.1 12.7 to 13.5 19.3 to 28.4 14.5 to 18.9 24.0 to 26.2
Swing from previous high/low (mt) (-) 6.6 (+) 14.9 (-) 9.5 (+) 7.3
Swing % (-)32.8% (+)110.4% (-) 33.5% (+) 38.6%
Monsoon plays a key role in sugar production as sugarcane yields are greatly affected by the level of rainfall, notably during the critical monsoon season. The other most important factor is the domestic sugar policy that amplifies the cycle through its impact on incentives along the sugar value chain, including for farmers and sugar factories.
Sugar Sector
Contents
Global Scenario
Balrampur Chini
Shree Renuka Sugars
Indian Sugar Cycle

Low cane arrears/High cane cultivation High sugar price/ Improved profitability High cane production High sugar production
cle ) cy ars U p 3 ye (2
Decline in sugar prices
Lower sugar production
c le c y rs) wn yea Do 2 3 (
Lower profitability
We are here Lower cane production Decline in area under Cultivation High cane arrears
The cyclicality of sugarcane production causes large swings in the area under cultivation of sugarcane and hence its availability to the sugar industry. During the stage of high sugarcane production, profitability of sugar manufacturers decline due to lower realisations, resulting in untimely payments to the farmers and increasing cane arrears. As a result, farmers reduce their sugarcane acreage and opt for other crops, which can give them higher returns. Consequently, it leads to lower sugarcane production and supply deficit of sugar in the market, leading to decline in sugar prices. This again improves their profitability and enables them to clear the arrears. As the incidence of default declines, sugarcane cultivation becomes attractive once more, shifting the domestic sugar balance into the upside phase of the cycle. Over a period of time there is overproduction and the prices fall again. Thus, the infamous 'Indian Sugar Cycle' is set in motion again. 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
30 25 20 15
Higher production leads to depressed sugar prices, resulting in higher cane arrears
28.4 18.5 18.5 20.1 13.5 12.7 19.3
26.4 18.9 14.5
24.4
26.0
25.0 127.0
85.7 30.5 SY2001 SY2002 SY2003 16.7 28.2 8.8 20.8 SY2004 SY2005 9.7 SY2006 51.9 23.2 SY2007 SY2008 SY2009 12.3 27.2 SY2013E SY2010 SY2011 SY2012 43.2
10 5 0
140 120 100 80 60 40 20 0
Production (mt)
Source: ISMA, Directorate of Economics & Statistics, SPA Research
Cane Arrears (INR bn) RHS
Domestic demand supply situation

Production to remain +24 mt for third consecutive year
India's sugar production has increased by 6.6% in 2011-12 (Oct-Sep) to 26.0 mt from 24.4 mt in the previous year. Drought in Maharashtra, India's biggest sugar producing state, in the last year is likely to pull down India's overall sugar production by 3.8% to 25.0 mt in 2012-13. This will be the third consecutive year that sugar production will remain more than 24 mt due to remunerative cane prices vis a vis other crops. Production of more than 20 mt for 3 consecutive years has not happened over the past many years and only cumulative exports of 7.3 mt in 2011 and 2012 have helped lower domestic inventory.
Domestic Sugar Balance (Million Tones) Opening Stock Production Growth YoY Internal Consumption Growth YoY Exports Imports Closing Stock Stock to use ratio
Source: ISMA
F2006 5.7 19.3 51.8% 18.5 3.2% 1.1 0 5.4 29.2%
F2007 5.4 28.4 47.2% 19.9 7.6% 1.7 0 12.2 61.3%
F2008 12.2 26.4 -7.0% 20.9 5.0% 5.0 0 12.7 60.8%
F2009 12.7 14.5 -45.1% 21.7 3.8% 0.2 2.4 7.7 35.5%
F2010 7.7 18.9 30.3% 22.8 5.1% 0.2 4.1 7.7 33.8%
F2011 7.7 24.4 29.1% 23.3 2.2% 3.8 0 5.0 21.5%
F2012 5.0 26.0 6.6% 23.0 -1.3% 3.5 0 4.5 19.6%
F2013E 4.5 25.0 -3.8% 23.5 2.2% 0.5 1 6.5 27.7%
Sugar Sector
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Global Scenario
Balrampur Chini
Shree Renuka Sugars
Production in two sugarcane growing states of Maharashtra and Karnataka (which together accounted for 49% of India's sugar output), is expected to decline by 12.2% and 18.4% to 7.9 mt and 3.1 mt respectively in 2012-13. Un-favourable climatic conditions have negatively impacted sugarcane acreage and sugar production in Karnataka and Maharashtra, where sugar recoveries at 10.9% and 11.3%, respectively, are among the highest in the country. The loss in these two States is expected to be made up by India's top sugar producing state, Uttar Pradesh, where farmers buoyed 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)
10 8 6 4 2 0
28.8%
33.1% 13.5% 3.8 3.1
7.0 7.7
9.0 7.9
8.7% 2.3 2.2 TN 3.9% 1.0 1.0 Gujarat 3.9% 1.0 1.0 AP
7.9% 2.0 2.1 Others
35% 30% 25% 20% 15% 10% 5% 0%
UP
SY2012
Maharashtra
Karnataka SY2013E
% of total production (Avg.)
Production to decline by 5% in 2013-14

Early and above normal rains have curtailed damages to some extent and now sugar production is expected to decline by 5% to 23.7 mt in 2013-14. Importantly some of the farmers have already switched to other crops inspite of higher cane prices due to water unavailability as unlike other crops 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 drought

Sugarcane is the India's third largest crop, next to rice and wheat. The sugar yield is not only related to the industry's manufacturing capacity but also to the availability of sugarcane. Acreage under Sugarcane has not increased much in the last 10 years. In fact there is a huge fluctuation in area under cultivation because of the uncertainty over payments from the millers and erratic monsoon, which prompts farmers to shift to other crops. Area under cane cultivation was the highest ever (5151 thousand hectares) in the year 2006-07. The yield per hectare was also the highest that year.
Sugar Sector
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Global Scenario
Balrampur Chini
Shree Renuka Sugars
Area under sugarcane production & Recovery trend

80 70 60 50 40 30 20 10 0 SY02 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11 SY12 SY13E Sugar Production (In mt) Sugarcane Yield (In mt/ha) Sugarcane Area (In lac ha) % Sugar Recovery Sugarcane Production (in 10 mt)
Source: ISMA, Directorate of Economics & Statistics, SPA Research Cane plantation set to fall to the lowest in four years to ~4.85 mh, 3% lower than last years 5.0 mh and below the government's target of 5.3 mh for this year
Cane Yield & Sugar Recovery (2011-12) Regions Area Cane Sugar ('000 ha) Yield (t/ha) Rec.(%) Tropical Maharashtra 940 80.1 11.3 Karnataka 410 90.3 10.9 Gujarat 203 70.2 10.5 TN 333 102.8 9.1 AP 200 82.0 9.8 Sub-tropical UP 2277 59.6 9.1 Bihar 235 51.5 9.3 Punjab 84 58.4 8.8 Haryana 107 73.3 9.0
Source : Cooperative Sugar Journal, November, 2012 SPA Research
The total cane area across the country is set to fall to the lowest in four years to ~4.85 million hectares (mh), 3% lower than last years 5.0 mh. That's the lowest since the 2009-2010 season and below the government's target of 5.3 mh for this year. However, early monsoon and proper distribution of rains have eased some concerns over sugar cane acreage for sugar season 2013-14. Though India is among the largest producer of sugarcane, yield from the crop and sugar recovery is ~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 mainly because of variation in the climatic conditions prevailing in the country. The average cane yield in tropical region is about 85.1 tonnes while in the subtropical region, it is only about 60.7 tonnes per hectare. Despite Maharashtra and Uttar Pradesh being the top two Indian states in terms of the area under cultivation as well as their contribution to sugar production in India, Tamil Nadu has the highest yield of 103 tonnes per hectare in 2011-12. The second place in productivity is taken by West Bengal, followed by Karnataka. Uttar Pradesh, with the largest area under cultivation, ranks 14th in productivity.
Percentage Share of Indian States in Area under Sugarcane Cultivation
UP 47.1% Maharashtra 17.5% Karnataka 7.8% Tamil Nadu 7.5% Gujarat 4.6% AP 3.8% Bihar 2.8% Uttarakhand 2.3% Haryana 1.8% MP 1.4% Punjab 1.4% Other states 2.1%
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Global Scenario
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Shree Renuka Sugars
Export & Import - Ceteris paribus, currency playing an important role

India's status as a net importer or exporter frequently changes as a result of imbalances caused due to cyclical nature of production, with imports exceeding 2 mt during the deficit phase of the cycle, replaced by large exports during the surplus phase.
Import & Exports across cycles
6 5 4 3 2 1 0 -1 -2 -3 -4 -5 4.90 3.50 2.60 1.77 0.36 0.41 1.02 0.01 0.06 -0.20 -0.94 -1.00 -2.00 0.42 0.99 1.08 0.07 0.02 0.07 -0.40 0.27 -0.12 -0.33 -2.14 -2.40 -4.08 1991-92 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 0.00 1.11 1.73 0.17 0.24 0.00
Import (mn tn)

