renuka sugar comparative study

A PROJECT REPORT ON COMPARATIVE PROFITABILITY ANALYSIS IN SUGAR

INDUSTRY UNDERTAKEN AT SHREE RENUKA SUGARS LTD

Babasabpatilfreepptmba.com

Executive Summary

Title of the project

“Comparative Profitability Analysis in sugar industry- a study undertaken of Munoli and Ajara

plant at Shree Renuka Sugars Ltd.”

Main Objectives of the Study:

o To know the profitability of Munoli and Ajara Plant.

o To estimate the Return on investment of both the Plants.

o To compare the profitability of the plants.

o To project the profitability of the plants for next 2 years.

Techniques applied for the study

o Return on Investment (ROI)

o Linear Trend Analysis.

Data Collection

o Primary Data:

Primary data are those data which are collected directly without the use of any secondary

media. Such as Interaction with the company officials

o Secondary Data:

Secondary data are those which are obtained from sources such as follows:

o Annual reports of the company

o Internal Financial records of the company

o Books




Need of the study

o To know the advantages of setting plants at different locations.

o To know the various factors affecting the profitability.

Limitation

o Profitability analysis is a wide study which involves numerous techniques; each and every

aspect of it cannot be dealt in detail.

o As this is an external study, the results are not complete and clear as I m having a little idea

about practical difficulties facing day to day, except the information provided by the SRSL;

o Lastly the study is purely academic. The experience makes this study less precise when

compared with a professional study.




COMPANY OVERVIEW

Founded in October 1995, SRSL manufactures sugar, energy, ethanol and biofertilizers in an

integrated plant in North Karnataka, India. With an able management and robust vision, Shree

Renuka Sugars today is one of the fastest growing sugar manufacturers in the country. Shree

Renuka Sugars is an integrated manufacturing company with strategic focus on Sugar and its allied

products in Power and Ethanol. The Company's registered office is in Belgaum, Karnataka and

Corporate Office is at Mumbai. Their key manufacturing facility is in Munoli, Athani & Havalgah,

Karnataka and they also operate three leased facilities at Ajara & Arag in Maharashtra and at

Aland in Karnataka. The current capacities of SRSL are as per the table below:

Unit Cane(TCD) Cogeneration

(MW)

Distillery

(KLPD)

Refinery

(TPD)

Munoli, Karnataka 7,500 35.5 120 1,000

Athani, Karnataka 6,000 37 160 1,000

Havalgah, Karnataka 4,000 - - -

Ajara, Maharashtra 2,500 - - -

Arag, Maharashtra 4,000 - - -

Aland, Karnataka 1,250 - - -

Haldia, West Bengal - 15 - 2,000




Total 25,250 87.5 280 4,000

SRSL has the largest sugar refining capacity in India of 4000 tons per day (TPD), two 1000TPD

each refineries integrated with its plants at Munoli and Athani and a 2000 TPD port based refinery

coming up in Haldia SRSL has acquired a majority stake in KBK, an engineering company

primarily engaged in providing turnkey solutions in the field of distilleries, Ethanol plants and bio-

fuels. SRSL has also acquired a standalone distillery of 100 KLPD from Dhanuka Petrochem

located at Khopoli, Maharashtra. The Company has set up a wholly owned subsidiary viz. Shree

Renuka Biofuels Holdings FZE in Sharjah International Free Zone (SAIF Zone) for its overseas

investments.

Company History

Shree Renuka Sugars Limited has been incorporated as a public limited company on 25th

October

1995. MURKUMBI family of Belgaum with participation of over 4500+ farmer shareholders has

promoted the company. It is an integrated manufacturing company with strategic focus on Sugar

and its allied products in Power and Ethanol. The Company's registered office is in Belgaum,

Karnataka and Corporate Office is at Mumbai. Its key manufacturing facility is in Munoli, 70 Kms

from Belgaum and also operates a leased facility at Ajara, Maharashtra. The company is working

on other acquisitions, expansions and lease opportunities to strengthen its existing strong

fundamentals and growth prospects.

Shree Renuka Sugars initially acquired a sick sugar mill with a capacity of 1,250 TCD of Nizam

Sugars Limited, a Government of Andhra Pradesh undertaking, situated in Hindapur in Andhra

Pradesh. This unit's asset base was moved to its own location in Munoli and expanded its capacity

to 2500 TCD with 11.2 MW cogeneration plant. The commissioning and trial production took

place in November 1999. A distillery and ethanol plant of 60kl per day capacity was added in

2002. The sugar refinery was set up to process raw sugar to produce refined sugar meeting

European specifications.




Shree Renuka Sugars is operating on lease a co-operative facility in Ajara, South Maharastra

which is a 2500 TCD plant. Further the company is operating on lease a co-operative facility in

Mohan nagar in Sangli district of Maharashtra, which has a capacity of 4000 TCD.

In fiscal 2002, they ventured into manufacture of ethanol by setting up a distillery with a

capacity of 60 KLPD at the Munoli unit. In 2003, we set up a refinery to process raw sugar with a

processing capacity of 250 TPD at Munoli and subsequently increased to 1,000 TPD.

In 2004, the Company acquired on lease, a loss-making co-operative sugar mill in Ajara,

Maharashtra with a manufacturing capacity of 2,500 TCD and added another lease facility of 2,500

TCD in Arag, Maharashtra and subsequently which got commissioned in the ongoing crushing

season and Arag Plant was further expanded to 4,000 TCD in 2006.

In 2005, the Company has acquired M/s. Haripriya Sugars, a green-field project at Athani

with land and licenses and successfully commissioned 6,000 TCD plant in March, 2007 with co-

generation facility of 37 MW and distillery of 120 KLPD. During the same period they have also

acquired a sick sugar mill in Sindhkheda, Dhule, Maharashtra of 2500 TCD from Sitson India

Private Limited which was dismantled and relocated & expanded to 4,000 TCD at Havalga,

Afzalpur, Karnataka.

The Company acquired another lease unit, a loss-making co-operative sugar mill in Aland,

Karnataka with a 1,250 TCD plant. The crushing capacity of Munoli plant increased to 7,500 TCD

along with an additional co-generation capacity of 15 MW and additional Ethanol capacity of 60

KL.

The current manufacturing capacity of Sugar, Power and Ethanol is 25,250 TCD, 87.5 MW

and 280 KLPD respectively at various locations in the state of Karnataka, Maharashtra and West

Bengal. The refining capacity of raw sugar is 4,000 TPD at Munoli, Athani and Haldia.

The Company’s merchant export division is the second largest sugar exporter out of India.

The Company has built a capability in sugar trade business and incorporated an overseas

subsidiary, Renuka Commodities DMCC in Dubai.This fiscal it is the largest raw sugar importer

into India. The Company manufactured and traded over 250,000 MT of sugar in 2002-03 and




350,000 MT in 2004-05. Total trade flow puts the Company in the top 10 of sugar

producers/marketers in India.

In the first year of incorporation (FY05), Renuka Commodities DMCC posted a profit of

Rs.153 million and achieved a turnover of Rs.1,562 million.

The company came out with an Initial Public Offer (IPO) at an issue price of Rs.285/- per

share aggregating to Rs.1,100 million. The Company was listed with NSE and BSE on October 31,

2005 at 9% premium to the issue price. The Company has nearly 9,000 farmers as its shareholders.

These farmers were allotted these equity shares of 500 shares each at par during the initial stage of

implementation of operations of the Company.

The company offered its shares to Qualified Institutional Placement through Motilal Oswal

Investments in August 2007 at an issue price of Rs.750/- per share aggregating to Rs.1,640 million.

Company Vision

“To become the most efficient processor of sugar and the largest marketer of sugar and

ethanol in the country.”

Company Mission

Shree Renuka Sugars Ltd aims to become the most efficient and market driven integrated

processor of sugarcane in the world, while enabling the team to grow in learning and motivating

atmosphere, participating in the all round development of the community and delivering

consistently on returns to all the shareholders




Business Segments

Company’s business operation can be segregated into four divisions are as below:

� Sugar Milling Division

� Ethanol Division

� Power Division

� Sugar Refining Division

SRSL PRODUCTS

SRSL are one of the few fully integrated sugar companies, which have capabilities to

extract maximum value from sugarcane. Sugar is the primary product of sugarcane. However,

sugarcane crushing yields by-products like molasses that are used in facilities for the generation of

power and production of ethanol and fuel ethanol.

