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

Ladies and gentlemen, good day, and welcome to Balrampur Chini Mills Limited Results 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, Steve. Good afternoon, everyone, and thank you for joining us on Balrampur Chini Mills' Q3 and 9M FY '21 Results Conference Call. Today, we have with us Mr. Vivek Saraogi, Managing Director of Balrampur Chini Mills; and Mr. Pramod Patwari, Chief Financial Officer of the company. We would 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 shared earlier. I would now like to invite Mr. Saraogi to make his opening remarks. Over to you, Vivek.

Yes. Thank you. And good afternoon, everyone, and thank you for joining us on our company's Q3 and 9 months earning conference call. I trust you and all of your family members are keeping good health. I will begin the call by giving you an update on the current developments, followed by key highlights. India's production is estimated to be -- ISMA's estimate has come at 302 -- or 30.2 million. Our estimates are below 30 million, from the earlier figure of 31 million, against last year's production of 27.4 million. The lower-than-expected production is primarily due to reduction in output in UP, whereas production in Maharashtra and Karnataka is expected to be higher compared to last year. Sugar production in UP is expected to drop to 10.2 million, our estimate is [ 13 million ], against 12.6 million. That's almost a 20% reduction owing to lower cane yields and fall in sugar recoveries owing to some diseases and higher diversion to B-heavy. That is higher diversion to ethanol. As per estimates, Maharashtra is expected to produce around 10.5 million against 6.2 million. The higher forecast is primarily attributable to increase of -- 48% increase in [ cane acreage ] and better yields due to better weather conditions. Karnataka is expected to produce 4.2 million, as compared to 3.5 million during the last season. Therefore, after considering an increased diversion of 2 million towards B-heavy, net sugar production for the current season is expected to be 30.2 -- or about 30 million, let's say. This combined with an opening stock of 10.7 million and consumption of 10 million, with an export of 5 million, is likely to lead to a lower closing stock by 9 -- which would finally be around 9.7 million. So production, let's say 30 million, consumption [ 2.60 ]. You are left with a domestic surplus of 4 million, export of about 5 million, so it's a net reduction this year by 1 million. 10.7 million gets truncated to 9.7 million. And Pramod, this, we are talking of exports during the current sugar year...

Sugar year up to September.

Up to September. Thereafter, we hope to see another 1 million in the next quarter because government has mandated an export of 6 million. In the past few months, government has announced 2 important policy measures to strengthen the liquidity of the industry and tackle the oversupply situation. First one, an upward revision of ethanol prices for the current season by an average of 5% to 6% per liter. That is for the current tender, which is from December '20 to November '21. Second was an announcement of its subsidy of INR 6,000 per tonne for 6 million. That's what I just spoke about. The ethanol blending program has been hugely successful. And the incentives given by the government have helped OMCs procure 182 crore liters last season from only 38 crore liters in the year 2013, '14. The government plans to continue its aggressive policy and plans to achieve 20% blending by 2025, [ 5 years ] ahead of its previous target. This will also help reduce the government's reliance on expensive imports. Pramod, what is the expected figure this year?

From 10% blending, they have come...

No, what tenders for...

325 crores. As of now, 325 crores.

So in the current year...

In the current year.

Vis-à-vis 182 crores last year, tenders of 325 crores have already been signed.

Correct, yes.

Right. The pending demand with the government is for increase in MSP from INR 31 to INR 33. In UP, the SAP still remains unannounced. So definitely one is hopeful of the MSP in the coming months. UP SAP, we are silent. We have no further information. Coming to our company's performance. We have delivered a muted performance for the quarter under review, which was adversely impacted owing to lower sugar offtake and subdued sugar prices. Though sugarcane crushing for BCML has been same as for last year, till now sugar recovery has been lower, owing to adverse weather condition and some disease which is affecting the crop in the entire state of UP and we are included in that. In addition, we have aggressively diverted sugarcane towards production of B-heavy molasses, which has impacted recoveries but which will aid the distillery. Both these together have led to a higher cost of production, and also the markdown in the inventory in the current quarter has led to the results which are in front of you. However, we'd like to highlight here that our performance cannot be tracked on a quarterly basis, owing to this naked cost phenomenon which is in production we -- as we said in the last quarter, whatever we -- any expense is accounted for in the quarter. So there is no deferred accounting. Production follows, and as we are all aware, the January-March quarter is the full production quarter. This quarter was therefore also a partially operational quarter, so the impact of lower recoveries is on margin much higher. This will correct itself in the next quarter. So our results are best tracked, to be honest, on an annual basis and comparable on an annual basis with, a, ourselves in the previous year; and with any other company on a year-to-year basis. Similarly, while distillery segment registered a stable performance owing a higher offtake and better realization, we anticipate better performance in the current -- coming quarter given our inventory levels, with a notable shift to B-heavy route. On 30th -- 31st December, closing stock of B-heavy was higher at 8.67 lakh quintals versus 5.67 lakh quintals. To conclude. We continue to take judicious initiatives [indiscernible] performance. A recent announcement to expand our distillery capacity by adding a new 320 KLs distillery in Maizapur unit is a step in the right direction. Keeping in mind our constant philosophy of rewarding shareholders from time to time, Board has declared an interim dividend of 250%, amounting to INR 2.5 per share, leading to a cash outflow of INR 52.5 crores. We are confident that, based on our prudent capital allocation and free cash flows and other industry-led structural changes, BCML will continue to create wealth for its shareholders. I'd now like to hand over the mic to Pramod.