Exports (mn tn)
In addition to the infamous Indian Sugar Cycle, currency factor and global fundamentals also influences the Indian trade scenario. After exporting ~3.5 mt of sugar last year, Indian exports have suffered drastically this season on the back of weak international prices which has made overseas shipments unviable. Importing sugar has mostly been unviable for the domestic players as the landed cost (import duty of 15% + freight charges+ handling charges) of sugar is largely higher that domestic prices. However given the sharp decline in global sugar prices to three years low, Indian players has already imported ~0.7 mt of sugar till date in this season despite holding comfortable stocks which has resulted in a downward pressure on domestic sugar prices. However with the increase in import duty from 10% to 15% coupled with sharp depreciation of rupee, the prospects of further imports seems limited at the moment.
Despite weak international prices, rupee depreciation in turning exports viable
Moreover rupee depreciation in addition to squeezing imports has turned exports viable. Given low international prices at this point in time, it is extremely favorable for export from costal millers. In fact, Indian traders have signed deals at $ 500-501 per tonne (FOB) to export 75,000 tonnes of white sugar in July, on the back of strong demand in Gulf and African states due to the Islamic fasting month of Ramadan. This in addition to already lower sugar production forecast for SY14, will lead to further tightening in domestic sugar availability, thereby presenting a bullish scenario from overall demand supply perspective.
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Sugar Sector
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Sugar Manufacturing & Its By-products

Sugar Plant
To Grid Power
Turbines
Cogeneration
Steam
Boilers
Weighed & Prepared Cane Bagasse Cane Milling / Crushing
Manufacturing Process
The process of manufacturing sugar starts with pressing of sugarcane to extract the juice. It is followed by boiling the juice resulting in thickening of the juice and sugar begins to crystallize. The crystals are spun in a centrifuge to remove the syrup, thereby producing raw sugar. The raw sugar is then transported to a refinery where it is washed and filtered to remove remaining non-sugar ingredients and colour. It is then followed by crystallization, drying and resultant packaging of the refined sugar.
To Factory Press Mud

Juice Defecation & Clarification
Bio-Composting Spent Wash Alcohol
Juice Sulphitation
Syrup Boiling Molasses Fermentation Centrifuging Factory Raw Sugar
Distillery
By-products - An integral part of industry

Sugarcane By-products Bagasse 30% Water 51% Sugar 10% Molasses 5%
In sugar manufacture, the major byproducts comprise of bagasse, molasses and press-mud, which are utilized to generate power and produce industrial alcohol/ethanol and fertilizers. The byproducts account for about ~40% of crushed sugar cane by weight. India has achieved considerable progress utilising these by-products. A) Bagasse The fiber (30-33% per tonne of sugarcane crushed) derived from crushing sugarcane is known as bagasse. Bagasse is used as a combustible in furnaces to produce steam which is used to generate power. The power generated is used in processing sugarcane and surplus power is supplied to the grids. B) Molasses Molasses is used primarily for production of rectified spirit and extra neutral alcohol. It accounts for ~5% per tonne of sugarcane crushed. Alcohol serves as raw material for industrial manufacture of potable alcohol and fuel ethanol. Sugarcane is generally regarded as one of the most efficient sources of biomass for bio fuel (ethanol) production. The demand of ethanol is generated due to its compulsory blending with petrol. C) Organic manure Organic manures accounts for around 3%-5% of the sugar cane crushed. Sulphitation press mud is mainly used as manure. The press mud organic manure is free of inorganic elements present in the traditional form of organic manures, commonly used by the farming community. Crops yield good results when applied during early land preparation. It increases soil porosity and helps the crop in the uptake of chemical fertilisers (NPK).
Press mud 4%
Production of Molasses (mt) SY07 SY08 SY09 SY10 SY11 SY12

13.1 11.3 6.5 8.4 10.7 11.5
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11
By products de-risk the business model & acts as savior to the bottomline during the down cycle
A significant part of the total revenue and profits of sugar mills comes from by-products, especially in the case of forward integrated entities. In down-cycle these products act as a savior to bottomline de-risking the business model. Greater the level of integration, better is the ability to wither the downturn 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 resource utilisation. We feel by-products will remain important part of the industry due to improving macro scenario for these products. Prices of by-products such as bagasse and molasses continue to remain remunerative 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 improved returns from by-products.
Ethanol Blending Program gains momentum To completely transform the industry

Free pricing will help to implement the ethanol blending programme
In November 2012, the Cabinet Committee on Economic Affairs (CCEA) has made it mandatory for three major oil marketing companies (OMCs) - Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation to blend 5% ethanol with petrol. Although this mandate has been there since last two years, it was partially implemented due to the absence of any clear directive and largely due to low procurement price of INR 27/litre fixed by the CCEA in August 2010. To remove this bottleneck, the committee has approved market-based pricing of ethanol (to be implemented from June 2013) as a result of which sugar producers will willingly supply ENA at market determined price. This has resulted in Ethanol Blending Program (EBP) gaining momentum and it can potentially transform the industry 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 finalise procurement 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 already contracted for the supply of molasses and rectified spirits for producing potable achohol. Importantly to meet the gap OMCs floated a global tender to import 0.50 bn litres, but the lowest price quoted by foreign suppliers of ethanol was about ~INR 75 a litre, double the preferred domestic quote. This resulted in OMCS floating second domestic tender to procure 1.34 bn litres of ethanol between the period 1st Dec 2013 to 30th Nov 2014, which was fully met by sugar companies. Moreover in the second tender prices offered might be higher because of high imported cost and 5% increase in sugarcane price by central government in FRP regime. Assured realisations coupled with the commitment 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 Ethanol market in India is driven more by beverage alcohol market rather than fuel alcohol market unlike rest of the world. Newer players especially global alcohol majors are entering Indian market seeing the growth 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 India starts planning for radical shifts in the sugar alcohol production combinations, so that we meet at least a part of the domestic requirements of petrol. This would help in saving valuable foreign exchange outgoes and in reduction of current account deficits, which have been of concern in the country. As indicated in table given below, there is scope for enhancement of ethanol prices by a margin of INR 11-12 per unit at the current petrol prices and more than that there is a sound case for premium pricing on ethanol due to its renewable/green status.
World Sugar Statistics Indian Sugar Industry Global Scenario Sugar Pricing Outlook Balrampur Chini Shree Renuka Sugars
Overseas players offering ethanol at INR 75/ litre, double the domestic offer price
Need to change the sugar - alcohol production combination
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Scope for enhancement of ethanol prices by a margin of INR 11-12/Lit remains
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 Assumed for Petrol as taken 2 Add: Ocean Freight from AG to Indian Ports $/bbl 2.06 for Diesel Taken from IOCL website as 3 C&F (Cost & Freight) Gasoline Price $/bbl 113.85 on 16th June'13 C&F (Cost & Freight) Gasoline Price Rs/Lit 41.98 At Rs 59 per USD Assumed for Petrol as taken 4 Import Charges Rs/Lit 0.40 for Diesel 5 Basic Customs Duty @ 2.575% (2.50% + Assumed for Petrol as taken Rs/Lit 1.11 3% Education cess) for Diesel 6 Import Parity Price (at 29.5 C) Rs/Lit 43.49 (Sum of 3 to 5) 7 Export Parity Price (at 29.5 C) Rs/Lit 42.31 Calculated 8 Trade Parity Price (80% of (6)+20% of (7)) Rs/Lit 43.26 Refinery Transfer Price (RTP) 9 Rs/Lit 43.26 35.00 Calculated (Price Paid by the Oil Marketing Companies to Refineries) 10 Add: Excise Duty & Cess @ 12.36% Rs/Lit 4.33 Freight may vary from Depot 11 Add: Freight Rs/Lit 2.76 to Depot Add: Premium recovered for BS-IV Grade 12 Rs/Lit over BS-III Grade Assumed for Petrol as taken 13 Add: Inland Freight, Delivery Charges etc. Rs/Lit 0.95 for Diesel 14 Add: Marketing Cost of OMCs Rs/Lit 0.69 0.69 Calculated 15 Add: Marketing Margin of OMCs Rs/Lit 0.67 0.67 Calculated Total Desired Price (Sum of 9 to 15)16 Before Excise Duty, VAT and Dealer Rs/Lit 45.57 Calculated Commission Price Charged to Dealers (17-18)17 Rs/Lit 45.57 Calculated Excluding Excise Duty & VAT Add: Specific Excise Duty & Cess 18 Rs/Lit 9.48 @ Rs 9.48 per Lit- Petrol Difference b/w Petrol & 19 Sub-Total Rs/Lit 55.05 43.45 Ethanol- Rs 11.60 per Lit It may vary from state to 20 Add: Dealer Commission Rs/Lit 1.79 1.79 state Tax remains same as ethanol 21 Add: VAT Rs/Lit 11.37 11.37 will be sold as petrol As per invoice taken from 22 Add: Cess & Service Tax- Ethanol Rs/Lit 1.01 1.01 HPCL petrol pump Retail Selling Price at Delhi 23 Rs/Lit 69.21 57.62 Rounded 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 76 litres of Ethanol. This results in a price parity of 1:1.53 between Ethanol and Sugar. Hence depending upon the prevailing prices, sugar manufacturers will enjoy the flexibility to divert sugar capacity to ethanol production.
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Regulatory Framework
The Indian sugar industry is one of the most regulated industries. Till few months back, its entire gamut of activities starting from procurement of sugarcane and ending with the sale of sugar were governed by Indian government. However after years of deliberation, Indian government has finally decontrolled the sugar sector albeit partially, in April 2013. The major pertinent regulations and policies still adopted by the Government are given below:
Controls on sector prior to reforms
Minimum Distance Criteria between mills Levy Sugar Obligation on mills
Minimum Distance Criteria between mills
Controls after partial decontrol

