Balrampur Chini Mills Limited (BALRAMCHIN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Balrampur Chini Mills Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Karl Kolah from CDR India. Thank you, and over to you, sir.

Thank you, Rio. Good afternoon, everyone, and thank you for joining us on Balrampur Chini Mills Q2 and H1 FY '21 Results Conference Call. We have with us today Mr. Vivek Saraogi, Managing Director of Balrampur Chini Mills; and Mr. Pramod Patwari, Chief Financial Officer of the company. We will now like to begin the call with brief opening remarks from the management, following which we will have the forum open for discussion. Before we begin, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation, which was shared earlier. I would now like to invite Mr. Saraogi to make his opening remarks. Over to you.

Thank you, Karl. Good afternoon, everyone, and thank you for joining us on Balrampur Chini's Q2 and H1 FY '21 Earnings Call. I hope you and all your loved ones are safe and in good health. Let me begin by giving you an update on the latest developments on the sector. According to the latest ISMA estimates, India's net sugar production is estimated to be around 31 million tonnes in the ensuing season after accounting for diversion of 2 million tonnes in ethanol using B-heavy and juice, which means if B-heavy and juice was not there, it would have been 33 million, diversion of 2 million, net production of 31 million. Production of UP is expected to be lower at 12 million in 2021 as compared to 12.6 million. Maharashtra is likely to see a sharp increase of around 10.5 million as compared to 6.2 million, and that is accounting majorly for the increase in the country's production. Diversion of cane juice and B-heavy into ethanol is expected to decrease sugar production by 2 million in 2021 season as compared to 0.8 million diverted in '19/'20. The government has recently taken proactive steps of hiking the price of ethanol. Focus is clearly on improving the blending ratio that will lead to improved financial position for the industry and also cut the country's oil import bill, along with carbon footprint. Further, the government is looking to structurally manage the surplus situation with a plan to divert higher production of cane to the environment-friendly ethanol blending program, and we fully support this proactive approach to achieve higher blending by increasing realization as well as reducing operational difficulties. This will help the entire sector, farmers, millers, environment, tremendously. We are pleased to share that the Board has approved the CapEx of approximately INR 320 crores for our fifth distillery of 320 KL at Maizapur unit. We propose to set up a state-of-art facility with fully -- full flexibility to produce ethanol from syrup juice, B-Heavy route as well as to operate a multi-feed of grain in the offseason. Our plan in the upcoming season is to divert 65% of cane via the B-heavy route as compared to 38% diverted last year. After we commission this unit, we will look to divert 5% of the -- our total sugarcane to the direct route, which means Maizapur unit's proposed distillery will ensure that Maizapur factory does not produce any sugar during the season. The entire juice syrup will be used to produce ethanol. The cumulative distillery capacity will be augmented at 840 KL for the group. This investment is a major milestone for the company and will eliminate the dependence on exports for clearing the inventory. I will explain that later on. Moving to the company's performance. Let me briefly highlight that we have reported a good performance for the quarter under review despite the challenging environment of the corona. However, Sugar segment delivered subdued performance on account of nonproductive -- production in the quarter where all the offseason expenses get accounted for and charged to the PL account. This is a quarter phenomenon, and we are on track to report robust results on the full year basis. The Distillery segment registered healthy performance owing to higher volumes and better offtake and better realization. To conclude, we believe that our well-integrated operations, robust cash flow and prudent CapEx investments will help us create shareholder value in the long term. I now hand over the mic to Pramod to take you through the financials.

Thank you, sir. Good afternoon, everyone. A detailed PPT presentation was uploaded on the website of the stock exchange as well as the company, wherein all the financial performance, including the quantitative details, have been given. So for the benefit of having a larger portion of time at our disposal for the Q&A session, we would not like to review the financial numbers as such. So we now go ahead with the opening of forum for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Varun Goenka from Nippon India Mutual Fund.

Great to see such cash flows. I have 2 questions. One, about the CapEx that we have announced, if we could understand from you a little better in terms of the economics. What could be the payback period? What could be the impact on inventory reduction permanently going forward? That will really help us.