Sugar

Renuka Sugars produces EC II grade refined sugar which confirms to EU norms (Less than 45

ICUMSA). SRS uses phosphorisation process which produces sulphur less sugar. It is considered a

higher end product mostly used for direct consumption in European and African countries as well

by corporates for Industrial usage.




SRSL has two integrated refineries each at the Munoli and the Athani Plant. It is also in the last

stages of commissioning a stand alone refinery at Haldia, West Bengal. This reinforces the focus

on value and products and an export oriented outlook.

Ethanol

SRSL produces alcohol from the molasses (Molasses is the brown coloured residue after sugar has

been extracted from the juice. Molasses still contains some quantity of sugar, but this sugar cannot

be extracted by usual technology) left after the extraction of sugarcane juice, which can be used

both for potable purpose as well as an Industrial chemical. Further this alcohol can be again

purified to produce fuel grade ethanol that can be blended with petrol.

Power

In the process of crushing of sugar cane, Bagasse, a fibrous by-product is produced which is used

in the boilers to generate steam. We produce power from bagasse, which is used in the

manufacturing process as well as sold to the state electricity boards. Further this bagasse based

cogeneration plant is eligible for carbon credit compensation under the Kyoto protocol.

Bio-Fertilizers

The residue product from distillery operations blended with chemicals is being sold as bio-

fertilizers




Elements of Growth Strategy of Shree Renuka Sugars Limited

Large Expansion of Installed Capacity

End to End Integration of all Plants

Quick Scale-up of capacity by leasing

TRADE-FLOW: Synergy of trading and manufacturing

Reduce Price risk by Hedging

Capitalize on Changes in the World market

New Ideas in Old Business




Organizational Chart of SRSL

Chairperson

M.D.

Dir. comm

CFO President ED1 GM Sales

ED2

Mgr Sales

Dy mgr

Sales

Sr.Godown

Keeper

G.D K

HR

Asst mgr

comm

Co. Sec

DGM

GM

Mgr A/c

Sr Ac off.

Dy Mgr

Ac off.

GM cane Dept

Dy cane Mgr

Cane supplier

Asst.cane off.

Cane off.

C. E.

Eng

C.

Chem

C. Eng

GM 3 GM1

C.Eng

C.Chem

C.E.Eng

GM2

C.Eng

C.Chem

C.E.Eng

GM cane Dept

Dy cane Mgr

Cane supplier

Asst.cane off.

Cane off.

GM5

Distillery

Lab I/C

C. Chem

Mgr. Dist

GM4

C. Eng

C.Chem

C. Eng

GM3

C. Eng

C.Chem

C. Eng

GM2

C. Eng

C.Chem

C. Eng

GM1

C. Eng

C.Chem

C. Eng




INDIAN SUGAR INDUSTRY

Domestic Scenario

India is the largest consumer and second largest producer of sugar in the world (Sthece: USDA

Foreign Agricultural Service). In SY 2006/07 India produced 28.5 mln tons and consumed 20 mln

tons of sugar. India has exported around 1.5 mln tons of sugar after the ban on sugar exports was

lifted in January, 2007. With an opening stock of 4 mln tons in 2005-06, India will end the year

with stocks of more than 11 mln tons.

The following table shows the supply demand balances since 2000. India has swung itself from a

net importer to a potentially big exporter in a matter of 2 years. This shows the cyclicity of the

Sugar industry in India.

The Indian sugar industry is the second largest agro-industry located in the rural India. The Indian

sugar industry has a turnover of Rs. 700 billion per annum and it contributes almost Rs. 22.5

billion to the central and state exchequer as tax, cess, and excise duty every year (Sthece: Ministry

of Food, Government of India). It is the second largest agro-processing industry in the country

after cotton textiles. With more than 600 operating sugar mills in different parts of the country,

Indian sugar industry has been a focal point for socio-economic development in the rural areas.

About 50 million sugarcane farmers and a large number of agricultural labtheers are involved in

sugarcane cultivation and ancillary activities, constituting 7.5% of the rural population. Besides,




the industry provides employment to about 2 million skilled/semi skilled workers and others

mostly from the rural areas. (Sthece: ISMA)

Production

In 2006/07, India produced 28.5 mn tons of sugar. UP and Maharashtra together contributed more

than 67% to the total production. Maharashtra overtaking UP became the largest producer of sugar.

Maharashtra’s production increased from 5.9 mn tons to 9.6 mn tons this year. Higher yields and

greater cane acreage contributed to this increase. Following table shows region wise distribution of

production.

Current Industry Status

In 2005/06, there were 581 installed sugar mills in the country with a production capacity of 190

lakh MTs of sugar, of which only 455 are working. These mills are located in 18 states of the

country. Around 312 of the total installed mills are in the cooperative sector, 205 in the private

sector and 64 in the public sector (Sthece: Directorate of Sugar). The no. of factories in the private

sector has increased by more than 15% which shows the corporatization of sugar production. But

majority of the industry is still fragmented with more than 50% of the industry represented by the

co operatives. Maharashtra has been the most enterprising of the states in starting new factories

which increased from 102 in 2004/05 to 142 in 2005/06.




Sugarcane Availability

Sugarcane occupies about 4.2% of the total kharif area under cultivated area and it is one of the

most important cash crops in the country. The area under sugarcane has gradually increased from

2.7 million hectares in 1980-’81 to 4.3 million hectares in 2005-06, mainly because of much larger

diversion of land from other crops to sugarcane by the farmers for economic reasons. From a level

of 154 MMT in 1980-1981, the sugarcane production increased to 241 MMT in 1990-1991 and

further to 297 MMT in 2006-2007 (Sugar India Yearbook).




Sthece: ICRA sugar sector analysis

Production Mix

Most of the mills in India are not equipped to make refined sugar. Mills which are designed to

produce refined sugar can manufacture sugar not only from sugarcane but also from raw sugar

which can be imported. Therefore, such mills can run their production all the year round, as

opposed to single stage mills which are dependent upon the seasonal supply of sugarcane Due to

good demand and bulk requirement, a lot of millers have shown interest in producing Raw Sugar

this year. It is to be seen if this latent demand can be converted into an opportunity and India can

establish itself as a bulk exporter of Raw Sugar.

Global Sugar Scenario

Supply and Demand

During the 2006/07 crop cycle, production exceeded consumption by over 10 mln tons. Global

cane sugar production shot up to 131 mln tons from 110 mln tons in 2005/06, a jump of 19%.

World sugar production totaled 162.6 mln tons, balance contributed by Beet Sugar. Global

consumption grew by 5.3 mln tons to 152.4 mln tons. The year on year consumption growth




increased to 3.5% from 1.8% in 2005/06. 2006/07 saw a major swing from deficit to surplus, with

much of the growth in production coming from the Asian countries, especially India which turned

into an exporter in January, 2007 and has thus swung the world sugar balances in the other

direction.

Major Sugar Producers

India and Brazil continue to dominate the global sugar production followed by China, Thailand

Mexico and Australia. In SY 2006-07 India and Brazil together contributed more than 60 mln MT

out the total 131 mln MT of sugar produced from cane. Top ten countries produced more than 80%

of the total production.

World Sugar Consumption

Currently 69% of the world’s sugar is consumed in the country of origin whilst the balance is

traded on world markets. India is the largest consumer of sugar and consumption has grown faster

in Asia than across the world. Long-term potential for consumption growth, particularly in




Southern African countries, remains positive. Consumption growth in China has increased as a

result of the buoyant economic conditions currently being experienced in that country.

2007/08 Estimates

According to the International Sugar Organization (ISO) said that 2007-2008 sugar production

would reach 165.6 million tons, up 3 million tons on the year. It also said the 2007-2008 surpluses

would be around 10.8 million tons. World consumption is projected at 156.8 million tons, up 2.3%

from 2006- 2007. The ISO also predicted that India would become the world’s largest sugar

producer in 2007-2008, replacing Brazil. They forecast India’s production at a record 33.15

million tons, up 2.55 million tons on the year.