Tariff rates on trade
Cane Area Reservation
GOVT.
POLICIES
Regulated Release Mechanism
Cane Area Reservation
GOVT.
POLICIES
40% sugar to be packed in jute bags only
Import and Export Compulsory sugar packing in jute only
State Govt. Controls
State Govt. Controls
Dual sugarcane pricing (FRP/SAP) The industry is subject to fair and remunerative price (FRP) for sugarcane fixed by the Central Government from year to year, taking into account cost of production of sugarcane, return to growers 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 laid down criteria and no relation to sugar price). Dual cane pricing distorts cane and sugar economy and is contributing majorly to cane price arrears and cyclicality. This is very unlike than all the major sugar producing nations in the world like Brazil, Australia and Thailand, where there is a direct linkage between sugarcane and the sugar prices. Sugarcane growers revenue share in the total 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 bounds in comparison to the SAP States, where either the growth is flat or negative. A higher price for cane is sustainable 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.
100 90 80 70 60 50 40 48.5 SS05 66.5 81.2 Share of cane price as percentage of exmill sugar price 96.4 77.3 64.7 70.9 83.7 64.8 57.1 SS06 SS07 SS08 UP
Source: Committee report on sugar deregulation, SPA Research
Dual pricing contributing largely to cane arrears & cyclicality in sugar industry
86.4 73.0 79.1 81.4
75.9 68.8
SS09 MAHARASTRA
SS10
SS11
SS12
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The SAP in UP has been increased from INR 165 per quintal of cane in 2009-10 sugar season to INR 280 per quintal in 2012-13, which has meant:
Political Agenda destroying UP's sugar economy
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 to INR 35 per kg in 2012-13 season. As compared to these very high costs, the sugar prices which were INR 28 per kg in 2009-10 increased 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 just 11% in the same period.
350 300 250 200 150 100 50 0 2006-07 2007-08 Sugarcane Production&Price trend
2008-09
2009-10 UP SAP (INR)
2010-11
2011-12
2012-13
UP Sugarcane Prod. (mt) TN SAP (INR)

TN Sugarcane Prod. (mt)
Sugarcane FRP (INR)
Import-export of sugar Depending on mill-wise monthly production and stocks, local production levels and world market conditions, the Government regulates the import (through import duty) and export [through open general license (OGL) and advance license scheme (ALS)]. Minimum distance criteria and Cane area reservation Each sugar mill is allocated a command area in its vicinity (which usually varies from 15 km to 25 km radius, depending on the state). The mill is obligated to purchase sugarcane from cane farmers within the cane reservation area, and conversely, farmers are bound to sell to the mill. This is intended to serve the twin purposes of giving a minimum assured supply of the highly-perishable raw material to a mill, while committing the mill to procure at a minimum price (FRP/SAP). Jute Packaging mandate for sugar Jute Packaging Materials Act mandates that sugar be packed only in jute bags. It is estimated by the sugar industry that this leads to an increase in cost by about ~40 paise per kg of sugar besides adversely impacting quality on account of ingress of jute fibers of jute bags. Further there is often a shortage of jute bags. However this has now been relaxed for 60% of production. Controls on sale of by-products There are several regulatory hurdles in respect of the by-products of sugar industry. In respect of molasses, these are at the state level, in terms of state government decisions relating to fixation of quotas for different end uses of molasses, restrictions on movement (particularly across state boundaries), etc.
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Partial decontrol of sugar - Leading to rerating of sector

The expert committee headed by Dr. Rangarajan submitted its recommendations on the deregulation of the sugar sector to the government in Oct 2012. The key proposals suggested were a) abolition of levy sugar, b) doing away with monthly/quarterly release mechanism of non-levy sugar, c) sugarcane price to be linked to 70% of realized value from sugar, molasses and bagasse with FRP forming a floor and no state-wise SAPs, d) removal on quantitative restriction on sugar exports and imports, e) removal of controls on sale of by-products, and f) gradual phasing away of cane area reservation and minimum distance criteria for mills. The GoI accepted the Rangarajan Committee report on April 4, 2013 and announced a partial decontrol of the sugar industry by:Financial burden before decontrol Production for 2012-13 25.0 mt Levy share 2.4 mt Financial burden on company Levy Price INR 19.7 Market price of sugar INR 32.0 Loss on levy quota INR 12.3 Total Burden INR 29.52 mn
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 levy obligation will have a substantial impact on profitability as it would lead to ~ 1.3/kg increase in blended realisation of sugar manufacturers. b) Abolishing the regulated release mechanism to sell non-levy sugar in the market - The abolition of the monthly release mechanism will facilitate the free play of market forces for the commodity. It will benefit sugar mills in the medium to long-term by enabling them to manage their working capital requirements better while also enabling financially stronger sugar mills to capitalize on better sugar realizations. Importantly other key recommendations of Rangarajan Committee namely, the revenue sharing formula for sugar cane pricing, the minimum distance between factories and the reservation of area for factories etc, have been delegated to the State Governments to take a considered view.
Karnataka & Maharashtra finally showing interest for adopting revenue sharing formula for cane pricing
The revenue sharing formula for sugar cane pricing entails that 70% of revenues (sugar, molasses and bagasse)/75% of revenues for non-integrated mill, should be shared with farmers and payment would be made in 2 stages; FRP within 14 days of cane purchase and balance on half yearly basis on ex-mill price declared by respective states. It has been gathered that the Government of Karnataka has already enacted an Act in May 2013 deciding to form a sugar board and prescribing that the sugarcane price will be based on the revenue sharing model. Maharashtra is also readying to consider a similar move prior to the start of the next season. This is a remarkable initiative taken by these two State Governments and we hope that this 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. We view these policy changes as a step in the right direction and expect the sugar industry to get transformed and re-rated in the coming years.
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Significantly beneficial for sugar mills, particularly UP based Units Cane crushed Sugar Recovery rate sugar prodn/sales sugar realisation (Ex-mill) Sugar revenue Molasses Recovery rate Production Realisation (assumed) Molasses Revenue Bagasse Recovery rate Production Captive cons Exportable surplus Realisation (assumed) Bagasse Revenue Cane price estimation Total revenue (sugar+molasses+bagasse) Cane cost (% of total revenue) Total Cane cost Cane crushed Cane cost per tonne as % of sugar realisation INR mn % INR mn mt INR/tn % 27520 70% 19264 8.0 2408 75.3% 31360 70% 21952 8.0 2744 85.8% mt 30% mt INR/tn INR mn 30.0% 2.40 0.72 1.68 800 1920 30.0% 2.40 0.72 1.68 800 1920 % mt `/t INR mn 5.0% 0.40 3200 1280 5.0% 0.40 3200 1280 mt INR/tn INR mn 9.5% 0.76 32000 24320 11.0% 0.88 32000 28160 mt Uttar Pradesh 8.0 Maharashtra 8.0
Trend in domestic sugar prices

