Corporate

Sustainability Yeilds Sweet Success

BASIC ECONOMICS TEACHES that companies exist to maximize their profits. Godavari Biorefineries, an Indian producer of sugar, ethanol, and biobased chemicals, didn’t get that memo. Its managers appear focused as much on philanthropy and sustainability as they are on generating a financial surplus every year.

It’s an unconventional approach that is working for the firm. Sales at the 76-year-old company have risen steadily from $160 million in 2010 to $202 million last year, according to a recent financial report. Investors seem to like what they see. Godavari succeeded in securing a $15 million cash injection last month from a private equity fund.

Godavari is an unusual company. On the one hand, it does business in the standard way of producing price-competitive materials at large, integrated complexes. On the other hand, it funds medical services and the education of young people in the communities where it operates and also lends money to farmers that supply it with sugarcane.

“We have a strong sense of social mission that started with my grandfather, who was born poor,” says Samir Somaiya, Godavari’s third-generation chairman and managing director. “We take a very long-term perspective to business.”

The company was founded in 1939, when the elder Somaiya, after enjoying some success as a sugar trader, decided to start up his own sugar mill. In the decades that followed, Godavari’s business thrived, partly because it was protected by Indian import tariffs. When his grandson Samir Somaiya joined the company, those tariffs were in the process of being dismantled. The company had to close plants, a trauma that has guided Somaiya’s decision-making ever since.

“I decided to never rely again on tariff protection,” Samir Somaiya says. He went further than that, reorganizing the business so success doesn’t depend on any specific set of conditions. “We don’t want to be vulnerable to any technology, any one process, any customer,” Somaiya says.

India is a major sugar exporter, and Godavari is one of India’s major sugar refiners. Under Somaiya, a basic tenet has been to extract more value out of sugarcane farming. Starting with sugarcane, Godavari refines sugar, ferments ethanol, and derives an ever-expanding range of biochemicals. From plantation waste, it extracts energy at cogeneration plants that are integrated with its mills and chemical plants.

Ethanol is Godavari’s starting point for a family of downstream chemicals. It converts ethanol into acetaldehyde and then acetic acid. From there it produces derivatives such as ethyl acetate, crotonaldehyde, 1,3-butanediol, and flavor and fragrance ingredients. The company calls itself one of the world’s top 10 producers of ethyl acetate, and it exports more than two-thirds of the chemicals it makes. With the launch of new biochemicals and the commissioning of more power generation capacity this year, the company expects its sales to surge by 25% to $250 million.

IT’S UNUSUAL for a major biobased chemical maker to emerge from the sugar business, according to Sarah Hickingbottom, business development manager for oleo- and biochemicals at LMC International, a consulting firm based in Oxford, England. Most biochemical firms own a specific technology they use to produce chemicals from purchased feedstock. Or they are chemical companies that modify a petrochemical process to use a biobased feedstock instead.

But as the biobased chemical business matures, access to competitive feedstock may win the day, Hickingbottom predicts. Production processes in this relatively new business will eventually become standardized. When that happens, having access to cheap raw materials will be key.

As a major sugar exporter, India is advantaged, Hickingbottom says. But the country’s output varies from year to year, she notes. In poor harvest years, companies that maintain close relations with local sugarcane growers will likely be in a better position to secure raw materials. In that context, it’s possible that Godavari’s philanthropic bent may help the company businesswise, even if that wasn’t the point. Paul S. Zorner, an American member of Godavari’s board who has worked at and advised dozens of biobased fuel and chemical companies, notes that the firm helps fund the studies of thousands of young people in the communities where it operates. Godavari also loans money, when the need arises, to the 20,000 or so farming families that supply it with sugarcane.

According to Somaiya, several family foundations that he chairs pay for the education of 35,000 students in communities where Godavari operates. They also fund a 500-bed hospital and a rural health center.

Zorner first met Somaiya at a conference on sugar in South Africa. He has now been on Godavari’s board for seven years because the two men share similar ideas about how to extract value from sugar. The company’s manufacturing operations are highly efficient, Zorner claims. “Godavari’s plants have a very good scale and are well engineered both chemically and mechanically,” he says. “The only thing that is wasted is CO2, really.” Godavari was able to achieve this efficiency thanks to India’s abundance of engineering talent, he adds.

IN FACT, the company’s biobased chemicals are produced so efficiently that they compete pricewise against identical products obtained from petrochemical sources. There was a time when companies expected to receive a premium for renewably sourced chemicals, but according to Zorner, it’s a rare case when that happens.

Even without a price premium, at least one investor sees opportunity in Godavari’s focus on products from renewable sources. The Mauritius-based private equity fund Mandala Capital last month agreed to inject $15 million in Godavari. The cash will help to support product development and pay for a new specialty chemical plant. Mandala didn’t respond to a request for comment for this article, but in an earlier statement, the firm said it endorsed Godavari’s strategy of getting more value from sugar.

