Risk of Business Disruption due to COVID-19

Before dwelling on the normal business risks, it is imperative to evaluate the recent emergent risks as a result of COVID-19. The pandemic has brought about most unprecedented public health and socio-economic crisis in our lifetime across the globe. To check the spread of virus, the Government declared complete lockdown from March 25, 2020 till May 3, 2020 during which period only essential services were permitted to operate. Subsequently, the lockdown was relaxed in phases. Many sectors of the economy had been badly hit due to disruption in activities, lower demand, financial crunch, disruption in supply chain and reduced supply of labour.

The major business of the Company – Sugar along with Cogeneration and Distillery, being essential goods in nature, operated uninterruptedly during the lockdown period with the active support of the State and Central Government in overcoming supply chain challenges. The demand of sugar and ethanol declined temporarily during the lockdown period but these were normalized within a few months. The business operations of engineering business were impacted during the lockdown period due to the closure of the factory/project sites but these resumed normal operations by the middle of May 2020. In the subsequent few months, the activities were normalized but there was some loss of business due to inability of customers to take deliveries, delayed order finalization / booking and restriction to travel and interact physically with customers. The business conditions were largely normailised by the 3rd quarter, but the 2nd wave of the pandemic in the 4th quarter has again slowed down the process. There is some degree of uncertainty on when the full normalcy would return and until then, there would be greater reliance on IT tools to connect with customers and transact business to the extent practicable. Equally importantly, the health and welfare of employees and their families is important and the Company would be focusing on this area, including ensuring vaccination for all. It will help to minimize interruptions to the business.

SUGAR BUSINESS

Sugar business is exposed to significant external risks, which mostly are uncontrollable and thus, it is imperative to optimise the controllable business productivity and efficiencies on a dynamic basis to counteract the impact of such external risks. The internal risks are moderate and are by and large predictable and manageable.

It is the objective of the Company to be amongst the top performers in UP, much above the average, so that it remains less impacted by the cyclicality associated with this industry. During SS 2020-21, the Company has achieved recovery of 11.86% (after adjustment of B-heavy molasses) – 44 basis points higher than the average recovery achieved in Uttar Pradesh.

Some of the key external risks to which the Sugar business is exposed are described herein below:

Risk of over dependence on Government’s policies and support

Risk of sugar production in excess of domestic consumption

The all India production in the SS 2020-21 is expected at ~30.9 million tonnes, which is 12% higher than the previous season and against domestic consumption of ~ 26 million tonnes. With opening sugar inventories of 10.7 million tonnes, excess of production over consumption by 4.9 million tonnes, the sugar inventories may further increase unless the surplus stocks are exported. It will lead to higher inventory holdings, increased working capital requirements, higher finance costs and liquidity constraints.

Mitigation

The Government has been actively promoting export of sugar for the last several years to evacuate surplus sugar and provides subsidy to undertake exports. It has again introduced a scheme for exports up to 6 million tonnes for the SS 2020-21 along with export subsidies. Pursuant to the scheme, the target exports are expected to be achieved and in view of firm international prices, the actual exports may exceed the target by up to one million tonnes, which will be without export subsidies. Thus, the sugar inventories at the end of the SS 2020-21 is expected to decline by around 2 million tonnes, which augurs well for the sugar prices and working capital management.

The Government has been supporting production of Ethanol by using B-heavy molasses and sugarcane juice which results in diversion of sugar. The diversion of sugar is estimated at ~ 2 million tonnes in the SS 2020-21 and will progressive increase as further distillation capacities are set up to achieve Government’s target of 20% Ethanol blending by the year 2025.

Pursuant to such policies, our Company has exported significant sugar in FY 21, equivalent to 22% of the production during the year and produced 56% Ethanol from B-heavy molasses. Consequently, the sugar inventory as on March 31, 2021 is 17% lower than the previous year.

As sugarcane prices are unrealistically high, it may not be feasible to compete in the world market on costs without export subsidies. Hence, diversion of sugar for ethanol production is a useful mechanism to achieve fuel security along with maintaining optimal sugar stocks.

ENGINEERING BUSINESS

The Power Transmission business and Water businesses are in the capital goods and infrastructure sectors and are largely dependent on the industrial and general economic conditions in the country which regulate demand of the products of our Engineering businesses. These businesses are exposed to the following major risks:

Risks

Risk of economic slowdown

Slowdown in the economy results in sluggish demand of the products of the user industries, which in turn has adverse effect on investment spend on capital goods required for capacity creation or modernisation.

Scarcity of funds

The sluggish demand puts financial stress on the industrial companies and in view of stressed financials and risk aversion, the lenders generally subject the projects to stringent diligence before arriving at funding decisions. The user industries are forced to defer their expansion plans in view of delay in funding, resulting in poor off-take of capital goods.

Technology risks

It is extremely vital for the Engineering business to offer technology and benchmark efficiencies at par with the competition and in the event of a significant gap in its offerings as compared to its peers, the customers may not prefer the products of the Company.

Project delays and payment risks

On account of financial problems with customers, including non-achievement of financial closure, the project may get delayed, resulting in credit risks, cost overruns and blockage of working capital.

Mitigations

Power Transmission business (PTB)

PTB has fared well in FY 21, given the scale of challenges and constraints it faced due to Covid-19. Order booking during the year was almost at the same level as last year, which is an indication of normalisation of its business activities. The business model of Gear Business is robust with main verticals being supply of Gear boxes to OEMs and Aftermarket services, including retrofitting and refurbishment business, with a focus to expand export footprints. The Company is working on new areas, such as manufacturing of gear internals to other OEMs under ‘Built-to-Print’ and foray into Defence sector using a range of products which are aligned to ‘Make in India’ initiative. The diversified business model will enable Gear Business to avoid overdependence on few sectors and withstand sector specific cyclicality.

Water business (WBG)

The order book of Water business is healthy and despite its operations getting impacted during the financial year due to COVID-19, it has reported satisfactory results. The order intake had been subdued though, in view of delayed finalization of orders. In view of strong pipeline of projects to be tendered and orders under finalization, substantial orders are expected to be secured in the FY 22 unless the impact of second wave of the pandemic is not prolonged.

The Company has an access to almost all technologies which are required to be deployed in various projects within the range and competence of the Company. The Company does proper diligence on its customers prior to accepting any order, which includes evaluating its financials, ensuring financial closure of the project, credit ratings (if any), track record and market feedback, and continues to closely monitor any financial stress which the customer may be subject to during the execution of the project.