World Sugar Prices




Higher world market prices during the past two years provided the incentive amongst sugar

producers worldwide to expand their cane and beet sugar crops. The resultant increased sugar

availability has served to dampen world market prices which have fallen from US20 cents/lb in

February 2006 to less than 9.5 US cents/lb at the end of July 2007.

Globally sugar is standardized as either raw sugar, which is traded on the NYBOT or Refined

Sugar traded on the LIFFE exchange, London. There are a lot of other regional exchanges in Major

producing countries like Brazil and India, but liquidity and participation remains dominant in the

NYBOT and the LIFFE.




Recent Developments

Preferential prices in the EU and US remain at a significant premium to the world sugar price. In

terms of the EU Sugar Regime reform, a uniform price is now being paid for ACP (African,

Caribbean and Pacific) and EBA (Everything But Arms) sugar protocol exports.

The EU sugar regime has changed from the year 2006/07 with most of the preferential quota being

abolished by the April 2005 WTO ruling. This created a glut of refined sugar globally in March –

May 2007 leading the prices rally to more than 400$ per tonne

A lot of standalone refineries have been announced to fill the gap left by the exit of the European

Sugar which have again depressed the world refined sugar prices to the lows of 270$ per tonne in

August 2007.

Going forward India is going to play a very crucial role in World Sugar Trade. Policy decisions

and Production figures in India would have substantial impact on the world sugar prices.




Competitive Strengths

The Company believes that we have distinct and different competitive strengths in the businesses.

1. Shree Renuka Sugars Ltd. is fully integrated player

As opposed to a conventional sugar mill, where the primary product is sugar and the by-products,

bagasse and molasses are sold to third parties, an integrated sugar mill is able to extract the

maximum value out of sugarcane by being able to produce value added products like Ethanol,

Power, and Bio fertilizers from molasses, bagasse and press mud respectively. The Company is

able to process sugarcane into all three co – products i.e. Sugar, power and ethanol. Further, the

Company’s integrated distillery provides several advantages such as -

a. They need not have to sell molasses to third parties

b. Ready power and steam is available for ethanol from the co-generation plant

c. A number of sugar mills in the region do not have attached distilleries. This enables the

Company to have access and buy molasses as and when required.

2. Reduced impact of seasonality by processing of raw sugar

The manufacturing processes at Munoli and Athani facilities are designed as such that can produce

sugar not only from sugarcane but also from raw sugar.

The uniqueness of the Company’s business model is that its operations can run on two feed stocks

- sugarcane and/or raw sugar. The Company, in the intermediate stage, extracts raw sugar from

cane and then processes this intermediate raw sugar into refined white sugar. In the off-crushing

season, the Company runs the second intermediate process, producing refined white sugar on a raw

sugar feed. The benefits of such dual feeding are Multi- pronged -

a. Greater fixed asset utilization and distribution of fixed overheads; and

b. Reduced impact of seasonality of the sugarcane crops.

c. Higher level of operations.




SRSL is one of the few mills in the country to leverage double feed operations.

3. Superior utilization of fixed assets

SRSL achieve higher capacity utilization and asset turnover as compared to industry due to longer

operating season in the region, higher sugar content in available cane, and dual raw material

capability. All India average for duration of crushing was 96 days in SY 2005 and 126 days in SY

2006 [Source: Indian Sugar, Vol. LVII, July 2007]. They were able to operate the factory for a

longer period. We operated the mills for 208 days in SY 2004, 329 days (including sugar refining)

in SY 2005 and 230 days in SY 2006. During the nine months ended June 30, 2007, we have

already operated for 269 days (including sugar refining).

4. Access to superior technology for refining of sugar

SRSL have a tie-up for technical expertise in refining operations with Tate & Lyle Industries Pte

of UK, which is a GBP 4.07 billion company and one of Europe’s largest sugar refiner. The sugar

refinery was set up with technical assistance from Tate & Lyle Industries Pte of UK. We have

entered into a Memorandum of Understanding with Tate & Lyle Industries Pte of UK, whereby

they will render technical assistance on an ongoing basis for further development of refining

capability and development of value-added products.

5. Company sales are focused towards corporate and industrial buyers

Sugar traditionally was sold in the wholesale market to agents and dealers. SRSL believes in

marketing sugar directly to corporate and industrial buyers to capture a larger market share.

Dealing with corporate and industrial buyers has several benefits like:

� Scope to fix prices in advance and reduce price risk;

� Reduced working capital cost due to increased comfort for working capital lenders; and

� Reduced dependence on brokers for sale of sugar.




SRSL supplies sugar to multinational companies who manufacture carbonated soft drinks, fruit

juices, chocolates, baby food and dairy products. Corporate sales constituted 20% of the gross

sugar sales Some of their key corporate buyers of sugar are Hindustan Coca Cola Beverages

Private Limited, PepsiCo, ITC Ltd, Britannia Industries Limited, Nestle’ India Limited, Cadbury

India Limited, to name a few.

6. Prominent trading presence in India’s international sugar trade

The Company is active in international trading of sugar from India. The exported 558,297 MT of

sugar between 2002-2007 and are ranked 2nd (Source: Indian Sugar Mills Association)in terms of

overall exports of Indian sugar in terms of quantity. They have imported 381,458 MT of raw sugar

between 2002-2007. Their wholly owned subsidiary, Renuka Commodities DMCC is active in

third country trade of sugar, which gives them a continuous presence in India’s key export

markets. The Company has also been awarded a 2 star export house status by the Director General

of Foreign Trade (DGFT), Government of India. Trading in sugar gives the Company an enhanced

trade flow much larger than its own manufactured sugar. This translates into a deeper and wider

exposure to price trends and customer buying patterns in both domestic and international sugar

markets.

7. Locational Advantage

Another strong positive for the Company is the advantage of being located in south India. Sugar

companies in south India are inherently at an advantage over northern India mills as:

a. They have a longer crushing season.

b. The market for co-generated power has matured in these States with proven stability in off take

and payments from the electricity distribution companies.

c. The Company, located in south India, are closer to ports and that opens up a cost-effective

option of extending sugar-producing capacity through the raw sugar-refining route.

d. They operate in a free market compared to north Indian sugar mills.

Moreover, they operate in the “high recovery area” of southwest India, where sucrose content of

cane is 10%-20% more than elsewhere in the country. South Indian mills have far higher yields as




compared to the north Indian belt of Haryana and Uttar Pradesh. This is due to a far longer

crushing season for south Indian mills and also higher sucrose content in cane crushed in

southwest India. The Company plants are located close to the ports of Goa and Karwar

(approximately 160 km. and 200 km. respectively). The average door-to-door shipment is less than

24 hthes, compared to around 3-4 days for a north Indian mill. Transport costs for a near-coast mill

like this Company are about Rs.500–Rs.600/ MT of sugar versus a north India based mill, for

which it costs around Rs.1,000–Rs.1,200/ MT. This translates to a cost ratio of around 1:2.

8. Excellent relationship with sugarcane farmers.

SRSL believe that they have excellent relationship with sugar cane farmers. As shareholders, the

farmers enjoy benefits of sharing profits of the Company. They also make sure that payments to

sugarcane farmers are made in a timely manner. They have formed a trust, Shree Renuka Sugars

Development Foundation, which mainly focuses on promotion of education, healthcare and overall

betterment of the farmers and the local community. They believe this strong relationship is a

significant competitive advantage because farmers have no obligation to grow sugarcane and may

switch to crops that may be more profitable. They also coordinate and manage the harvesting and

transportation of cane, which saves the farmers effort, time and money. This also enables them to

get fresh and mature sugarcane, which increases the yield of sugar.

9. An elaborate sugarcane collection network.

In order to carry out cane development and cane procurement activities effectively and smoothly,

they have a dedicated cane department to control and supervise the cane development and

procurement activities. They purchase sugarcane directly from the farmers without involvement of

any intermediaries. Based on the age of the crop, variety and maturity, a harvesting program is

chalked out for desired quantity and quality of cane to be procured on a day-to-day basis. The

Cane Managers issue cutting orders / harvesting permits based on date-wise cum pre-harvesting

maturity survey. Accordingly cane transporting vehicles along with harvesting groups are allotted

for harvesting and transporting cane to the mill.