India has been witnessing higher sugarcane price over the last few years, however sugar prices have not risen in direct proportion leading to severe margin pressure on the industry. Sugar prices during 2011-12 did not increase sharply and ranged between INR 29 to INR 31 per kg, due to an expected 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 at around INR 36/kg, due to expectation of lower sugarcane production in Maharashtra and Karnataka in current sugar year. However with consumption remaining at ~23.5 mt in addition to higher global production and subdued global prices (restricting export attractiveness), sugar prices has remained under pressure since H2FY13. There were several other factors also that led to decline in prices. While the initial decline in the period January- March 2013 was driven mainly by seasonal supply pressure from new production and sale of sugar in the domestic market by shore based refiners having access to cheap raw sugar, the continued decline since April 2013 has been driven mainly by the announcement of partial decontrol in April 2013, which resulted in large scale releases of sugar by financially weak mills with large cane dues. In addition, competition from sugar produced by processing raw sugar (whose prices remained weak globally 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 April 2013 and has finally stabilized at ~INR 31/kg on concerns over lower cane acreage.
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Prices stabilising
4500 4000 3500 3000 2500 2000 1500 1000 500 0 Aug07 Jun08 Nov08 Apr09 Sep09 Feb10 Jul 10 Dec10 Oct11 Aug12 May11 Mar12 Jun13 Jan08 Jan13
Source: Bloomberg, SPA Research
Global Scenario
World sugar dynamics
World 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 of substitutes and concerns about obesity and health. At the same time, it has been increasing in developing countries, which now account for around 70% of world sugar consumption, driven by rising incomes, population growth and changes in diet. Sugar crops in many parts of the world are projected to expand in response to rising demand for sugar and other uses. World sugar production is expected to increase by 30 mt to reach over 210 mt in 2020-21. The bulk of the additional sugar production will come from the developing countries and the main burden of growth will continue to fall on Brazil. Brazil has expanded production rapidly in the past two decades, but a slowdown in investment in new mills occurred after the financial 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 in the sugar supply-and-demand equation. Brazil is both the largest exporter of sugar and the largest producer 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 in the global sugar market. Main producing countries Raw sugar is derived from both sugar cane and sugar beet. Brazil and India are the world's two largest sugar producers. Together, they have accounted for over half the world's sugar cane production for the past 40 years. The EU is the third-largest producer and accounts for around half the world's sugar-beet production. World production of raw sugar has increased by 2% YoY to 174.5 mt in 2011-12. By 2018, production is projected to reach 202 mt - slightly higher than the projected consumption of 198 mt.
30.00 25.00 20.00 15.00 10.00 5.00 0.00 China Brazil India USA EU Thailand Australia 22.66 14.49 10.42 8.23 4.53 2.74 4.59 3.31 Mexico 2.39 Pakistan 2.20 Rest of world
Shree Renuka Sugars
CAGR in sugar consumption to 2021

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 South America N&C America Oceania Europe World Africa Asia
Source: Rabobank 2013
INR per tonne
Major sugar producing countries contribution (%) in total world sugar production
24.44
Source: USDA, SPA Research
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Russia
Main exporting countries World exports of raw sugar increased by 1% YoY to 58 mt in 2011-12 led by Brazil (24.6 mt) and Thailand (9 mt).
Largest exporters of Raw sugar as a % of total exports by volume, 2007-12
Brazil 44% Thailand 12% Australia 6% India 5% EU 4% UAE 3% Guatemala 3% Mexico 2% Columbia 1% Cuba 1% Others 19%
Source: USDA FAS Sugar: World Markets & Trade, SPA Research
Main importing countries Import 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 Dynamics

Ethanol & Its advantages With ever-rising cost of petrol, global warming, peak oil and so on, there has been a growing need for sourcing alternative sources of energy and ethanol seems to be a product that many economies are putting much of their hopes into. The use of ethanol as a blended fuel component in gasoline is steadily increasing. Ethanol's main attraction comes from the fact that it burns cleaner than petroleum oil, and that it is more cost and fuel-efficient. Ethanol is also a renewable energy resource, an important factor considering our high dependence on petroleum, being non-renewable, which is entering into a stage of scarcity, or peak-oil, driving the price of petrol up. Furthermore, the production of ethanol may have a role in easing the global economic crisis. The financial worth of ethanol producing crops will drive up the prices of vegetation such as corn, so farmers can enjoy a significant profit. These same crops need to processed, meaning there will be an increased need for factories and workforces.
Global Ethanol Production in 2012
Other Countries Canada 9.94% 1.93%
China 2.39% India 2.53%
Brazil 23.99%
USA 59.22%
Demand drivers & Growth potential The US, Brazil and to a smaller extent, the European Union, together dominates global production of 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 and the 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 Brazil is linked to the development of the flex-fuel industry (FFVs) and the import demand of the United States 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 the United States and in Brazil. With lower prices of maize and sugar anticipated in 2013-14, a large increase in production is anticipated in both countries. In addition to the pivotal 3 markets - the
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US, Brazil and the EU -rising transport fuel demand in other countries, together with additional governments expressing mandates and targets for ethanol inclusion in gasoline, point to considerable potential for fuel ethanol demand over the remainder of this decade.
Renewable Energy & Nuclear Power are fastest growing sources of energy consumption
world energy consumption by fuel quadrillion btu
250 200 150 100 50 0 1990 History 2010 Projections
Liquid fuels (including biofuels)
34% 28%
Coal Natural gas
15%
22% 11% 5% 1995 2000 2005 2010 2015 2020 Nuclear 2025
Renewables (excluding biofuels)
7%
2030
2035
2040
Source: EIA, International Energy Outlook 2013, SPA Research
By 2022, OECD is expecting world ethanol production to increase by almost 70% compared to the average of 2010-12 and reach some 168 bnl. Out of this, production in developing countries is projected to increase from 42 bnl in 2012 to 72 bnl. in 2022, with Brazil accounting for 80% of this supply increase and a large part of the rest coming from China, where less than half of their ethanol production is consumed in the fuel market, the rest is consumed as alcohol in many food and nonfood preparations.
200 150 100 50 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Brazil 28% China 6% EU 7%
Regional distribution of world ethanol production and use in 2022
Production to grow at 6% CAGR

Production India 2% Thailand 1%
Consumption India 2% China 6%

USA 48%
Thailand 1%
Other 8%
EU 10%
Share of world total

USA 52%
28% 27% 23%
World ethanol production (bnl)
World ethanol trade (bnl)
Brazil 21%
Source: OECD-FAO Agriculture Outlook 2013, SPA Research
Crude oil has little direct impact on ethanol prices Increasing gasoline prices lead to surge in demand of ethanol because it makes ethanol more competitive. 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 minimal impact on the price of ethanol. In the world market for crude oil, an individual country's supply and demand decisions are small relative to the market as a whole-even for a country the size of the US. To put this into perspective, the US consumes roughly 20% of world oil. Roughly half of the US oil consumption 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 and demand would need to be very inelastic before such a quantity had a noticeable effect on price.
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Sugar Sector Contents World Sugar Statistics Indian Sugar Industry Global Scenario Sugar Pricing Outlook Balrampur Chini Shree Renuka Sugars
CBOT Ethanol Nearest-Futures versus NYMEX RBOB Gasoline Nearest-Futures
7% CAGR in world gasoline prices to result in 8% CAGR in world ethanol prices
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 an increase in demand and consumption of ethanol by owners of flex-fuel cars thereby putting upward pressure on the world price of ethanol in the medium-term. As a result OECD is expecting an increase 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 its potential role as the next major source of fuel. The most important is the fact that creating ethanol is thought to consume more energy than its overall output. The amount of crops needed to fuel a car for 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 needed to satisfy the global thirst for fuel is staggering. This need for fuel means that more farmlands must be created, resulting in considerable deforestation. There would also be less of an incentive for farmers to grow other crops, when ethanol-producing harvest would fetch more of a price, or even using vegetation, such as corn, for food products instead of as fuel. The result would be overinflated prices on all food products, an expense that could further damage populations already dealing 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 far lower than originally expected. Weather is uncontrollable, but we can influence demand for corn supplies. Government incentives for corn ethanol increase demand at a time when corn is expected to 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 the environment by being implemented in ethanol-gasoline, or ethanol-electric cars.
Sugar Sector Contents World Sugar Statistics Indian Sugar Industry Global Scenario Sugar Pricing Outlook Balrampur Chini Shree Renuka Sugars
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Ethanol from sugarcane stands out

The development of ethanol in Brazil has helped the country overcome a historical dependence on foreign oil while curbing its greenhouse gases emissions and diminishing local air pollution. The overall success of Brazil's ethanol program has resulted in calls for its replication abroad, including in the United States. However, reproducing Brazil's ethanol success in other countries would not be that easy.
According to agroecological zoning In Brazil: - Sugarcane (for sugar & ethanol) occupies 9.8 mn ha 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 can be produced from corn, sugar cane, and other starchy agricultural products, as well as cellulosic materials in agricultural wastes (e.g., waste woods and corn stalks). The most important differentiation 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 vast lands available and suitable for planting sugarcane without displacing other crops. Thus it can easily increase its ethanol production. However for other countries to do so, they have to divert substantial portion of their primary agriculture crops to ethanol production, which will almost certainly affect food prices. Thus mass production of ethanol from sugarcane does not cause the same 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 of producing sugarcane ethanol is also much cheaper, which allows Brazilian ethanol to compete with gasoline without the substantial subsidies generally provided to other countries to make ethanol competitive. For all of these reasons, if other countries were to pursue ethanol as a substitute for gasoline on the same scale as Brazil did, and if it were to do so with an eye toward real environmental gains and minimizing impacts on the food supply, it would have to seek source plants other than corn.
Ethanol yields per ha France (beet)
Gross feedstock costs per litre of fuel ethanol France (beet)
Energy balance by feedstock Sugar cane Biomass Sugar beet
Brazil (cane)
Brazil (cane)
US corn Wheat
USA (corn)
USA (corn)
RME (Biodiesel)
0 10 20 30
2000
4000
6000
8000
10
Production (lt/ha)
Costs (US Cents/litre)
Energy output/Energy input
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Global demand supply situation - Sugar

