ICRA LIMITED 1

September 2012

INDIAN SUGAR SECTOR Improved outlook following increase in exports and expected supply correction…

ICRA Limited

ICRA LIMITED 2

Table of Contents

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1. Domestic Demand-Supply Scenario and Outlook 5 ..

2. Trends in Domestic Sugar Prices 8 ..

3. International Scenario and Price trends 10

4. Cane Pricing and Conversion Margins 11

5. By-products 13

6. Government policy interventions 17

7. Financial Performance and Outlook for sugar mills 18

8. Key Success Factors 19

9. Company Section

Triveni Engineering & Industries Limited 21

Balrampur Chini Mills Limited 23

Dwarikesh Sugar Industries Limited 25

Dhampur Sugar Mills Limited 27

Bajaj Hindusthan Limited 29

Sri Renuka Sugars Limited 31

EID Parry India Limited 33

Dalmia Bharat Sugar and Industries Limited 35

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Summary Opinion

INDIAN SUGAR SECTOR IMPROVED OUTLOOK FOLLOWING INCREASE IN EXPORTS AND EXPECTED SUPPLY CORRECTION…

Industry Update September 2012

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The domestic sugar industry is likely to remain in surplus with the sugar output likely to outstrip domestic consumption for the second

consecutive year. During SY 2011-121, sugar output is likely to be around 26 million MT (a 7% growth over the previous year) which is likely

to outstrip domestic consumption (expected at around 23 million MT) by 3 million MT. However, the impact of this surplus has been

largely mitigated by exports of ~3.2 million tonnes till July 2012. Thus, sugar stocks are likely to remain stable at about 6 million MT or 3

months domestic consumption. Going forward, ICRA expects sugar production for SY 2012-13 to decline to around 23.5-24.5 million MT,

with Maharashtra likely to witness the largest decline, driven mainly by weak and delayed monsoon in several key growing regions.

The domestic free sugar prices were subdued and range bound between Rs. 28,000-Rs. 30,000/MT during October 2010 to March 2012

mainly because of domestic sugar surpluses. Prices have however started showing an uptrend since April 2012, which was especially

marked from July 2012 onwards, and currently stand at around Rs. 35,000/MT. This uptrend followed significant export of sugar, which

relieved pressures on domestic stocks, lower sugar releases but most importantly concerns over delayed and weak monsoons affecting

sugar output in the coming season SY 2012-13. With production likely to decline next year and international prices and import duty

deterring imports, ICRA expects sugar prices to be supported at the current level in the next 12 months. In the medium-term, the sugar

price trends will continue to be determined by the following three factors. Firstly, domestic sugar production for the coming seasons

(which is expected to decline to 23.5-24.5 mn MT SY2012-13). Secondly, the international crude oil prices, which will determine the raw

sugar: ethanol mix in Brazil, the world’s largest producer; and finally, the Government of India’s policies regarding exports of sugar and

import duties.

During SY 2011-12, most mills have seen an increase in cane costs, however this was largely offset by increase in realizations and thus the

conversion margins2 either improved or remained stable in SY 2011-12. The major exception however was UP where the Rs. 350/MT hike

in cane prices resulted in the increase in the cane cost of production significantly outstripping realization growth resulting in a sharp

decline in conversion margins. The impact of this was compounded by the SC ruling which upheld the SAP announced for SY 2006-07 and

SY 2007-08 which resulted in significant cash outflow for most mills.

Prices of by-products such as bagasse and molasses continue to remain steady driven by healthy demand from consuming sectors such as

power, paper and alcohol. Further, forward integration into distilleries and power generation continues to yield healthy returns, driven

mainly by supporting regulatory framework and healthy offtake and pricing for alcohol and power. ICRA observes that a very significant

part of the total revenue and profits of sugar mills comes from by-products, especially in the case of forward integrated entities. ICRA

believes that forward integration will remain crucial for improving profitability and riding through the cyclicality of the sugar industry.

As far as financial performance for SY 2011-12 is concerned, the operating profits for mills in most parts of the country barring UP have

been supported by higher volumes and improved conversion margins , however the impact at the net level has been moderated by higher

interest costs. However, for UP mills, profitability indicators and cashflows for sugar mills in the first nine months of SY 2011-12 have been

impacted severely because of reasons mentioned earlier. Although the profitability is likely to recover significantly in the last quarter

following recovery in sugar prices in Q4 SY 2011-12, overall the profitability numbers for UP sugar mills are likely to remain stressed in SY

2011-12. For SY 2012-13, while sugar mills are likely to benefit from steady sugar and by product realizations, fixation of cane prices will be

the key variable, especially in SAP states.

1 SY is Sugar year which is from October to September

2 Net realizations less cane cost of production/MT-sugar. All domestic prices quoted in this report are net of excise ex-UP, unless specified otherwise

ICRA LIMITED 4

The domestic sugar industry is highly regulated. The GoI has recently set up a committee headed by the chairman of Economic Advisory Council, Mr. C Rangarajan to

prepare a roadmap for deregulation. ICRA understands that some of the key suggestions of the committee include: Doing away with all restrictions on sale of sugar

and byproducts; de-reservation of cane areas; fixation of cane prices based on market price of sugar and byproducts; purchase of sugar by Government for levy

obligation at market prices; and freeing up of international trade with export/import duties being the only tools for controlling the same. Decontrol of the sugar

industry, including abolition of the levy requirements will be critical for supporting the sugar industry; however it is uncertain as to when such an event will occur.

As far as the medium to long-term outlook is considered, as in the past, the long-term prices and profitability of Indian sugar companies would remain highly cyclical

and dependent on domestic and international supply-demand trends. The latter in turn would depend on agroclimatic conditions in major producing countries and

crude oil price trends, which determine the diversion of cane crop to ethanol. Consequently, the price trends in international markets would be the key determinants

of future profitability. Further, government/court action in ensuring a decontrol of the sugar industry and a rational linkage between cane prices and sugar prices will

also be a key to long-term viability of sugar operations, especially in states governed by SAP. Within the sugar industry, however players who enjoy the benefit of high

operating efficiencies, forward integration and a strong capital structure will be best placed to ride out the cycles.

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