10. Committed and experienced management team

Mr. Narendra Murkumbi, Managing Director is a post graduate from IIM Ahmedabad and was

inducted on the Board of ICICI Bank Limited in recognition of his expertise and involvement in

the sugar industry in India. This is reflected in the way the management is planning the future

growth and taking advantage of the improving dynamics of the sugar industry. Since inception the

Company has gone about in a systematic manner to increase the manufacturing capacities to gain

advantages of economies of scale. Mr. Murkumbi pioneered the strategy of acquiring and putting

to use leased assets for sugar manufacturing from the loss making co-operative mills at very low

costs. This helped the Company to scale up the operations within a short span of time.

11. Human resources

They have a highly qualified and well-trained workforce of 1,233 employees as at September 30,

2007. This includes over 650 technically qualified workforce which constitute 53% of the

workforce. They believe that we are one of the few sugar companies in India to have in place an

employee stock option plan (“ESOP”) which rewards the performance of the employees.

12. Prudent management of financial resources

SRSL believe that the optimal utilization of financial and other resources is a key element for

achieving success in this industry. Their strategy is to focus on the capital utilization and structure,

so as to optimize their returns. They also actively engage in the analysis and identification of sugar

mills which they believe would maximize the returns, and accord priority to such mills.

They have implemented internal reporting systems that enable them to carefully monitor cash

flows regularly. Their aim is to not overextend the financial resources in any single project, while

at the same time assisting adequate cash flow to be generated to enable work progress. They are

endeavoring to minimize the cost of capital through regular reviews of capital requirements, as

well as periodic renegotiation of the terms of debt.

13. We operate integrated ethanol facilities

Integrated ethanol facilities provides them with several advantages like:




• Able to add value to molasses produced from the plants, and need not sell any molasses to third

parties

• Cheap power and steam is available for the distillery from the co-generation plant

• Effluent (spent-wash) can be processed with press mud into bio-fertilizers and compost

• A number of sugar mills in the region do not have attached distilleries. This enables us to buy

molasses, if required

14. The Company has a fuel ethanol plants attached to the distillery

They are one of the few distilleries, which are equipped to manufacture fuel ethanol from ethanol.

Fuel ethanol is gaining momentum due to rising oil prices. The GoI is encouraging the use of fuel

ethanol as a motor fuel since it is considered to be less polluting and also a renewable source of

energy (since it is sourced from an agricultural product, which can be re-grown). Subject to

fulfillment of certain conditions, GoI has mandated blending of 5% ethanol in petrol across the

country except North East, Jammu & Kashmir and Island territories. They supply fuel ethanol to

various oil companies such as IOCL, HPCL and BPCL for blending in petrol.

15. Government policy encourages co-generation.

The Government of India has prescribed that a certain percentage of energy from alternative

sources has to be purchased by distribution companies and has also allowed open access, which

will enable us to sell power to third parties also. The electricity regulatory commissions of

Maharashtra and Karnataka have also prescribed preferential tariffs for electricity produced from

renewable energy sources including cogeneration.




Company’s Strategy

The corporate vision is to be the most efficient processor of sugarcane and the largest marketer of

sugar and ethanol in the country. The strategies for meeting these objectives are as follows:

1. Bio-fuels strategy: To consolidate its leadership position in the fuel-ethanol market, we

have taken the following steps:

i. Consolidate leadership in Fuel ethanol market –

They are the market leaders in the fuel-ethanol market in India. During the tenders which were

brought out by the oil marketing companies (OMCs) for the blending 5% ethanol with petrol, they

were able to garner 20% market share in the process. This meant that they would be supplying 217

million litres of ethanol to the OMCs over a period of 3 years at a fixed price of Rs.21.50 per litre.

They intend to consolidate the leadership position in the fuel-ethanol market, when the blending

increases to 10%, which the government is planning to introduce shortly. As part of this plan, SRS

have also announced new capex which would take the production capacity to 900 KLPD from 450

KLPD over the next two years.

ii. Acquisition of ethanol manufacturing assets to cater fuel ethanol market:

SRSL have acquired a stand-alone ethanol plant with a capacity of 100 KLPD which could be

expanded to 300 KLPD. This will help the Company in cutting down transportation costs for

supply of Ethanol contracts to the Oil Marketing Companies (OMC) located in coastal States of

Goa, Karnataka and Kerala and for export purpose. They have firm orders from Oil Marketing

Companies for supply of ethanol over the next 3 years. They intend to increase the manufacturing

capacity of ethanol from 100 KLPD to 300 KLPD, to cater to the fuel ethanol market in southern

States of India..




iii. Acquisition of ethanol EPC & equipment manufacturing capability –

SRS have acquired 54% stake of KBK Chem-Engineering Pvt. Ltd. (KBK) for a consideration of

Rs 400 million. KBK is an engineering Company, primarily engaged in providing turnkey

solutions (EPC Contracts) in the field of Distilleries, Ethanol plants and Bio-fuels and about 50%

of its revenues are from overseas projects. This acquisition provides a platform for leading the

innovation into flexi production, new feed stocks and cellulosic processes. It also enables to

undertake Research & Development on design and development of process technology.

iv. Overseas acquisitions and investments:

SRS are also evaluating potential overseas acquisitions and investments in the Biofuels space to

take advantage of the fast growing global Biofuels market. There is a global interest in Biofuel

blending programme and the company intends to have its presence in the international market.

2. Expand the installed capacity for an increased market presence:

SRS intends to enhance the manufacturing capacity of ethanol from 450 KLPD to 900 KLPD and

power generation capacity from 103.5 MW to 129 MW with an exportable surplus of 70 MW. This

expansion will help us to leverage the capacities for the increased blending programmes

announced by the Government of India and to be an active power trading player.

3. To set up a state- of- art refinery capacity

SRS intends to set up a state-of-the-art manufacturing capacity of 2,000 TPD port-based refineries

in Haldia, West Bengal. This refinery would use raw sugar and convert it into European grade

sugar which fetches a 30 premium in the world market. This refinery is strategically placed for




servicing domestic and export markets and can operate round the year on combination of domestic

and imported raw material. The facility has capacity to process up to 700,000 Tons of sugar per

year. They have a refinery of 1,000 TPD capacity at the existing plant in Munoli, Karnataka and

has been operating the same for the last three years. Now, we intend to set up refineries of 1,000

TPD capacity at Athani and 2000 TDP at Haldia. These refineries would also be able to produce

European grade sugar.

4. Achieve greater raw material security.

SRS pursues cane development initiatives and facilitate crop loans to increase cane production in

the reserve area. Acquisitions / leasing of other sugar mills allow them to cover more cane areas.

They provide quality seeds, other agri-inputs, fertilizer subsidies to farmers. They have taken steps

to educate the farmers about the economics of growing cane as compared to other crops. They also

have taken initiatives for development of irrigation sources as well as taking up land development

to bring additional acreage under cultivation, which is either barren or unsuitable for growing cane.

5. To reduce price risk in sugar by hedging

SRS intends to use the large trade flow, which consists of the sales of manufactured and traded

sugar to manage price risk. They have membership at the National Commodities and Derivatives

Exchange (NCDEX). They will actively utilize NCDEX and international commodity exchanges

to fix the prices of sugar for forward sales. The percentage of forward cover is decided by their

internal risk management team and is driven by their perception of trends in the market. This

hedging strategy provides them with protection to the price volatility in commodity market and

stable revenue flows.

6. Maintain a strong presence in the export markets

SRSL is one of the largest exporter of sugar in India. They have exported 46% of their sugar

during the nine months ended June 30, 2007. They intend to be a prominent supplier of high




quality European grade sugar within Asia where they will be in a position to supply not only the

in-house manufactured sugar but also traded sugar.

7. Entitlement to carbon credits in the Cogeneration plant

Bagasse based cogeneration plant at Munoli has qualified as a Clean Development Mechanism

(CDM) project which entitles us to generate Carbon Credits under KYOTO protocol. This project

will be eligible for Carbon Credits based on the units of power sold from the Munoli co-generation

plant. They have also applied for the other projects at Athani and Havalga to be eligible as a CDM

project and are expecting toreceive the eligibility certificates soon, which would help them to

sell/trade carbon credits from all the units on an ongoing basis.