Global surplus to decline significantly in 2014 Production deficits in 2008-09 and 2009-10 were followed by surpluses in 2010-11 and 2011-12 as sugar crop areas expanded on the back of higher prices. The International Sugar Organisation has forecast a 10.1 mt global supply surplus in 2012-13 on account of more supplies from major exporting countries like Brazil (+6.8%), Australia (+9.0%), Thailand (although -2.9% on YoY but substantially higher than previous estimates) and high production in major importing countries like 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 mt anticipated earlier.
World sugar surplus to decline significantly to 3.5 mt in 2013-14
Importantly the global sugar surplus is expected to decline significantly in 2014 with ISO estimates indicating 3.5 mt of surplus for the period 2013-14. Sugar price declines in recent years have created incentives for a new equilibrium in the sector. On the demand side, cheaper prices boost consumption. On the supply side, lower prices squeeze profit margins, causing farmers to opt for other crops and to invest less in the remaining sugarcane plantations. World sugar output is expected to decline by 2.8% to 178.5 mt while consumption is expected to grow by around 0.8% to 175.5 mt in 2013-14. The expected global sugar surplus for the fourth consecutive year can totally be eliminated also depending on the amount of cane that is used in Brazil for ethanol. A 20% increase in Brazils ethanol consumption has the potential to completely eliminate the world sugar surplus.
200 150 100 (10.6) 50 0 FY07 FY08 FY09 Production
20% increase in Brazils ethanol consumption can completely eliminate the world sugar surplus.
10.4
8.2
Demand Supply Dynamics (0.1)
7.8
10.1 3.5
15 10 5 0 (5) (10) (15) (20)
(14.0)
FY10
FY11
FY12
FY13E
FY14E
Consumption
Surplus/Deficit
Brazil - The Potential game changer

Most important factor for the world sugar & ethanol market 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)
Brazil - Sugar production to cross 40 mt in 2013-14 Brazilian cane production increased by 5.4% to 591.1 mt in 2012-13 season while sugar production surged by 6.8% to 38.6 mt YoY, showing a strong upturn of the cane crop from a sharp drop in yields in 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 sugar production is expected to surge by 4.7% to 40.4 mt. The center-south (CS) region is expected to harvest 585 mt of sugarcane (+9.8% YoY) and crush 36.4 mt sugar (+6.6% YoY) in 2013-14, due to expected higher agricultural yields as a result of good weather conditions and adequate renewal of sugarcane stocks. Brazilian sugar exports are expected to increase by 6.0% to 29.3 mt in 2013-14 to meet projected international demand. Raw sugar should account for 23.0 mt, whereas the remainder represents exports of refined sugar.
Sugar Sector
Contents
Global Scenario
Balrampur Chini
Shree Renuka Sugars
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Brazil Ethanol & Sugar Production
50 40 30 20 10 0 2009 2010 2011 Ethanol (bn lt)

36.2 31.0 26.0 27.0 26.0 25.0 31.0
38.6
40.4
23.0
23.4
26.8
2012 Sugar(mt)
2013
2014E
Mills are seen to be allocating much more of the cane they harvested to ethanol production than they did last year. Total ethanol production is forecast to increase by 14.9% to 26.8 bn liters (12.6 bn liters of anhydrous ethanol and 14.2 bn liters of hydrated ethanol).
Forecast of Brazil's Sugar+Ethanol Demand (in mt)
180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0
2002 2000 2001 2004 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Source: Datagro 2013, SPA Research
Relative prices favouring Ethanol production over Sugar

29 27 25 23 21 19 17 15
Jan-12 May-12 Sep-12 Jan-13
Higher Ethanol Prices over Sugar might eliminate world sugar surplus Brazil has a unique system of producing competing tradable products - sugar and ethanol - from non-traded sugarcane. Modern "flex-plants" produces either sugar or ethanol from sugarcane based on the prevailing respective prices. Throughout 2012, relative prices favored sugar output. But in the early months of 2013, the drop in international sugar prices led relative prices to favor the production of ethanol, pushing a greater part of the harvested sugarcane into ethanol production. This is expected to result in higher production of biofuel over the sweetener in the current season. Total sucrose content diverted for sugar and ethanol production is forecast at 45% and 55%, respectively, as opposed to an equal split of 50/50 in 2012-13. If ethanol prices continue rising, millers may well prefer to produce ethanol and sell it in the domestic market, which will provide them with cash quicker.
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Sugar Sector
Contents
Global Scenario
Balrampur Chini
Shree Renuka Sugars
The Government of Brazil recently introduced two measures that have the potential to divert a greater share of sugarcane output into ethanol. First, it increased the mandatory amount of ethanol to be blended into gasoline back to 25% beginning in May 2013. The blending rate had been cut to 20% in October 2011, following a poor 2011/12 sugarcane harvest. Second, after keeping gasoline prices unchanged since 2006 to check inflation, it has raised them by 6.6%, a move that improves the competiveness of ethanol against gasoline at the pump. Brazil also plans to reduce taxes on ethanol to boost production and use of the biofuel. If Brazil cuts tax, the ethanol parity to sugar may rise and thus the share of cane directed to sugar production in the 2013-14 season may be lower than 45%. The expected global sugar surplus for the fourth consecutive year may be eliminated within 18 months depending on the amount of cane that is used in Brazil for ethanol. A 20% increase in Brazil's ethanol consumption has the potential to completely eliminate the world sugar surplus.
660 640 620 600 580 560 540 520 2009 2010 2011 Production (mt)
Ethanol share set to be higher
58% 56% 54% 52% 50% 48% 46%
2012 % Ethanol
2013
2014E
Thailand - Continues to remain 2nd largest exporter

Thailand continues to maintain its status as the second largest exporter of sugar in the world after Brazil. Thailand's total production is expected to decline from the record 10.2 mt produced in 2011-12 to 9.9 mt in 2012-13 (Nov-Oct) after an early drought threaten yield. Production is then expected to rebound to a record 10.5 mt in 2013-14. Consequent to larger supplies, exports are forecast to increase to 7 mt in 2013-14 on growing Asian demand, particularly in Indonesia.
Thailand Demand Supply Situation (mt) 12 10 8 6 4 2 0 FY11 FY12 Production
9.6 6.6
10.2 7.8
9.9 8.0
10.5 8.5
FY13E Consumption
FY14E
Sugar Sector
Contents
Global Scenario
Balrampur Chini
Shree Renuka Sugars
25
Australia: Output to decline by 6.5%

Sugar output in Australia, the world's third-biggest raw sugar exporter, is expected to decline by 6.5% to 4.25 mt in in 2013-14 season (July to June) due to heavy rainfall in early 2013 and disease that attacked the crop in Queesland, the country's largest sugar producing state. Sugar exports are expected to remain flat at ~3 mt. The Australian Sugar Milling Council forecasts this years sugar cane harvest at about 30.6 mt, down from expectations of as much as 33 mt.
Mexico - Largest exporter to the United States

Mexico 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 during last five years on account of higher area and productivity. Sugar exports also reached to record 2.5 mt, which is an increase of 166% from 0.94 mt in the last year. Moreover, production for the next crushing 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 the United States.
China becoming the 'buyer of last resort' for the world sugar market
Production increase not offsetting imports Chinese sugar production, the world's second largest consumer after India, has increased by 13.5% to 13.1 mt in 2012-13 (Sep/Aug) and is close enough to consumer demand. By 2014-15, China targets sugar production of 16 mt, which would be enough to cover around 85% of the country's sugar demand. China's sugar import needs have increased off late due to increasing domestic demand, spurred by growing prosperity, prompting more buying. Sugar is gaining market share over high-fructose corn syrup, an alternative sweetener, because sugar prices have dropped. Imports continue to increase A more than doubling of imports to a record 4.2 mt in 2011-12 had led many to expect that China will sharply reduce imports in 2012-13 but imports now look set to exceed expectations. China imported 2.5 mt from October through July 13 and is expected to import ~3.5 mt in 2012-13 compared with an earlier forecast of about 2 mt. Chinese imports are climbing as a government policy to stockpile local sweetener pushed domestic prices above the international market, prompting more buying. A drop in the global raw sugar price to less than $ 20 cents/lb has created a huge gap between domestic prices in China and the cost of imports. 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 with around $ 30/tonne in Brazil and Thailand. There are 1.9 mt of duty free imports allowed and tariffs are payable on additional supplies of "out of quota" sugar. Private buyers continue to import out-of-quota sugar that the country does not need. This opens up the possibility of China becoming the 'buyer of last resort' for the world sugar market.
Sharp drop in global sugar prices resulting in increasing market share of sugar over highfructose corn syrup, an alternative sweetener.
China has among the highest sugar production costs in the world at ~$ 30 cents/lb, compared with roughly $ 18-19 cents/lb in Brazil
Indonesia Imports expected to more than double

Abandoned plans to become self sufficient in sugar production, imports to more than double in 2013
Indonesia, the world's largest raw sugar importer has abandoned its goal of being self-sufficient in 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 double to 5.4 mt in 2013 from 2.5 mt last year after heavy rains hit domestic output. Indonesia, whose consumption accounts for about 3% of global output, imports raw sugar from Brazil, Thailand and Australia.
World Sugar Statistics Indian Sugar Industry Global Scenario Sugar Pricing Outlook Balrampur Chini Shree Renuka Sugars
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Sugar Sector
Contents
While sugar production is expected to stand flat at 2.6 mt in 2013, consumption is forecasted to rise around 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 prospects