Okay. Yes. So what I would do, let me begin by addressing this investment in totality and the construct and the logic why we find this a very exciting opportunity. If you see, the honorable Prime Minister on the Independence Day speech put special emphasis on ethanol. Now I believe that when the government goes to see as to how much ethanol can be produced in the country, the quantum required for 12% at least. 12% is the level at which the engines today are compatible with no change required. So to address that, sugar mills, B-heavy, even juice might not be enough for the country-wide requirement. Hence, there is a fresh sort of impetus which they have put into this grain sector. So as we see that the grain prices last year was about INR 47, INR 47.5, they've been jacked up to INR 51.5 to begin with. Surplus rice has gone to INR 55.

INR 54.

INR 54. So there is a tailwind which they are giving on that side of the business also. Plus, the area in which we operate and Maizapur distillery where it is proposed, there is abundance of broken rice available at very good competitive rates. So the idea is we're going to look to set up this distillery, divert one sugar factory's juice completely to making ethanol. No sugar would be made. In the offseason, this grain itself, which is at approximately INR 50 crore addition to the distillery cost total, when it operates in the offseason, it would give very good returns. So this with the concept that if cane crushing increases, we can make more B-heavy. This distillery can run on any fuel. It can run on juice. It can run on B-heavy. It can run on C-heavy. It can run on grains. So assume we get into a year where your sugar production recedes, one might not -- and sugar prices are good, one can use this for grain. So the idea that is the safety net in this distillery. Secondly, we see the program ultimately in India and the desire would be that to end this export subsidy by 2023. In order to do that, India's structural, if you see when it gets into an average production or even surplus, the levels are going to be at this 31 -- pre-diversion, 32 million to 33 million. Your consumption, which we've been pleasantly surprised by, is close to 26 million now. In the 2 years to come, we hope it will go to about 27 million, 27.5 million. So you have a surplus ultimately of about 5 million tonnes, structural surplus, which is about 16% of the country's production. So at Balrampur, we have attempted to come up with a formula where, ultimately, based on this new configuration, we are able to divert about 18% to 20% sugar into ethanol and become one of the largest producers in the country with one of the most efficient distillation capacities spread over 5 locations. So we are not only addressing our need and making it into an investment which will be profitable, we are also going to be looking at a proportion where the country does not need to export sugar but is able to divert enough sugar into ethanol 5 -- 2 to 3 years down the line. So I hope I've given the entire construct of the investment.

Right, right, sir. And about your assessment of the payback of this investment, sir?

You see, we've done an internal calculation very stressfully. Until we presented to the Board with a proper DPR -- proper data, it's not -- if they are sketchy numbers, so this is just an in-principle idea. And the cost, et cetera, having worked 3 decades in the sector, one has an idea. The details, we would come up to the Board and then share with the team. But one can be very reasonably happy about this investment, our internal calculation for that right now.

Absolutely. I think there is no doubt that the way our company allocates capital or the efficiency measures are best in the world. I was trying to get a number of 3 to 4 years maybe of payback period. Or...

Don't worry, [ it pays ]. All we can tell you is we are in the [ belt ] of raw material for the grain sector. And the government is very pleasantly disposed towards the grain sector based on the future ethanol requirement.

Sure, sure. And the second part being the export subsidy issue for this year, maybe eventually it will not be needed, but do you see it coming? Or how will this be managed, sir?

Okay. Good question. So it will help give the next question, which is under -- yes. So basically, for the next 2 to 3 years, I don't remember the exact year, we will need this export subsidy. And I think government has understood that. So if you see and the panic -- there was a tweet by the honorable minister, who just newly had taken charge, giving a negative connotation on the export subsidy. I think in the next 2 days, there was a clarification to that. So I see this coming. Probably one can't -- I can't give you time to perfection, but probably gray areas like Bihar election, Diwali, all that kind of stuff is there. So I see this coming definitely for the current year. I think let's look at it 1 year at a time. This year, monsoon is coming pretty soon. This is the best guesstimate I have.

The next question is from the line of Pratik Tholiya from Elara Capital.

Sir, my first question is basically on this inventory loss that we've seen in the sugar sector. If you could just elaborate in terms of what really has happened. Is it a benefit at all?

You are talking of the inventory certified loss, which we are going to have going forward?

No, no. The reason for this subdued performance in the sugar, I believe there's some inventory loss in the quarter, in Q2, because of your higher cost that we have seen in the offseason expenses basically. So if you could just explain what exactly has happened, why we have this lower sugar profit.