Recent Developments in the Company

During the last nine months the following proposals were approved and informed to the

Exchange:

• The Company has contracted to supply 217.32 million litres of Ethanol to the Oil Marketing

Companies (IOC, HPCL & BPCL) for a period of three years upto October, 2009. They have a

20% share of the total tendered quantity of 1061 million litres making us the market leaders in

India.

• Pursuant to the provisions of Chapter XIII of the SEBI Guidelines, they have issued and allotted

1,000,000 convertible warrants of Rs.10 each to Shree Renuka Sugar Development Foundation,

Shree Renuka Sugar Employees Welfare Trust and Murkumbi Industries Private Limited on




September 7, 2007. These warrants can be exercised within a period of 18 months from the date of

the issue at a price of Rs. 625. 71/- per Equity Share

• The "Compensation Committee" of the Board of Directors has approved, by circulation on 28th

June, 2007, grant of 2,38,000 Stock Options to the employees/Directors under the ESOS -2006.

The price per share to be allotted on exercise of Options is Rs.591 Vesting of option is as under :-

(1) 50% of the options granted to the employees shall vest on 28th June, 2010.

(2) 50% of the options granted to the employees shall vest on 28th March, 2012. The options shall

be exercised within three years from the date of vesting or Five years from the date of granting,

whichever is later.

• The Company has acquired a 54% stake in KBK, an engineering company primarily engaged in

providing turnkey solutions in the field of distilleries, Ethanol plants and bio-fuels. The above

acquisition was made for a consideration of Rs.400 Mn

• The Company has set up a wholly owned subsidiary viz. Shree Renuka Biofuels Holdings FZE

in Sharjah International Free Zone (SAIF Zone) for its overseas investments".

Expansion Phase 1:

1. In the current year SRS have expanded the cane crushing capacity at their plant in Munoli,

Karnataka to 7500 TCD and the cogeneration capacity to 35.5 MW.

2. They have commissioned a 4000 TCD plant at Havalgah, Karnataka.

3. They have enhanced the crushing capacity at the leased facility at Arag, Maharashtra from 2500

TCD to 4000 TCD.

4. The company has completed a green-field plant and commenced crushing operations at Athani,

Karnataka. The plant has a capacity of 6000 TCD and a cogeneration capacity of 38 MW.




5. They have built a 2000 TPD port based refinery at Haldia, West Bengal which will be

operational in sugar year 2007 -08.

6. They have taken on lease a sugar manufacturing unit having a capacity of 1250 TCD

of Aland Sahakari Sakkare Karkhane (N), District Gulbarga Karnataka State, for a period of seven

years starting from sugar season 2005-06 to 2011-12.Thus their Sugar manufacturing capacity has

increased to 25250 TCD, Ethanol capacity has increased to 450 KLPD and their Co-generation

capacity to 87.5 MW as of September 30, 2007. This capacity expansion required a total capex of

Rs. 7,010 million.

Expansion Phase 2:

In the second phase the co-generation capacity would be increased to 129 MW and the distillery

capacity to 900 KLPD by 2009.

Some of the key developments for fiscal year 2006 were:

ERP Implementation: We successfully implemented My SAP- ERP for seamless integration of

data from different locations and from cross functional areas of financial, sales, production etc.,

providing strong foundation for an open and transparent work environment and also providing

solid foundation for organized system of information, integration and knowledge management and

CDM Project: they became the first bagasse based cogeneration mill in the world to be

registered as a clean development mechanism (CDM) project.

Government Norms in Indian Sugar Industry

Sugar is a regulated industry in India sugar is an essential commodity, and is covered by the

Essential Commodities Act, 1955 and consequently, its production supply and distribution are

regulated by the state and central government. The Cane Commissioner of each state reserves and

assigns areas for the supply of sugarcane to factories on an equitable basis.




The purchase price of sugarcane is regulated and the central government fixes the SMP, which

must mandatorily be paid by sugar producers to sugarcane growers, within a specified time. The

Government of India, through the Sugar Directorate, can further fix the quantity and quality of

sugar that may be produced by a factory during any year and can also regulate the sale of sugar.

Sugar mills must sell a specified percentage of sugar (free sale sugar), which is currently at 90 per

cent of their production in the open market and are therefore subject to the forces of demand and

supply. However, the quantity of free sale sugar to be sold is based on the release mechanism

governed by the Sugar Directorate. 10% Levy sugar must be sold as per government directions

through fair price shops and the public distribution system at government notified prices, which

may be set below the cost of production, however exports are not subject to this release mechanism

as stated above.

Various taxes and levies are also imposed on the purchase, use, consumption and sale of

sugarcane. Any change in government policies or present regulations to the detriment may

adversely affect the business, financial condition and results of operations.

Under the Sugarcane (Control) Order 1966, the Government of India fixes the Statutory Minimum

Price (“SMP”) for sugarcane each year based on the recommendations of the Commission on

Agricultural Costs and Prices, which takes into account factors such as the cost of cultivation,

return to factories and average recovery for previous year. The SMP is fixed for a given base level

of recovery and is the minimum price that is required to pay the farmers from whom we purchase

cane.

A portion of the sugar manufactured by sugar companies is bought by the Government of India as

“levy sugar” at a price that is fixed by the Government of India. The remaining sugar is known as

“free sale sugar” and is sold at a price that is determined by market factors such as availability. The

free sale sugar prices are also controlled to some extent by the monthly release mechanism

(“MRM”), which is dependent on demand and supply of sugar.

RISK FACTORS

Risks relating to the Company




SRSL operating results may fluctuate in the future due to a number of factors, some of which are

beyond their control. Their results of operations during any fiscal year and from period to period

are difficult to predict as sugar business, results of operations and financial condition may be

materially affected by:

• Changes in demand for sugar and sugar-related products in the Indian and global markets;

• Shifting consumer preferences away from certain sweeteners and brands towards other certain

types;

• A decrease in international and domestic prices for sugars products;

• An increase in interest rates at which Company raise debt financing;

• Adverse fluctuations in the exchange rate of the Rupee versus major international currencies,

including the US dollar will affect company’s results if SRSL become a regular exporter;

• A decrease in Indian import tariffs and an increase in domestic duties on sugar and sugar-related

products;

• Increasing transportation costs, including freight to key export markets, or non-availability of

transportation due to strikes, shortages or for any other reason;

• Strikes or work stoppages by company’s employees;

• Equipment failure;

• Failure to comply with applicable regulations and standards and to maintain necessary licenses

and changes to government environmental policies and regulations;

• Changes in government policies affecting sugar industries for raw materials and the amount of

sugar it must sell in India;

• Other changes in government policies, including those relating to alcohol and power distribution,

pricing and taxation;

Risks relating to sugar business of Shree Renuka Sugars Limited




1) Sugarcane is the principal raw material used for the production of raw sugar.

SRSL business depends on the availability of sugarcane and any shortage of sugarcane may

adversely affect company’s results of operations. A variety of factors beyond the control may

contribute to a shortage of sugarcane in any given crushing season.

2) Company’s profitability depends significantly on the cost of and the selling price

that we are able to obtain for sugar.

Sugar industries are not able to set the cost of sugarcane or the selling price for sugar product.

Some of the main reasons that contribute to fluctuations in the margin between raw material cost

and the selling price of sugar are set forth below.

Under the Sugarcane (Control) Order 1966, the Government of India fixes the Statutory Minimum

Price (“SMP”) for sugarcane each year based on the recommendations of the Commission on

Agricultural Costs and Prices, which takes into account factors such as the cost of cultivation,

return to factories and average recovery for previous year. SRSL may be adversely affected if the

Government of India raises the SMP, which in turn would affect the actual price paid. Such a

situation may worsen in the event of a decrease in the selling price of sugar. A portion of the sugar

manufactured by us is bought by the Government of India as “levy sugar” at a price that is fixed by

the Government of India. The remaining sugar is known as “free sale sugar” and is sold at a price

that is determined by market factors such as availability. The free sale sugar prices are also

controlled to some extent by the monthly release mechanism (“MRM”), which is dependent on

demand and supply of sugar. On the last day of every month the Company receives a release order

indicating the quantity of sugar sold for the next month. We may be adversely affected if free sale

sugar prices decline.