Russia which was the world's top raw sugar importer a decade ago, had moved towards self-sufficiency in sugar in the last few years as its production costs grew more competitive with Brazilian mills which struggled to find sufficient cane to crush. Due to falling demand and increasing costs, Russian farmers are reducing beet planted areas in 2012-13 (Oct - Sept) by 21% YoY to 905,000 hectares and further by 15%-20% in 2013-14. Sugar production from the beet harvested this year is forecasted to decline by 17% YoY to 4 mt in 2012-13 and further to 3.85 mt in 2013-14. The USDA currently estimates Russian imports in 2013-14 at a three-year high of 1.03m tonnes.
International sugar prices at 3 years low

Large players like Brazil & India impacting overall industry pricing
World sugar prices have been volatile for many years with rapid spikes immediately followed by equally rapid falls. This volatility is largely as a result of changes in production - especially by large players such as Brazil and India - and also due to the nature of the industry. Apart from being the major sugar producers, Brazil and India are also major sugar consumers, and their export volumes are secondary to the needs of domestic processors. Growing trends in the production of sugar based biofuel reduce exports, too. Sugar prices have remained in the negative territory and touched its three year's low in the month of June 2013 as a result of third consecutive year of surplus production. Prices have been on a downward trajectory due to significantly higher Brazilian cane harvest in 2013-14 season along with better-thananticipated crop production figures in India, Thailand, Australia, China and Mexico. The ISO has infact forecast a fourth straight year of surplus, at 3.5 mt in 2013- 14, down from a surplus of around 10.1 mt in 2012-13. A key influence in this year's negative sugar price trend has been the Brazilian currency, which has recently tanked to four-year low to ~2.3 against the US dollar. Brazil being the largest producer and exporter of the commodity, the recent depreciation of the Brazilian real has made their export competitive resulting in the US dollar price to fall.
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jul-98 Apr-01 Jun-99 May-00 Mar-02 Depreciating BRL moving sugar prices lower 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Jul-09 May-11 Apr-12 Jun-10 Mar-13
Shree Renuka Sugars
Sharp depreciation in Brazilian currency further impacting world sugar prices
Dec-04
Nov-05
BRL/USD
USc/lb (RHS)
ICE Raw Sugar futures declined around 17.5% since October 2012 and touched a low of 16.02 cents/lb in June 2013. Prices although recovered marginally in the month of June amidst wet weather in Brazil during the first half of the month hampering sugarcane crushing, but were unable to sustain at higher levels. Although much weaker than the 30-year highs posted in 2011 (36 cents), prices remain above their decade average of 14.90 cents/lb.
Sugar Sector
Contents
Global Scenario
Aug-08
Feb-03
Oct-06
Sep-07
Jan-04
Balrampur Chini
27
40 35 30 25 20 15 10 5 0
ICE Sugar (raw sugar prices)
900 800 700 600 500 400 300 200 100 0
Liffe Sugar (White sugar prices)
USD cents/lb
Feb-98 Oct-98 Jun-99 Feb-00 Oct-00 Jun-01 Feb-02 Oct-02 Jun-03 Feb-04 Oct-04 Jun-05 Feb-06 Oct-06 Jun-07 Feb-08 Oct-08 Jun-09 Feb-10 Oct-10 Jun-11 Feb-12 Oct-12 Jun-13
USD/tonne

Long-term prices are largely dependent on domestic and international demand supply trends. These, in turn, would depend on agro climatic conditions in major producing countries and crude oil price trends, which determine the diversion of cane crop to ethanol. As the 2012-13 international crop year enters its last quarter, international sugar prices should be increasingly driven by the sentiment and perspectives for the 2013-14 season. The global sugar surplus is expected to narrow significantly to 3.5 mt in 2013-14 from expected 10.1 mt surplus in 2012-13, as demand accelerates in developing nations 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 short term following abatement of supply pressure with end of crushing and an increase in import duty from 10% 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 based sugar mills and we anticipate some sugar exports which will partly relieve pressure on stocks. Although an early and above normal monsoon so far has eased the supply side threat for SY14, proper distribution of rainfall in the remaining part of the monsoon season and timely withdrawal of the same will have a significant impact on the cane yield. Apart from the domestic fundamentals, prices will also take cues from the progress of Brazilian cane crushing and their impact on the global sugar prices. International sugar prices have declined sharply over the past few months and touched three year's low in June due to three back to back years of sugar surplus coupled with supplies from Brazil. Supply outlook is expected to deteriorate marginally with less supplies from Brazil, world's largest sugar producer. World sugar output is expected to decline by 1.92% to 178.5 mt while consumption is expected to grow by around 2% to 175.5 mt in 2013-14.
Ethanol vs Sugar profitability holds key to over global output
Significant decline in global sugar surplus to provide a breather to declining sugar prices
Export of sugar from India to result in reduced surplus, thereby impacting domestic price positively
One factor that can completely eliminate the global sugar surplus within 18 months is the amount of cane that is used in Brazil for ethanol. It remains to be seen how the "ethanol vs sugar profitability" will impact sugar production in Brazil and therefore world sugar prices. A 20% increase in Brazils ethanol consumption has the potential to completely eliminate the world sugar surplus. The Government of Brazil has recently introduced two measures that have the potential to divert a greater share of sugarcane output into ethanol. In addition it also plans to reduce taxes on ethanol to boost production and use of the biofuel. If brazil cuts tax the ethanol parity to sugar may rise and thus the share of cane directed to sugar 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 levels will 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 up higher gradually in 2014-15. Weather development in 3Q 2013 in Brazil (peak harvest season) holds importance as adverse (overly wet) conditions can reduce the efficiency of local millers and potentially trigger cuts to crushing estimates which could have an impact on market sentiment.
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Sugar Sector
Contents
Global Scenario
Feb-98 Oct-98 Jun-99 Feb-00 Oct-00 Jun-01 Feb-02 Oct-02 Jun-03 Feb-04 Oct-04 Jun-05 Feb-06 Oct-06 Jun-07 Feb-08 Oct-08 Jun-09 Feb-10 Oct-10 Jun-11 Feb-12 Oct-12 Jun-13
Sugar Pricing Outlook Balrampur Chini Shree Renuka Sugars
Summary
Companies Section
Company Balrampur Chini Shree Renuka Sugars
MCAP (INR bn) 10 13
CMP (INR) 43 20
Target (INR) 71 32
Sugar Sector
Contents
Global Scenario
Balrampur Chini
Shree Renuka Sugars
29
Balrampur Chini Mills

CMP - INR 43 Target - INR 71
Balrampur Chini Mills is one of the largest sugar producers in India with an annual output of ~0.9 mt of sugar and an installed capacity of 76,500 TCD for cane crushing. It has 10 mills all located in the north Indian state of Uttar Pradesh. In addition to sugar it also produces alcohol and power as by-products. It has an installed capacity of 320KLPD for alcohol and 180MW for power out of which 128 MW is saleable.
Investment Rationale
Largest integrated sugar manufacturer
Balrampur Chini is the largest sugar manufacturer in Eastern UP, with its catchment areas being within radius of 200 km from the production facilities. Balrampur Chini has 3 distilleries, 8 power plants and 5 integrated manufacturing facilities, thereby having one of the largest integrated facilities in the industry.
New investment plans on the anvil

BCML has announced some fresh investments plans. It plans to add 12.7 MW cogeneration capacity with an investment of INR 520 mn and acquire a sick sugar mill, Khalilabad Sugar Mills Ltd (KSMPL), in UP which has a crushing capacity of 2,500 TCD and has ~INR 1 bn debts on its books.
Strong balance sheet

Balrampur Chini has one of the strongest balance sheets in the industry with Net D/E ratio of 1.2x in FY13. BCML's long term debt stood at INR 5 bn with long-term debt-equity ratio at 0.4x. BCML has already expanded its capacity aggressively over FY2005-08 and does not have any major capex plans now. Thus, going ahead, the company has no need to raise a significant amount of long term debt.
Derisked Business Model

The company's business model is complimented by the production of ethanol, industrial and potable alcohol, organic manure and pressmud. BCML's cogeneration division is bolstered by dual fuel power production (viz. coal and bagasse), which helps the company to mitigate the risk arising out of the cyclical nature of the sugar business. These by products contribute ~15% to the topline of the company, and help the company to better utilise its manufacturing facilities.
Outlook & Valuation

BCML being one of the largest and most efficient sugar producers in the country is best placed to capitalize on the positive structural changes witnessed by the industry. Improving ethanol dynamics and robust balance sheet will aid profitability. Sharp rise in cane prices (SAP) for SS14 remains the biggest risk for BCML. The stock at 0.67x FY15E BV of INR 64.5 adequately factors in the concerns arising from the global oversupply supply of sugar and subdued domestic prices. We recommend a BUY on the stock with a target of INR 71, based on 1.1x FY15E BV, over a period 18 months.
Ethanol buying program to aid distillery segment growth