Okay. You must be knowing that this is a non-production quarter wherein we are required to incur a lot of expenditures for upkeeping of our plant, repairs and maintenance, in addition to the normal recurring expenditure of depreciation and wages and factory maintenance. We have an accounting policy wherein all expenses incurred gets debited to profit and loss account on an instant basis, and we do not defer anything. Now because of the very low production in this period after 31st of March, this entire expenditure, whatever we have incurred, was debited to the profit and loss account, and it is a quarter-to-quarter phenomenon, nothing new which has happened. This expenditure, which ultimately will form a part of cost of production, will get neutralized over a period of next 2 quarters.

Every year, let me tell you, this happens. And I have always requested all the investors to see the yearly result. There is a little more sort of lower prices on sugar because B-heavy lowers the recovery and the consequent impact is seen in the distillery. So if you see the full year, you -- as I said in my opening remarks, yes, whatever lower realization has been, has been a little lower. That is the only factor which one should worry about. The rest is all under complete control.

Got it. Sir, secondly, on the balance sheet. Congratulations on your strong cash flows and the way you managed your working capital. But sir, obviously, we know that at this time the inventory liquidation was also much higher because of higher exports and the divergence for ethanol. But I just wanted to understand, I guess, some sense on how this balance sheet will look by March because once the new crushing starts, so this 0 short-term debt that we have currently, this should go up again by March because of your working capital go up? Or you think that the internal accruals will be sufficient for major working capital demand and then there wouldn't be any need for short-term borrowings?

See, ours is a highly working capital-intensive industry. But the kind of cash flows we have generated and the kind of surplus cash which we are sitting as of now, we won't be requiring any incremental working capital maybe for the period up to 15th of January. So if your question, what would be the quantum of short-term borrowings on 31st March, it is difficult to predict. But definitely...

But much lower than last year.

But definitely, it will be much lower than the last year.

Okay. Sure. And sir, lastly, this CapEx that you've announced of INR 320-odd crores, if I say that INR 160 crores CapEx that -- 160 KLPD plant that we've put up earlier, the CapEx was somewhere around INR 200 crores. So for 320 KL, our CapEx was around INR 320 crores. So I just want to understand whether we underbudgeted or we have some additional -- or some existing infrastructure already at that location so that we don't need that much CapEx.

You are right. There is some infrastructure already, one. And two, when you're going for economies of scale, there is some saving. Like a 500 KL distillery might not cost INR 500 crores.

Okay. It will be lower than that. Fair point, sir.

Slightly lower. You save on the -- a lot of basic infrastructure, et cetera. KL-wise, it doesn't add up. And this also includes the input for grain, that investment required to run on grain. And plus, of this, the debt which we take, 15% interest will be met by government of India.

Right. Right. Sir, and this 320 also includes that incremental investment on the grains infrastructure?

Absolutely.

Yes.

The next question is from the line of Ritesh Poladia from Girik Capital.

Sir, just one question on -- again, on net profit. Sir, what is the current revenue of the unit? And after this recent -- this expansion of sugar and grain-based ethanol, what will be the revenue?

See, the current capacity is around 3,000 TCD, which is ultimately running on sugar only. And the production, we are expecting a cane availability of around 55-plus quintals in 2 years of time. So in the process, we will be sacrificing around 60,000 to 70,000 tonnes of sugar.

Okay. So current will be about 55,000 tonnes of sugar from the [ government ]?

Cane was around 45 lakh quintals, which resulted into 12.5% of recovery, which means INR 150-odd crores of revenue.

Yes. The next question was on export subsidy, which you already answered.

The next question is from the line of Gaurav Jhanwar from Systematix Shares.

My question is relevant to the previous participant's questions. Despite that increase in the sales of around almost 8 lakh bags, our PBIT, if you look at Y-o-Y basis, is pretty less. It's around INR 23.48 crores as compared with the INR 90 crores in the last quarter. So I just want to know, it's because of the less recovery or any other reason? Can you please throw some light on this?

See, last -- there is 2 reason behind it. Number one, there is a lower realization on a comparative basis. Last year, we made almost INR 4 per kg on 21 lakh bags, which we sold. This quarter, we sold 30 lakh bags, but the profit margin was INR 3 per kg. And on top of it, we have already explained the rolling costing method that all netted expenditure got debited to profit and loss account in this quarter, which gets neutralized only in next 2 quarters when the new production kicks in. So it's an inventory valuation impact which has happened in this quarter.