The academic world also sees value in Godavari’s approach. Somaiya teaches a one-month chemical engineering course on biorefining every two years at Cornell University. More broadly, Zorner says, Godavari can serve as an inspiration to the many parts of the world that have strong agricultural sectors but little industry. “It just shows what you can accomplish with the sun, water, and some manpower.”

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Godavari Biorefineries Limited Launched its New Chemical Plant

Godavari Biorefineries Limited inaugurated its new MPO plant with a capacity of 4,000 tons per annum, at Sakarwadi in Maharashtra. 

Godavari Biorefineries Ltd. is a biorefining company producing sugar, biofuels, chemicals, power, compost, waxes, and related products, using sugarcane as the primary feedstock.  The company has manufacturing plants at Sameerwadi, Bagalkot district in Karnataka and Sakarwadi, Ahmednagar district in Maharashtra.

Inaugurating the plant, Shri Prakash Mehta, Minister of Housing, Labour & Mines, Guardian Minister of Raigad District, Government of Maharashtra, said, “The development of this plant will contribute to the socio-economic development of the area. The commitment of the company for this region began with Karamshibhai Somaiya when he founded the company here and this became his Karmabhoomi. From the past 76 years, the company has worked for the development of this area”.

Samir Somaiya, Chairman and Managing Director said, “The new unit will allow us to offer customized chemicals and solutions for the global markets. It is part of our strategy to meet the growing demand for chemicals manufactured from renewable feedstocks using sustainable practices”.

The company had recently raised private equity from Mandala Capital, a part of which was for the setting up of this plant.

About Godavari Biorefineries Limited

Godavari Biorefineries Ltd., a member of the Somaiya Group, was established in 1939 and is one of the leading companies in the Indian sugar industry.  It has sugar, power and chemical plants in Karnataka and Maharashtra. Godavari Biorefineries Ltd. expects a turnover exceeding Rs. 1,200 Crores for the year ended March 2016.

The company undertakes continuous research and innovates for making new products and entering new markets in order to derive maximum value from its feedstock. The company has been pioneers in the making of ethanol based chemicals and is now working on the utilisation of biomass to make a wider variety of products.

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A Bitter Harvest

Correct the mismatch in pricing and save the sugar industry

It is a super industry, and we need to look at it from an advantageous point of view:

• Millions of farmers grow cane in large areas of the country
• Cane is among the most remunerative crops for them (if policy is good),   and also hardy (it can with stand drought and flood better than many).
• India is the largest consumer of sugar in the world.
• From cane, a variety of by-products such as ethanol and power can be produced.

The problem that the sugar industry faces is one of oversupply of cane. This is primarily due to high announced prices (fair and remunerative price or FRP) and returns. Any farmer faced with a good price pronouncement of cane will plant more. This then leads to an oversupply of sugar, which will automatically depress the price of sugar. Prices need to be based on economics, and only then will this mismatch be corrected. Thus, sugar prices are low, and cane prices are high, making the payment of cane price, the FRP impossible. And this will not change, unless this mismatch is corrected.

In recommending the FRP, the CACP (Commission for Agricultural Costs and Prices) had suggested the cane price, with the proviso, that if the frp was higher than the economically linked Rangarajan formula (this price links the price of cane to the price of sugar, molasses and bagasse), then the difference should be met by the government, through some stabilisation fund. The government announced the FRP by only looking at FRP number, and overlooked the suggestion of the price difference. So, one option is for the government to pay this difference.

The other approach is to create demand. This can be done by:

• Buying sugar for a ‘strategic reserve’. This can work once or twice, but a long-term natural demand must be created.
• The government should give a subsidy for exporting sugar (raw, white or refined). A subsidy for raw sugar was announced, but at the end of the season, so by the time the price was announced, the season was almost over, and the raw price had fallen.
• Creating a programme that encourages the use of sugarcane for production of ethanol, biochemicals, sugarcane for production of ethanol, biochemicals, or even electricity, so that mills have alternate revenue streams, as well as options to put their surplus sugar. The government has just announced an excise exemption for ethanol used in fuel, this is good. Policies can be examined for examining the same for bio-refineries, and also giving good prices for power through the implementation of recs (many states such as Karnataka, are not following the recommendations of CERC for RECs).

Further, since sugarcane pricing will always be politically sensitive sugar prices will always have to be protected by high import duty. Not because the industry needs protection, but because the cane price, and therefore the farmer, needs protection. The recent policy measures raising import duty, etc, are good in the long run, as an insurance against Brazilian or international low prices.

It is best to follow the Rangarajan formula – linking the price of sugarcane to sugar, molasses and bagasse – the primary by-products. This is done in Brazil, Thailand, and almost everywhere else.

The high prices of cane, those too high to pay, result in some farmers getting a very high price, and some get nothing. This leads to poverty and a crisis. This is industry provides employment to lakhs of people and even many more million farmers.

The author is chairman and managing director, Godavari Biorefineries Limited.

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