UP 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 13Mar 14 period. This would lead to 20.5% CAGR in revenue of distillery segment over FY13-15E.
Shareholding (%)
Promoters FIIs DIIs Others
Jun-13
40.93 17.18 15.38 26.51
Key Data
BSE Code NSE Code Bloomberg Code Reuters Code Shares O/S (mn) 500038 BALRAMCHIN BRCM IN BACH.BO 244.30 1 10.47 74.50/34.60 273439 6.18 0.55
Y/E Mar (INR mn)

Net Sales Growth (%)
FY12
23095 -22.41%
FY13
32748
FY14E
36797
FY15E
38869 5.63%
41.80% 12.36%
EBIDTA Margin (%) 10.30% APAT Growth (%) EPS 4
12.82% 12.74% 11.67% 1619 1875 1820 -2.97% 7.45 5.75 0.67 5.25 0.98 12.24 12.10
Relative Price Performance

120 100 80 60 40 20 0 Nov-12 Apr-13 Dec-12 Aug-13 Oct-12 Feb-13 Jun-13 Sep-13 May-13 Mar-13 Oct-13 Jan-13 Jul-13
-99.77% 40375.00% 15.84% 0.02 NA 1.15 12.75 1.63 4.58 NA 6.63 6.46 0.80 5.72 1.20 11.25 12.81 7.68 5.58 0.73 5.13 1.07 12.78 13.64
Face Value Mcap (INR bn) 52 Week H/L 2W Avg. Qty, NSE Free Float (INR bn) Beta
P/E P / BV EV/EBIDTA Net Debt-Equity Ratio RoACE (%) RoAE (%)
BCML
Sensex
30
Sugar Sector
Contents
Global Scenario
Balrampur Chini
Shree Renuka Sugars
Financial Summary
Income statementYear E
Y/E March (INR mn) Net Sales Growth (%) Cost of goods sold Employees Cost Other Mfg. Expenses Total Expenditure EBIDTA (without OI) Growth (%) EBITDA Margin % Depreciation EBIT EBIT Margin % Interest Expenses Other Income EBT Tax Expenses PAT Extraordinary Items Net Profit Growth (%) Net Profit Margin (%) EPS Growth (%) FY12 23095 -22.41% 17755 1177 1054 20716 2380 -53.85% 10.30% 1155 1225 5.30% 1474 265 16 12 4 0 4 -99.77% 0.02% 0.02 -99.74% FY13 32748 41.80% 25190 1295 1170 28551 4198 76.42% 12.82% 1084 3114 9.51% 1439 423 2098 485 1613 (6) 1619 40375.00% 4.94% 6.63 40375.00% FY14E 36797 12.36% 26807 1472 1656 32109 4687 11.66% 12.74% 1105 3582 9.73% 1321 346 2607 732 1875 0 1875 15.84% 5.10% 7.68 15.83% FY15E 38869 5.63% 29537 1555 1555 34333 4536 -3.22% 11.67% 1121 3416 8.79% 1283 387 2520 700 1820 0 1820 -2.97% 4.68% 7.45 -2.97%
Balance Sheet
Y/E March (INR mn) SOURCES OF FUNDS Share Capital Reserves Total Networth Total Debt Total Liabilities 244 11877 12121 19905 32026 244 12916 13161 17669 30829 244 14101 14345 16287 30631 244 15489 15733 15787 31519 FY12 FY13 FY14E FY15E
APPLICATION OF FUNDS Fixed Asset Investments Total Current Assets Total Current Liabilities Net Current Assets Net Deferred Tax Total Assets 16151 422 25494 7796 17698 (2245) 32026 15283 422 26528 9097 17431 (2306) 30829 14655 422 27441 9580 17861 (2306) 30631 15305 422 27826 9729 18097 (2304) 31519
Key Ratios
Y/E March Per Share Data (INR) Adjusted EPS CEPS DPS BVPS Return Ratios RoACE (%) RoAE (%) Balance Sheet Ratios Net Debt-Equity Ratio Current Ratio Interest Cover Ratio Efficiency Ratios Total Asset Turnover Inventory Days Debtors Days Creditors Days Valuations P/E P / BV Dividend Yield (%) Market Cap / Sales EV/EBIDTA NA 1.15 0.00 0.60 12.75 6.46 0.80 4.67 0.33 5.72 5.58 0.73 4.66 0.28 5.13 5.75 0.67 3.51 0.27 5.25 0.71 307 19 63 1.04 248 18 85 1.20 222 18 82 1.25 219 18 76 1.63 3.27 1.01 1.20 2.92 2.46 1.07 2.86 2.97 0.98 2.86 2.96 4.58 0.03 11.25 12.81 12.78 13.64 12.24 12.10 0.02 4.73 0.00 49.61 6.63 11.32 2.00 53.87 7.68 12.21 2.00 58.72 7.45 12.01 1.50 64.40 FY12 FY13 FY14E FY15E
Cash Flow
Y/E March (INR mn) EBT Depreciation Interest Inc./Dec. in working capital Tax paid Other Income Cash flow from operations (a) Inc./Dec. in investments Change in Fixed Assets Change in CWIP Others Cash flow from investing (b) Inc./Dec. in capital Inc./Dec. in debts Dividend paid Interest paid Others Cash flow from financing ( c ) Opening cash balance Cash Flow during the year (a+b+c) Closing cash balance FY12 16 1155 1474 (1136) (16) (265) 1228 (406) (94) 57 149 (295) (12) (212) 0 (1474) (688) (2385) 1584 (1453) 131 FY13 2098 1084 1439 2049 (424) (423) 5823 (0) (142) (47) 170 (19) 0 (2236) (489) (1439) 141 (4022) 131 1781 1912 FY14E 2607 1105 1321 (1395) (730) (346) 2562 0 (178) (299) 170 (307) 0 (1382) (488) (1321) (29) (3220) 1912 (965) 948 FY15E 2520 1121 1283 (760) (706) (387) 3070 0 (550) (100) 195 (455) 0 (500) (368) (1283) (989) (3140) 948 (524) 423
Sugar Sector
Contents
Global Scenario
Balrampur Chini
Shree Renuka Sugars
31
Shree Renuka Sugars Ltd.

CMP - INR 20 Target - INR 32
SRSL, promoted by Murkumbi family, is one of the largest sugar producers in the world with a combined crushing capacity of 22 mt across 11 cane mills globally. It is also the largest sugar refiner globally with refining capacity of 5500 tpd in West Bengal (2500 tpd) & Gujarat (3000 tpd). The company's plants are fully forward integrated with ethanol capacity of 4,160 klpd and Co-Generation capacity of 271 MW in India and 313 MW in Brazil, with exportable power surplus of 371 MW.
Investment Rationale
Presence in top 2 sugar producing regions ensures stability
Being the only sugar company in the world having manufacturing operations in top two sugar producing regions i.e India & Brazil (40% and 60% respectively), SRSL is well placed to benefit from the growth opportunities in the world sugar market. Moreover having a diversified geographical presence also ensures continuity in crushing operations almost throughout the year due to complementary seasons in India and Brazil.
Extending sugar season through refining operations

In India, the sugar season lasts for ~150 days. In order to extend this sugar season, SRSL invested in multi-feed sugar refineries and is one of largest sugar refiners globally with a capacity of 2.3 mtpa. During the season it uses sugarcane juice to produce sugar and during off season it uses raw sugar, thereby doubling the asset utilization rate against peers.
Debt to decline slowly

SRSL is carrying a consolidated debt of ~INR 84.7 bn (Brazil - INR 51 bn) in its books, resulting in Net D/E ratio of ~5.6x. It expects overall debt to decline in coming years aided by stabilizing Brazilian operations, which would lead to generation of substantial cash flows. Its earlier plan of deleveraging its balance sheet through sale of Brazilian assets is put on hold as of now. It was earlier looking to sell its Brazilian cogen plant of 295 MW. Replacement cost of setting up a power plant in Brazil is ~$1.5 mn/MW.
Locational advantage
SRSL enjoys significant locational advantage as all its 7 mills in India are located in Maharashtra and Karnataka, that are regions where operating environment are less regulated, have high recovery rates (~10% higher than other states), long crushing season and relatively flexible FRP based cane price regime. Besides SRSL is also the largest exporter of sugar in India as its Refining and Milling assets are close to the port, which gives the sugar giant easy access to the overseas market like Middle-East and Asia Pacific.
Outlook & Valuation

SRSL remains one of best integrated sugar business models in India with the ability to operate throughout the year coupled with substantial in-house refinery capacity. Improving industry dynamics domestically in addition to likely turnaround of Brazilian operations in next couple of years provides some respite to the company. Any success in balance sheet deleveraging activities will lead to rerating of the company. The stock at 0.63x FY15E BV of INR 31.9 adequately factors in the concerns arising from the global oversupply of sugar and subdued domestic prices. We recommend a BUY on the stock with a target of INR 32, based on 1x FY15E BV, over a period 18 months.
Y/E Mar (INR mn)
532670 RENUKA SHRS IN SRES.BO 671.29 1.00 13.43 38.80/14.50 4975965 8.28 1.35 Net Sales Growth (%)
Unique and derisked business model