Okay. And sir, that CapEx that we are doing for the fresh distillery units and the debt we are raising, it's -- what is the borrowing debt on that, sir, actually?

We are expecting maybe around 7%, and 50% of that would be reimbursed by the government of India. So net interest cost will be around 3.5%.

The next question is from the line of Madhav Marda from Fidelity Investments.

Sir, my question basically was -- it's a very basic question, to be honest. Given that we will be switching for the new distillery capacity from selling sugar to selling ethanol, net-net, is it an EBITDA accretive investment for us? Or it's just the way the pricing is done for ethanol with sugar, it will be the same EBITDA? How should we think about it?

It should be EBITDA accretive that we see. So if you see, currently, the prices have been raised of ethanol as well as there is a grain play, which is very interesting. So as we said, let us come back with what we can -- once we tell the Board, we can have something more detailed for the shareholders. But EBITDA accretive.

Okay. Okay. And one other question was given Balrampur probably will have, compared to the industry, much higher share of ethanol in the entire mix of things, so in case exports start coming down because of the subsidy being withdrawn or becoming lower over the years, like 2, 3 years, how does work? Like, if they're not able to -- can we bridge that 5 million tonne gap in the next 3 years, do you think? Or it will take longer than that? I'm just not very clear on that.

You see your question is very relevant, and that's what I tried to address in the beginning. 5 million is a good -- correct figure. If Balrampur would look to address it the fastest, and I am -- the kind of push which the government is giving and the kind of incentives that they are giving, I am confident that people will bite this, and we should be able to sacrifice the excess we have in hand over 2 years.

Okay. You're saying enough ethanol capacity can come up in the next 2 to 3 years to divert another 3 million tonnes of sugar.

Yes. That's the right thing, and people can leverage their current capacity mode.

That's awesome. There is scope there...

There are 2 ways to do it. Rather, they have 3 ways to do it, if you're getting into so much detail. One is expansion of your current capacity, which debottlenecking, pay at 20%, easily can happen for people. Two is if you become pollution compliant, you can rent 10% number of days higher in the current year with the same capacity. Your running number of days increase. And three is greenfield capacities like the ones we are doing.

Okay. And the industry also has scope to shift more from B-heavy to sugarcane juice at some additional CapEx so we can divert more of sugar. Is that also possible at the existing plant?

Every distillery with expenditure can process stuff, unless it's a very old distillery. For example, just let me tell you, Gularia, tomorrow I want to go to juice or syrup, but the investment is not much.

Okay. okay. Understood. And I'm not sure if I -- basically, would Balrampur be at a much better off situation given that the safe exports to be replaced with ethanol takes a bit longer than, say, 3 years? Would we be at more advantages versus the rest of the industry given that we are sort of investing before the rest of the country and will likely sail that way given that our balance sheet is strong?

That's our 100% belief.

The next question is from the line of Achal Lohade from JM Financial.

My first question is with respect to Sugar segment. If I look at the current quarter, the volumes have grown about 44% Y-o-Y, and it's entirely domestic sales. So given the consumption growth is generally 2%, 3%, so how do we explain this? And what is the growth or other volumes we could have probably in FY '21/'22 on a sustainable basis?

See, as you are aware, government of India runs a release mechanism. You can't predict -- we have done very well with our exports and sacrifice. That's why our inventory is on the lower side.

So basically, with respect to exports, we've got the accelerated release orders. Is that right?

Right.

And in fact, all fully consumed or there is some -- I mean we look at domestic sales volumes for sugar is similar to last year for coming quarters?

See, the mandate of government of India is to go for aggressive export and B-heavy diversion. And the people who are doing that, they get great advantage in terms of monthly release mechanism. So that was the reason we were getting higher release.

Okay. Okay. The second question, with respect to -- sorry, I missed the opening remark a bit in between. What is the distillery volumes we could look at for FY '21 and '22, sir?

FY '21, we are expecting around 17 crores to 17.5 crores of distillery volumes. At FY '20, it will be full 18.2 crores.

18 point -- but post this investment, let us get back to you.

Yes. After this investment comes...

And it only comes into play...

