Sugar cane production at Pelwatte Sugar Industries PLC had dropped drastically during the year ended March 31, 2008 to levels constituting the worst on record in recent years, the company’s Chairman, Mr. M.J.C. Amarasuriya has said in the company’s annual report.

The quantity of sugar produced during the year under review had plunged to 18,982 mt. from 34,750 mt. the previous year with the sugar cane crop down to 238,214 mt. from the previous year’s 404,246 mt.

Pelwatte posted a loss of Rs.701 million during the year which is its worst performance in recent times with sugar prices too slumping to Rs.42 per kg against Rs.55 per kg the previous year aggravating production losses on the plantation and outgrower settlements.

The production disaster was due to a number of factors including the infestation of an insect pest as well as outgrowers reducing the area under sugar cane to around 3,200 ha. as a result of escalation of cultivation cost.

Amarasuriya said that despite extensive spraying as a preventive measure, the `woolly aphid’ infestation that hit the cane growing areas was not adequately controlled. However, a biological control measure advised by the Sugar Cane Research Institute combined with continued spraying "is at last bringing the menace under control."

He was confident that they have cleared the worst of the crisis. He announced plans to introduce a pest resistant variety of sugar cane identified by the Sugar Cane Research Institute of India.

"When planting material is made available, we intend propagating this variety in the seed cane nurseries and introducing it in our fields," he said.

Outgrowers have moved away from sugar cane cultivation as a result of fertilizer and fuel cost more than doubling resulting in land preparation expenses increasing substantially.

"The cost of cultivation increased to around Rs.150,000 per ha. from Rs.100,000 per ha, a 50% increase," Amarasuriya reported.

The Central Bank assisted cane growers through a Non-Comprehensive Rural Credit Scheme (NCRCS) under which the company was given a loan of Rs.200 million at 8% interest to purchase standing cane on a forward contract repayable after 300 days.

Pelwatte used these funds to reduce the cost of production of farmers by between Rs.50,000 to Rs.52,000 per ha. with land preparation cost being subsidized.

Additionally the company also offered a 20% fertilizer subsidy to farmers amounting to Rs.2,810 per ha.

Amarasuriya said that subsidies for promoting rubber and maize planting had resulted in 800 ha. of land in Badalkumbura, previously used to grow sugar cane, being converted to these two crops with outgrowers finding alternative crops more profitable.

"We intend facilitating plantation of over 3,000 ha. by outgrowers in 2008/09, including 1,000 ha. at Wandama and 1,100 ha. of currently fallow land at Badalkumbura, Pelwatte, Wellawaya and Buttala," he said.

Despite the very poor performance in sugar, Pelwatte is forging ahead diversifying into the dairy industry with a 100,000 litres per day milk processing plant currently being installed for commissioning in the near future. An animal feed factory too is ready for launch.

The company has however suspended the construction of chalets for a leisure project due to severe cash constraints following the substantial losses sustained by the sugar cane industry during the year under review.

"Work will only be resumed after the company effects a turnaround in business to achieve sustainable profitability," Amarasuriya said.

He said that with both the cane crop and sugar prices down, Pelwatte was burdened with a VAT liability of Rs.280 million for the year affecting the company’s profitability and cash flow. Following strong representations made to the authorities, the government decided to exempt sugar cane from VAT with effect from January 1, 2008 but the company has to meet an unpaid VAT liability of Rs.280 million.

At group level, Pelwatte posted an after-tax loss of Rs.732 million against a profit of Rs.254 million the previous year.

The company’s alcohol production activity through its subsidiary, Pelwatte Sugar Distilleries PLC, also suffered from the shortfall of molasses available for distillation as a result of the sharp decline in the sugar cane crop. The distillery was not in production for six months with production down to 358 million bulk litres from 573.2 million bulk litres the previous year.

The distillery’s owning company posted a small profit of Rs.11.2 million during the year, down from Rs.106.9 million the previous year.

Amarasuriya said that their alcohol production continued to enable foreign exchange savings which otherwise would have expended in importing alcohol to Sri Lanka.

As at March 31, 2007, Pelwatte’s borrowings amounted to a hefty Rs.940 million.

Amarasuriya was hopeful that a harvest of 400,000 mt. of sugar cane would be possible this year through the planting of an additional 3,000 ha. on top of 1,540 ha. planted the previous year.

"Special attention has been paid to revive outgrower cultivation by better supervision and giving more assistance to outgrowers," he said.

He was also hopeful that the company could return to profitability during the current financial year if sugar prices remained at around the Rs.50 per kg. level as at present.

Pelwatte has a stated capital of Rs.679.8 million, reserves of Rs.374.4 million and is carrying accumulated losses of Rs.819 million in its books.

Master Divers (Pvt) Limited with 81.74% and Mr. D.A. de S. Wikramanayake with 3.24% are the two major shareholders of Pelwatte.

The year’s results translated to a group loss per share of Rs.10.54 against a profit of Rs.3.56 the previous year. No dividend has been recommended in view of the losses.

Pelwatte share traded at a high of Rs.41.50 and a low of Rs.22.25 during the year.

The directors of the company are: Messrs. M.J.C. Amarasuriya (Chairman), D.A. de S. Wikramanayake (MD), D.R. de S. Wikramanayake (Resigned 11.07.2008), N.V.T.A. Weragoda (Resigned 08.08.2008) and Y. Thilakasena.