3) SRSL operate in an industry where the market price for their products is cyclical

and affected by general economic conditions.




The sugar industry has historically been subject to commodity cycles and is sensitive to changes in

domestic market prices, supply and demand. The market in India has experienced periods of

limited supply, causing sugar prices and industry profit margins to increase. Sugar imports are

governed by the Government of India’s policy, which currently applies a 60 per cent customs duty

and other import tariffs on imported white crystal sugar. India is a member of the World Trade

Organization, which, under the framework of GATT, is likely to reduce tariff and non-tariff

barriers. If the Government of India creates incentives for sugar imports or reduces import tariffs,

they may face increased competition in the domestic market from foreign producers. This could

lead to increased competition from imported sugar and could cause a reduction in domestic sugar

prices which may lead to lower profits for us in the future. Conversely, years of low production

and declining sugar stocks may be followed by years of excess production that result in oversupply

of sugar to the domestic market, causing a decline in sugar prices and industry profit margins. At

present the Indian sugar industry is facing an oversupply situation, bolstered by excess production

capacity being available, which has resulted in a nearly 25 per cent decline in sugar prices from

September, 2006 to June 2007.

4) The prices they are able to obtain for the sugar that we produce depend largely on

prevailing market prices.

The wholesale price of sugar has a significant impact on company’s profits. Sugar is subject to

price fluctuations resulting from weather, natural disasters, domestic and foreign trade policies,

shifts in supply and demand and other factors beyond their control. In addition, approximately 30

per cent. of total worldwide sugar production is

traded on futures exchanges and is thus subject to speculation, which could affect the price of

sugar worldwide and the results of operations. As a result, any prolonged decrease in sugar prices

could have a material adverse effect on company’s results of operations.

5) Rising inventory levels are likely to keep sugar prices depressed and thereby

affect the results of SRSL operation




The closing stock of sugar for FY2004, FY2005, FY2006, and FY2007 was 8.5 million tons, 4.7

million tons, 4.4 million tons and 10.9 million tons respectively. Even assuming that the sugar

companies would move towards direct ethanol production, the closing stock of sugar for FY2008

and FY2009 is expected to be 13.4 million tons and 8.6 million tons respectively. Source:ISMA

and Citi .As such, rising inventory levels are likely to keep sugar prices depressed thereby

affecting the results of their operations.

6) SRSL is substantially dependent on the revenues from sugar.

Company is substantially dependent on revenues from sugar and any decline in their revenues

from sugar will adversely impact SRSL profit margins .Although company’s strategy is to actively

grow their other lines of business , their sugar business will continue to constitute a significant

portion of revenues and operating profit and any decline in the sugar revenues will adversely

affect the results of srsl operations.




Other Risks

1) Inability to manage company’s growth could disrupt their business and reduce the

profitability.

As part of company’s business strategy, they are rapidly expanding their operations by enhancing

the existing sugar refining capacity, cogeneration and bio-fuel production capacity and distillery

capacity. SRSL is also proposing to acquire and lease more sugar plants. SRSL has experienced

high growth in recent years, averaging a consolidated compound annual growth rate (“CAGR”) of

121 percent over the past three years and expect their business to grow significantly as a result of

their capacity expansion plans and increased focus on bio-fuel production. SRSL expect this

growth to place significant demands on company and require them to continuously evolve and

improve in the operational, financial and internal controls. Any inability to manage this growth

may have an adverse effect on the business and financial results.

2) SRSL derive a significant portion of their revenues from large corporate

customers. The loss of, or a significant reduction in the revenues they receive from,

one or more of these customers, may adversely affect the business.

For each of products namely sugar, ethanol and cogeneration, derive a significant portion of

company’s revenues from a limited number of customers. SRSL derive a significant portion of

sugar sales from large corporate customers, such as Nestle, Cadbury,

Britannia Industries Ltd and Coca Cola etc.. In fiscal 2005 and 2006, ten largest clients accounted

for 72.57 per cent and 73.01 per cent., respectively, of their sugar sales. We have fixed period

contracts for sugar sales with these customers and there is no certainty that such contracts will be

renewed. The cogeneration business is currently dependent on Reliance Power Trading

Corporation Limited, and the Hubli Electricity Supply Company Limited (“HESCOM”). Their

ability to purchase power from SRSL and make timely payments determines the profitability of the

cogeneration business. While the Indian Electricity Act, 2003 allows “open access” and hence

allows us to sell to third parties, currently Reliance Power Trading Corporation Limited and

HESCOM are the only purchasers of power from SRSL. Hence, any default by either of them




and/or any inability on their part to pay us for the power supplied to them, will adversely affect the

business and profitability.




Title of the project

“Comparative Profitability Analysis in sugar industry- a study undertaken of Munoli and Ajara

plant at Shree Renuka Sugars Ltd.”

Main Objectives of the Study:

o To know the profitability of Munoli and Ajara Plant.

o To estimate the Return on investment of both the Plants.

o To compare the profitability of the plants.

o To project the profitability of the plants for next 2 years.

TECHNIQUES APPLIED FOR THE STUDY


o Linear Trend Analysis.

Data Collection

o Primary Data:

Primary data are those data which are collected directly without the use of any secondary

media. such as Interaction with the company officials

o Secondary Data:




Secondary data are those which are obtained from sources

such as follows:

o Annual reports of the company

o Internal Financial records of the company

o Books

Need of the study

o To know the advantages of setting up plants at different locations.

o To know the various factors affecting the profitability.

Limitation

o Profitability analysis is a wide study which involves numerous techniques; each and every

aspect of it cannot be dealt in detail.

o As this is an external study, the results are not complete and clear as I m having a little idea

about practical difficulties facing day today, except the information provided by the SRSL;

o Lastly the study is purely academic. The experience makes this study less precise when

compared with a professional study.




In any investment proposal the following are the main points to be considered:

o Costs

o Benefits

o Risks

o Opportunity

Before an investment proposal is decided a detailed study of these factors is done so as to make the

best use of the scarce resources, to earn the best return, ensure the safety from any risk and utilize

the opportunity in the best manner.

For estimating the profitability of a proposal various items and indices are used.

Capital Employed

This represents the total money invested in construction of the project as well as initial working

capital. Thus, capital employed is equal to:

o Fixed capital cost.

o Amount of working capital.

Fixed capital cost is the total cost of the project. However, this will not include the cost of spares,

training cost and margin money for working capital. The provision for these items is made only for

financing purpose as these are not capitalized.




Working capital is the initial expenditure for procurement of raw materials, payment of labour,

operating expenses and other overheads till the finished product is sold and cash is realized. The

cycle normally takes 3 months to 6 months.

However for estimation purpose working capital is generally taken equivalent to 3 months of the

cost of production excluding interest and depreciation.

Benefits

The next item to be estimated is the benefits. Benefits may be in the form of following

o Net profit in case of new project

o Additional production resulting in additional revenue on incremental basis

o Reduction in the cost of production at the same level of production

o Lower rejections/wastages

o Better working condition

o Lower pollution and total pollution control

o Energy conservation

o Better information system

o Import substitution thus saving foreign exchange.

Cost of production and services

In the process of estimation of profitability of the project the next step is to estimate the cost of

production or services of the products or services, the project would be generating. In case of a

new project this would be fresh exercise for working out cost of production. Similarly, in the case

of running plant the total production process shall be reviewed and additional operation shall be

identified for ascertaining the additional cost. This may be on the basis of incremental cost.




Elements of cost generally are:

o Raw Materials

o Labthe

o Power and Fuel

o Repairs and Maintenance

o Stores and Spares

o Operating cost

o Overheads

For working out the raw material cost, norms of consumption of various materials are estimated.

Similarly for labour, number of workers and for power, units of consumption shall have to be

estimated.

Gross Margin

The term Gross Margin denotes the difference between the net sales/net benefits or savings and

cost of production and services before depreciation and interest.

Depreciation

Depreciation is worked out on straight line method which forms the basis for the purpose of

profitability evaluation.

Interest on Long Term Loans

Interest on long term loans for the project shall be worked out on the basis rate of interest of the

particular loan. In case there is more than one loan with different rates of interest, in that case a

weighted average rate shall be applied to work out the total interest charged.