Besides being one of the largest sugar manufacturers in the world, SRSL is one of the first mills to be fully forward integrated into distillery and co-generation operations thereby de-risking the core sugar business. This flexible operating model aids SRSL to grow across sugar 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 a combination of owned and leased mills for its capacity expansion, which aids the company in using its capital efficiently. Out of its 11 mills, 5 are leased mills acquired from loss making cooperatives at very low costs.
Shareholding (%)
Promoters FIIs DIIs Others
Jun-13
38.36 15.55 8.42 37.67
Key Data
BSE Code NSE Code Bloomberg Code Reuters Code Shares O/S (mn)
FY12
FY13
FY14E
115187 11.21% 13.68% 922 LP 1.37 14.56 0.68 5.37 3.72 7.72 5.38
FY15E
127155 10.39% 14.13% 1943 110.82% 2.90 6.91 0.63 4.25 3.11 10.91 9.47
123691 103576 61.28% -16.26%
EBIDTA Margin (%) 14.58% 14.53% APAT Growth (%) EPS (384) (818)
Relative Price Performance

120 100 80 60 40 20 Dec-12 Nov-12 Oct-12 Feb-13 Apr-13 Jul-13 Aug-13 May-13 Mar-13 Sep-13 Oct-13 Jun-13 Jan-13
PL-313.03% (0.57) NA 1.13 6.12 (1.22) NA 1.03 7.63 5.59 6.16 NA
Face Value Mcap (INR bn) 52 Week H/L 2W Avg. Qty, NSE Free Float (INR bn) Beta
P/E P / BV EV/EBIDTA
Net Debt-Equity Ratio 5.36 RoACE (%) RoAE (%) 8.92 NA
SRSL
Sensex
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Global Scenario
Balrampur Chini
Shree Renuka Sugars
Financial Summary
Income statementYear E
Y/E March (INR mn) FY12 FY13 Net Sales 123691 103576 Growth (%) 61.28% -16.26% Cost of goods sold 89665 78194 Power & Fuel Cost 3819 2865 Employees Cost 3920 2585 Total Expenditure 105281 91511 EBIDTA (without OI) 18410 12065 Growth (%) 40.83% -34.46% EBITDA Margin % 14.58% 14.53% Depreciation 10223 8868 EBIT 8187 3197 EBIT Margin % 6.62% 3.09% Interest Expenses 10381 8683 Other Income 1522 583 EBT (672) (4903) Tax Expenses (370) (1160) PAT (302) (3744) Exceptional/Extraordinary Items 74 (2923) Minority Interest 8 (3) APAT (384) (818) Growth (%) PL -313.03% APAT Margin (%) NA NA FY14E FY15E 115187 127155 11.21% 10.39% 86415 95449 3456 3815 2764 2925 99431 109181 15756 17973 30.59% 14.07% 13.68% 14.13% 8599 8713 7157 9260 6.21% 7.28% 7205 6467 351 821 303 3613 50 1126 253 2487 (671) 536 2 8 922 1943 LP 110.82% 0.80% 1.53%
Balance Sheet
Y/E March (INR mn) SOURCES OF FUNDS Share Capital Reserves Total Networth Minority Interest Total Debt Total Liabilities APPLICATION OF FUNDS Net Block Capital Work in Progress Investments Total Current Assets Total Current Liabilities Net Current Assets Misc. Expenses not written off Net Deferred Tax Total Assets 88376 3647 1935 60741 32709 28033 0 (1556) 120435 84149 2815 2354 66784 56431 10353 0 (272) 99398 81365 500 2354 73381 62234 11148 1 (319) 95048 75652 500 2354 71257 59605 11652 1 (349) 89810 671 18149 18820 36 101578 120435 671 13926 14597 33 84769 99398 671 19003 19674 35 75339 95048 671 20718 21389 43 68378 89810 FY12 FY13 FY14E FY15E
Key Ratios
Y/E March Per Share Data (INR) Adjusted EPS DPS BVPS Return Ratios RoACE (%) RoAE (%) Balance Sheet Ratios Net Debt-Equity Ratio Current Ratio Interest Cover Ratio Efficiency Ratios Total Asset Turnover Inventory Days Debtors Days Creditors Days Valuations P/E P / BV Dividend Yield (%) Market Cap / Sales EV/EBIDTA NA 1.13 3.16% 0.17 6.12 NA 1.03 2.24% 0.14 7.63 14.56 0.68 0.00% 0.12 5.37 6.91 0.63 5.00% 0.11 4.25 1.18 88 12 78 0.94 147 10 126 1.18 149 9 126 1.38 131 9 102 5.36 1.86 0.94 5.59 1.18 0.44 3.72 1.18 1.04 3.11 1.20 1.56 8.92 NA 6.16 NA 7.72 5.38 10.91 9.47 (0.57) 1.00 28.04 (1.22) 0.50 21.74 1.37 0.00 29.31 2.90 1.00 31.86 FY12 FY13 FY14E FY15E
Cash Flow
Y/E March (INR mn) EBT Depreciation Interest Inc./Dec. in working capital Tax paid Other Income Cash flow from operations (a) Inc./Dec. in investments Change in Fixed Assets Change in CWIP Others Cash flow from investing (b) Inc./Dec. in capital Inc./Dec. in debts Dividend paid Interest paid Others Cash flow from financing ( c ) Opening cash balance Cash Flow during the year (a+b+c) Closing cash balance FY12 (672) 10223 10381 (24338) (557) (1522) (6486) (746) (16157) 3369 7 (13527) 28 36499 (1343) (10381) (10043) 14760 6019 (5252) 767 FY13 (4903) 8868 8683 20121 (297) (583) 31889 (419) (726) 832 24 (289) 0 (16810) (336) (8683) (3330) (29159) 767 2442 3209 FY14E 303 8599 7205 (1807) (97) (351) 13852 0 (5815) 2815 12 (2988) 0 (9429) 0 (7205) 4757 (11877) 3209 (1013) 2196 FY15E 3613 8713 6467 (743) (1156) (821) 16074 0 (3000) 0 15 (2985) 0 (6962) (671) (6467) 773 (13327) 2196 (238) 1958
Sugar Sector
Contents
Global Scenario
Balrampur Chini
Shree Renuka Sugars
33
Sharad Avasthi
Dy Head - Equity Research
sharad.avasthi@spagroupindia.com
Tel.: +91-33-4011 4800
Ext.832
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Sugar Sector - Sector Initiation Report - SPA Sec

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ETHANOL,

Minimum DistanceCriteria betweenmills

LevySugar Obligationon mills

M inimum DistanceCriteria betweenmills

Tariff rates on trade

40% sugar to be packed in jute bags only

DualCane Pricing: Centre/State

Import and Export Compulsory sugarpacking injuteonly

Dual Cane Pricing: Centre/State

Central Govt. Controls

SECTOR INITIATION REPORT

Structurally poised for sweet time

Domestic production to decline by 5% in 2013-14

Ethanol Blending Program gains momentum - To completely transform the industry

Partial decontrol of sugar - Will lead to rerating of the sector

Ray of hope emerging for adoption of cane pricing formula

World sugar surplus to decline significantly to 3.5 mt in 2014

Sugar prices to remain steady

APAT (INR mn) FY14E FY15E 1876 1820 922 1943

FY14E 7.68 1.37

EPS FY15E 7.45 2.90

P/E (x) FY14E FY15E 5.58 5.75 14.56 6.91

P/BV (x) FY14E FY15E 0.73 0.67 0.68 0.63

EV/EBIDTA FY14E FY15E 5.13 5.25 5.37 4.25

World Sugar Statistics

Indian Sugar Industry

Sugar Pricing Outlook

Shree Renuka Sugars

World Sugar Statistics

Indian Sugar Industry

Sugar Pricing Outlook

Shree Renuka Sugars

World Sugar Statistics

Brazil 22.15% India 16.79%

World Sugar Statistics

Indian Sugar Industry

Sugar Pricing Outlook

Shree Renuka Sugars

Indian Sugar Industry

World Per Capita Consumption of Sugar (kg)

Maharashtra 37.4% UP 27.4%

Statewise sugar production as a % of total sugar production

World Sugar Statistics

Indian Sugar Industry

Sugar Pricing Outlook

Shree Renuka Sugars

SY2009 Uttar Pradesh

SY2010 Maharashtra Industry

Sugar Producing States of India

Uttaranchal Sikkim Uttarpradesh

Maharashtra High Andhara

Source: SPA Research

Indian Sugar Cycle

While consumption is growing @ 4% over last 10 years, production is cyclical

Swing % (-)32.8% (+)110.4% (-) 33.5% (+) 38.6%

World Sugar Statistics

Indian Sugar Industry

Sugar Pricing Outlook

Shree Renuka Sugars

Indian Sugar Cycle

Decline in sugar prices

Lower sugar production

Source: SPA Research

28.4 18.5 18.5 20.1 13.5 12.7 19.3