We will have a capacity of 29.5 crores, including grains.

Right. It could be closer to 30 crores. But we'll come back in detail on that one, as we told you at the beginning.

Sure, sure. But for FY '21, you're saying you could do about 17 crores liter?

17 crores liter.

That is for financial year basis? Because I see first half, the volume is...

[ 11.9 crores ]

Last year, we had balance sheet...

Around 11.8 crores.

Okay. Last year's balance sheet was 11.8 crores to 12 crores, something like that. This year's balance sheet is looking at 17-plus crores.

17-plus crores.

Okay. This year's balance sheet is INR 17-plus crores.

Understood. Understood. And given now -- I mean, as of now, if I understand correctly, the -- we are supposed to deliver ethanol to the depot. The transport cost is incurred by us, but it's partly reimbursed at a certain flag rate. And now my question was, as we expand our distillery capacities and the volumes, we have to go farther and farther from our existing production location. So how do you look at this transport cost angle? What is the actual transport costs we have incurred, let's say, in FY '20? And how much have we got reimbursed such as that?

Let me address your question in a minute. From last year to the current year, there's some rationalization government has done. So the loss has reduced on the amount government pays us and the amount we actually incur. So we'll continuously work with the government on reducing that loss more. They have begun that journey also of recognizing actual transportation cost. So this is not a concern at all in our minds.

Understood. Understood. And just last question. In terms of the preparation for the coming season, where are we? When do we think we can start since we are already in the first week of November? And what is the expectation on the cane price as it has not yet been announced?

Tough call. You know UP did it later last year. I was just checking. Cane price last year announced was 7th of December. So definitely, it seems it will be done after Diwali, the cane price announcement. And our factories would start after Diwali, towards 23rd, 24th.

I know it's tough to give any comment on the cane price, but given the FRP increase, could there be a possibility of any increase in the SAP? Or you think that is not possible given the current sugar pricing?

I can't say anything. But obviously, when FRP increases, there is some increase in SAP, no?

The next question is from the line of Anupam Goswami from B&K Securities.

Congratulations on the good set of numbers. Sir, my first question would be on the new capacity expansion. When can we have a ballpark figure, like, the commencement of this facility?

24 months is the target. So as we said, we'll get back, but ballpark, 24 months.

Okay. Okay. Sir, is it possible to just share any idea on how much grain input would give how much of ethanol, that input and output ratio?

As I said, what I -- what we haven't told the Board and we have not finalized, we can't tell the shareholders. The initial study is done. We will come back with all these details and the answers when we present it to the Board. We are also in the process of finalizing our own study because this is the first time for us.

Got it, sir. Sir, my next question is on the cost of production. We have seen around inventory at -- valuing at INR 31.03. What would be our overall cost of production this FY '21?

For FY '21, it is expected to be around INR 31 per kg.

Okay. And sir, one last question on the inventory. How many months of inventories are we going to have after the end of FY '21? And where are we looking at right now?

Inventory is, again, a function of monthly release. Our endeavor is to keep lower inventory, and that is possible through export and diversion. Going forward, we are reducing our dependence on exports very aggressively, and we will be sacrificing much more sugar in the form of B-heavy as well as the cane juice.

The rates have gone up. We are going towards that direction. Two things are in our hand. Let me be very clear. And unfortunately, I have to face this question, and I don't blame you because this happens only in the sugar industry. B-heavy diversion is in our hand, in brackets, it reduces inventory because it reduces production, gives you more than a consequent compensation via the B-heavy route. Juice, we are going ahead. Export is in our hand based on the government policy. If you see, Balrampur is the most proactive in the country as far as proportion of export to production in the last year. So we will continue to be most proactive on both these fronts. The rest of the release, et cetera, is in the hands of the government. But even there, we get into a tailwind because the person who sacrificed the sugar via both these routes gets a bump up in the release.

The next question is from the line of Richard D'souza from SBI Mutual Fund.

Sorry to harp on this. But you explained earlier the second quarter, the EBIT margins slightly declined. But could you just express it further? Because what we see is your realizations haven't gone down much. They've gone down by about INR 0.30, INR 0.40, but your EBIT margins have gone down substantially. And last year, same quarter, your EBIT margins were quite good. So I'm not able to get the dichotomy, if you could just explain, sir.