Interest on Working Capital Loan

On the short term loan from the commercial banks for financing working capital, interest is

worked out at the prevailing rate. This may be from cash credit facility. Some times for working




capital, financing is done from other sources also, such as public deposit scheme, etc. thus, the rate

of interest will be accordingly applied or working out the total interest charges.

Income Tax

In arriving at the net profit, Income Tax shall be worked out on the taxable profit at the prevailing

rate of Income Tax.

Profitability Indices

After the details of net sales, net savings, cost of production, etc. have been worked out, various

profitability indices shall be calculated. These indices are as follows:

o Pay Back Period


o Internal Rate of Return by DCF (IRR)

o Net Present Value Method (NPV)

Pay Back Period Method

This method indicates the time required to recover the initial project cost through its

benefits/savings. The project with minimum pay back period is accepted.

This method is suitable where chances of obsolescence losses are very high. However, it ignores

the time value of money to be received in later years and also the income which will be earned in

later years after the pay back period. Still this method is popularly used due to its simplicity.

Return on Investment

Return on investment is worked out by dividing the net benefits/net savings after depreciation but

before interest by the capital employed. This method is simple like the pay back period method.

However, this method also lacks in considering the time value of money to be received in future

years of the project. But it is a very widely used method in the estimation of profitability because

of its simplicity.

In working out ROI following components of costs and benefits are considered:

o Capital employed. This consists of fixed capital costs and working capital.




o Net benefit/savings

o Interest on loans

o Depreciation

Internal Rate of Return

It is the rate of discount that equals the present value of the expected future cash inflows to the

present value of the cash out flows. This method is popular and is very widely used. This is mostly

used as an important profitability index in major investment proposals. In this method cash flows

for incomes as well as expenditure are discounted to bring the same to the present value. It is done

on the logic that the money received today is not the same amount, if received after one year or

after two years or so on.

In this method income as well as expenditure is considered for the entire life of the project.

Decision is based on the costs and benefits in terms of present value.

Internal rate of return is worked out by discounting the cash outflows and cash inflows from the

project. The rate of discount is the result of various trials of calculations. Thus internal rate of

return is worked out by trial or error method. However, to avoid many calculations an indicative

rate may be known on the basis of pay back period.

Net Present Value Method

This method also like IRR method considers the income of the entire life of the project and time

value of money. The present value of the expected cash flows by the project is determined by

discounting these cash flows by the company’s cost of the capital or specified rate. The rate of

discount is generally considered as the prevailing borrowing rate or current bank rates of interest.

When the present value equals or exceeds the investment, the proposal is considered favourable. In

case of alternatives, the alternative is selected with comparatively higher NPV.




Plant capacity at Munoli and Ajara

Sugar Plant Capacities (in TCD) 2005 2006 2007

Unit - I – Munoli

2,500

2,500

7,500

Unit - II – Ajara

2,500

2,500

2,500

Capacity utilization




2005 2006 2007

Unit - I – Munoli 114.50% 123.25% 52.31%

Unit - II – Ajara 94.75% 119.79% 116.36%

Sugar Recovery

2005 2006 2007

Unit - I – Munoli 10.20% 11.20% 10.87%

Unit - II – Ajara 11.41% 11.73% 12.01%

Capital Employed at Munoli plant (sugar) (Rs. in millions)

Particulars 2005 2006 2007

Fixed Capital

Building 178,423,808.46 218,321,547.00 311,610,569.00

Depreciation 4,524,827.78 5,536,634.43 7,902,444.03

NET 173,898,980.68 212,784,912.57 303,708,124.97

Land 65,355,887.97 66,127,877.00 53,350,976.00

Depreciation - - -

NET 65,355,887.97 66,127,877.00 53,350,976.00




Plant and Machinery 532,659,865.59 581,996,186.00 1,144,139,101.00

Depreciation 15,979,795.97 17,459,885.58 34,324,173.03

NET 516,680,069.62 564,536,300.42 1,109,814,927.97

Total Fixed Capital 755.93 843.45 1,466.87

Working Capital

Term Loan 165.86 165.55 175.05

Owned Funds 55.29 55.18 58.35

Net Working Capital 221.14 220.74 233.40

Total Capital Employed 977.08 1,064.19 1,700.27

Capital Employed at Ajara plant (Rs. in millions)

Particulars 2005 2006 2007

Working Capital

Bank Borrowing 67.35 140.11 134.55

Owned Funds 22.45 46.70 44.85




Net Working Capital 89.79 186.81 179.40

Rent 56.00 58.80 61.74

Total Capital Employed 123.35 198.91 196.29

Calculation of EBDIT for Munoli Plant 2005 2006 2007

Crushing 641,200 677,875 839,576

Sugar Production (MT) 65,402 75,922 91,262

Op stock 3,063 6,847 8,277

Total 68,465 82,769 99,539




Sales 61,619 74,492 89,585

Cl stock 6,847 8,277 9,954

Sales revenue

Sales: MT 61,619 74,492 89,585

Free Sale 30,809 37,246 44,792

Exports 24,647 29,797 35,834

Levy Sale 6,162 7,449 8,958

Molasses 32,060 33,894 41,979

Bagasse 211,596 223,699 277,060

Pressmud 25,648 27,115 33,583

Revenue: (Rs. in millions)

Sales

Sale sugar – Mfg 1,139.95 1,154.62 1,209.40

Sale of Molasses 48.09 67.79 92.35

Sale of bagasse 137.54 100.66 96.97

Sale of Press mud 1.28 1.36 1.68

Total Net Sales 1,326.86 1,324.43 1,400.40

Increase / (decrease in stock) 88.42 11.73 (6.34)

Total 1,415.27 1,336.16 1,394.06

Raw materials (Sugarcane) 937.43 1,024.27 975.59

Cane Development Expenses 49.67 44.73 29.80

Power 1.85 1.96 2.42

Consumables &Oths 105.49 58.93 54.57

Stores and Spares 15.05 21.03 1.99

Salaries & wages 29.29 57.07 79.00

Other Manufacturing Exp 27.69 19.70 25.59

Total cost of production 1,166.47 1,227.68 1,168.96

Cost of production / MT 17,835.33 16,170.30 12,808.81

EBIDTA 248.80 108.48 225.10

Depreciation - allocated amt 20.50 23.00 42.23

Amortisation, if any - - -

Profit After Depreciation but

before Interest and Tax 228.30 85.48 182.87

Calculation of EBDIT for Ajara plant (Rs. in millions)

2005 2006 2007

Crushing 251,088 521,087 523,620

Sugar Production (MT) 28,649 61,123 62,887




Op stock - 2,865 6,399

Total 28,649 63,988 69,286

Sales 25,784 57,590 62,357

Cl stock 2,865 6,399 6,929

Sales revenue

Sales: MT 25,784.18 57,589.52 62,357.04

Free Sale 12,892.09 28,794.76 31,178.52

Exports 10,313.67 23,035.81 24,942.82

Levy Sale 2,578.42 5,758.95 6,235.70

Molasses 12,554.38 26,054.33 26,181.00

Bagasse 82,858.88 171,958.55 172,794.60

Pressmud 10,043.50 20,843.46 20,944.80

Revenue:

Sales

Sale sugar - Mfg 477.01 892.64 841.82

Sale of Molasses 18.83 52.11 57.60

Sale of bagasse 42.42 175.05 175.90

Sale of Press mud 0.50 1.04 1.05

Total Net Sales 538.76 1,120.84 1,076.37

Increase / (decrease in stock) 52.60 41.00 (1.34)

Total 591.37 1,161.84 1,075.03

Raw materials (Sugarcane) 368.53 704.51 641.80

Cane Development Expenses 19.20 34.39 25.66

Power 0.98 2.03 2.04

Consumables &Oths 13.45 32.34 25.14

Salaries & wages 32.33 42.48 50.89

Other Manufacturing Exp 28.94 9.99 11.52

Rent 56.00 58.80 61.74

Stores and Spares 6.61 9.56 18.59

Total cost of production 526.04 894.09 837.37

Cost of production / MT 18,361.46 14,627.60 13,315.57

EBIDTA 65.33 267.75 237.66


Before Interest and Tax 65.33 267.75 237.66

RETURN ON INVESTMENT




ROI = Profit after depreciation but before interest and tax X 100

Total capital Employed

Calculation of return on investment for the year 2005 (Amounts in Millions)

Munoli

ROI= 228.3 X 100

977.08

=23.37%

Ajara

ROI= 65.33 X 100

123.53

=52.96%


Munoli

ROI= 85.48 X 100

1064.19

=8.03%

Ajara

ROI= 267.75 X 100

198.91

=134.61%





Munoli

ROI= 182.87 X 100

1700.27

=10.76%

Ajara

ROI= 237.66 X 100

196.21

=121.08%




Projections for the year 2008 and 2009 Munoli (Rs. in millions)

2008 2009

Crushing 917,926 1,017,114

Sugar Production (MT) 107,122 119,206

Op stock 9,954 11,708

Total 117,076 130,913

Sales 105,368 117,822

Cl stock 11,708 13,091

Sales revenue

Sales: MT 105,368 117,822

Free Sale 52,684 58,911

Exports 42,147 47,129

Levy Sale 10,537 11,782

Molasses 45,896 50,856

Bagasse 302,916 335,648

Pressmud 36,717 40,685

Revenue:

Sale sugar - Mfg 1,443.55 1,649.51

Sale of Molasses 110.15 132.22

Sale of bagasse 90.87 100.69

Sale of Press mud 1.84 2.03

Total Net Sales 1,646.41 1,884.46

Increase / (decrease in stock) 15.18 17.52

Total 1,661.59 1,901.98

Raw materials (Sugarcane) 1,101.51 1,220.54

Cane Development Expenses 21.44 32.84

Power 2.37 2.77

Consumables &Others 50.00 48.70

Stores and Spares 3.00 3.00

Salaries & wages 104.83 129.69

Other Manufacturing Exp 22.30 21.18

Total cost of production 1,305.45 1,458.71

Cost of production / MT 12,186.55 12,236.93

EBIDTA 356.14 443.27




Depreciation - allocated amt 60.00 60.00

Amortization, if any - -


before Interest and Tax 296.14 383.27




Ajara 2008 2009

Crushing 664,464 770,731

Sugar Production (MT) 78,274 91,023

Op stock 6,929 8,520

Total 85,202 99,544

Sales 76,682 89,589

Cl stock 8,520 9,954

Sales revenue

Sales: MT 76,682.18 89,589.22

Free Sale 38,341.09 44,794.61

Exports 30,672.87 35,835.69

Levy Sale 7,668.22 8,958.92

Molasses 33,223.20 38,536.55

Bagasse 219,273.12 254,341.23

Pressmud 26,578.56 30,829.24

Revenue: (Rs. in millions)

Sales

Sale sugar - Mfg 1,111.89 1,254.25

Sale of Molasses 79.74 100.20

Sale of bagasse 65.78 76.30

Sale of Press mud 1.33 1.54

Total Net Sales 1,258.74 1,432.29

Increase / (decrease in stock) 20.70 17.36

Total 1,279.44 1,449.64

Raw materials (Sugarcane) 797.36 924.88

Cane Development Expenses 32.84 36.07

Power 2.91 3.66

Consumables &Others 35.33 41.19

Salaries & wages 60.46 69.74

Other Manufacturing Exp 24.00 26.00

Rent 64.83 68.07

Stores and Spares 20.00 22.00

Total cost of production 1,037.72 1,191.61

Cost of production / MT 13,257.61 13,091.24

EBIDTA 241.71 258.04

Depreciation - allocated amt - -

Amortization, if any - -





Before Interest and Tax 241.71 258.04


Munoli

ROI= 283.50 X 100

1246.06

=22.75%

Ajara

ROI= 300.93 X 100

274.62

=109.58%


Munoli

ROI= 383.27 X 100

1327.44

=28.87%

Ajara

ROI= 333.91 X 100

306.91

=108.80%




PROFIT MARGIN

Profit margin = Profit after depreciation but before interest and tax X 100

Net sales

Years 2005 2006 2007 2008 2009

Ajara 12.13% 23.89% 22.08% 23.91% 23.31%

Munoli 17.21% 7.37% 5.79% 17.22% 20.34%




Chart showing the trend for Return on Investment

ROI (Munoli)

23.37

9.17

4.77

22.75

28.87

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

2005 2006 2007 2008 2009

Years

Re

turn

s




ROI (Ajara)

52.96

134.61121.08

109.58 108.80

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

2005 2006 2007 2008 2009

Years

Retu

rns

Chart showing the trend of Profit Margin

Profit Margin(Munoli)

17.21%

7.37%5.79%

17.22%

20.34%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2005 2006 2007 2008 2009

Years

Pro

fit(

%)




Profit Margin(Ajara)

12.13%

23.89%22.08%

23.91% 23.31%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2005 2006 2007 2008 2009

Years

Pro

fit(

%)

Interpretation

o Return on Investment

2005 2006 2007 2008 2009

Munoli

23.37%

9.17 %

4.77%

22.75%

28.87%

Ajara

52.96% 134.61% 121.08%

109.58%

108.80%

o Profit Margin

2005 2006 2007 2008 2009




Munoli 17.21% 7.37% 5.79% 17.22% 20.34%

Ajara 12.13% 23.89% 22.08% 23.91% 23.31%




Plant wise comparison

o The return on investment and the profit margin of Ajara plant is higher than that of

Munoli plant due to the following reasons:

1. The percentage of recovery of sugar in Ajara plant (12.01%) is higher as

compared to Munoli plant (10.87%) in the year2007.

2. The capacity utilization at Ajara plant (116.36%) is higher as compared to

Munoli plant (52.31%) in the year 2007.

3. The over all cost of production at Munoli plant is higher to that of Ajara plant.

4. Except some of the costs like transportation, power, rest all costs of production

of Munoli plant is higher than Ajara plant.

5. The quality of the machineries used in Ajara plant is good as compared to the

machineries used in Munoli plant.

6. Ajara plant is a leased plant and the capital investment is very low as compared

to the investment done in Munoli plant.

7. The cane development expenses paid is very less in Ajara plant where as it is

comparatively higher in Munoli.




Year wise comparison

o The profits and the returns of Munoli plant in the year 2005 are higher than that of

2006,2007 Because of the following reasons:

1. In the year 2007 the plant capacity of Munoli plant was increased from

2500TCD to7500TCD but the recovery of sugar was comparatively less in that

period. Due to the expansion in the capacity the expenses of manufacturing

were also huge and the Sugar prices also reduced.

2. In the year 2005 there were droughts in India which affected the production of

sugarcane.

o The profits and the returns of Ajara plant in the year 2005 are lower than that of

2006,2007 Because of the following reasons:

1. Ajara plant was a sick unit which was taken over by SRSL in the year 2005 so

the returns were less in the first year(2005)

2. The capacity utilization in the year 2005 was 94.75% as compared to the

utilization in the year 2006 & 2007 which was above 100%.




.




Suggestions

o Ajara plant is highly profitable plant; SRSL should consider it as a good option for

acquisition so that they can go for expansion and increase its profitability.

o .The profitability and returns of Ajara plant shows growth, which is a good sign for

SRSL and they can further think of increasing the capacity of Ajara plant.

o The Sugar industry is growing at the rate of 3.5% and SRSL can make huge profits

from Munoli plant in the coming years if the machineries used in the plant are properly

rectified and maintained.

o As the sugar industry undergoes a cycle of growth and depression once in 2 years SRSL

has to increase its productivity by increasing the recovery rate of sugar and its capacity

utilization to maintain its level of returns and profitability.




o Ajara plant shows returns at a higher side as compared to Munoli plant as the capital

invested in the Ajara plant is very low as compared to the investment made in the

Munoli plant.

o Ajara plant is more profitable than Munoli plant as the rate of recovery and the capacity

utilization of Ajara plant is higher than that of Munoli plant.

o In the coming years both the plants have the required strength to sustain the

competition for maintain good returns and profit margin.




Books:

o Project Management and Control by Narendra Singh, 2nd

edition.

o Financial Management by M.Y. Khan & P.K. Jain 4th

edition.

Web Sites:

o www.shreerenukasugars.com

o www. Babasabpatilfreepptmba.com

http://www.shreerenukasugars.com/

renuka sugar comparative study

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