Thank you, sir. [ I guess we just ] have gone through the financial numbers. And we request the moderator to open the forum for any questions [ or clarifications ] that you may have. Thank you.

[Operator Instructions] The first question is from the line of Sanjay Manyal from ICICI.

Sir, just want a few things. One is what kind of distillery volumes we can expect in FY '22. And what will be the proportion of B-heavy?

Okay, so you're saying what will be the total expected volume this year. And how much would come out of B-heavy? [ Have I heard your ] question correctly?

Yes, yes.

[indiscernible].

Up to 31st of December, we have done total alcohol sales including the ENA at 12.75 crores liter. So for the March '21, our expectation is it should be around [ 15, 15.5 ]. That should be including ENA. And within -- up to 31st of December, we have already done 6.66 crores liter of B-heavy ethanol. So within [ 15 ], I think 2 crores will be ENA. The rest will be C and B. So 13 crores, maybe 11 crores can be B-heavy. 11 to 12...

Yes, 11 crores to 12 crores...

11 crores to 12 crores, [ this will be ]...

[indiscernible]. [ This will also reflect ] -- this was the current year ended 31st March 2021.

Right, sir. And any expectation what could be that number in FY '22?

It's too early to give out key estimates. As we said, it is slightly lower, but our proportion will be higher. So it's we'd like to answer that in the next call, in the next quarter call...

Okay. So what will be the like-for-like decline in recoveries? And given that the plantation sugar would have started by now, it means the crushing of plantation would have started by now, what is the current situation in terms of recovery? And how it would pan out in the full season. What could be the decline like-to-like [ again ]?

Okay. So let me explain a little bit of the background and then attempt to get to the figures. So when you divert B-heavy, your recovery goes lower, and that diversion of B-heavy gives you the entire revenue when you produce ethanol out of it, right? [ Taking that ] account for the current year should be 1.2 to 1.25. That is company would sacrifice, let's say, 11.5 lakh bags into B-heavy. If we had not done B-heavy, that much would have come in. So that is [ the loss from ] B-heavy. Last year, loss on B-heavy was about 0.6 to 0.65, right, Pramod? So there is going to be an extra loss of 0.6 on account of B-heavy which is going to be recovered out of the distributor. After that, we are thinking that, that might be a point to further loss in recovery, 0.2 to 0.3, 0.2, 0.25, too early to say. [ Plant crushing ] which has started coming in, recoveries are slightly better.

So sir, this -- we are talking about the full season, right?

Yes, full season.

And so as you mentioned that plantation recoveries are a bit better, so it is better than last year. Or it is better than the [indiscernible] one, which is...

It's better than the -- [indiscernible] is not better than last year.

Okay, sir, okay. Fine, sir. And sir, if it is possible, if you can explain the extension plan which you are going to take, how the economics really work in that direction and the sales from sugarcane to juice and grain to juice? What would be the gross margins in that kind of a CapEx?

So this is still in the -- we have done our detailed exercise. The revenue, et cetera, it's not possible to give now projection. We are still getting the details made, but all we can say is whatever we have said in the last call, that the margins and the payback will look very attractive. This is going to be the first of its kind [indiscernible] India.

[indiscernible].

[ I believe we will produce ] [indiscernible].

Right, sir. Sir, just one last one, if I can. If the export is going to be 6 million tonnes and which I believe in -- the way it has happened last year, due to COVID's -- I mean, despite COVID, it was completely done. I'm expecting that probably the entire 6 million tonne can be done. And so inventory levels would be lower. So is it possible that from March and April onwards sugar prices actually can move up the -- towards INR 34 or maybe higher given the tank inventories will be substantially down?

So I -- that's a very good analysis. So my personal view is, from April onwards, that when the [indiscernible] vanish, sugar prices could be, in my view, at least what you said, if not better. So there are 3 to 4 factors affecting this. North is the consumption belt. UP is going to, let's say, make 100 lakh tonnes of sugar [ instead of 10 26 ]. So UP is the feeder for the entire North belt. If you see Bihar, Haryana, everyone will be 10% to 15%, to 20% lower in production. So North belt is where the production is coming down. The exports, as you are aware, these people have not exported a single bag. We have sold our entitlement and we have made a profit, which will be reported in the quarters to come. And we have retained our sugar, which we hope to sell at a higher price as we go down the line. So yes, based on the fact that [ there's going to be an ] aggressive export, 16-plus is the -- to last evening, the closing price was 16.29. People are getting profit for selling the license. Maharashtra [indiscernible]. Maharashtra is going to be the primary physical exporter of sugar via mills selling their own sugar and via traders picking up Maharashtra sugar because of license selling by people like us, right, Pramod? These traders are securing from where, Maharashtra, Karnataka...

[indiscernible].

Our call is absolutely clear on the pricing in the manner you suggested, maybe a little better only.

The next question is from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund.

Sir, my question is extending from the previous participant. I mean now that we are looking at a drawdown in inventory, which would in all likelihood entail better prices. I mean I understand that we would have taken some kind of an inventory impact in this quarter. If you can quantify this inventory impact. And second is, as the prices come back, I mean, should the assumption be right, that this amount will actually be written back so to that extent this is only being an accounting adjustment?

You already understood and very well. You have explained the entire concept, so yes, what you said is absolutely right.

What will be the quantum of the write-off, sir, the provision that has been made?

That's -- Pramod, do you want to say...

During December this quarter, inventory loss was around [ 36 crores ].

But there's been -- so the details you are asking for, that's very internal and the effect of which you will see in the next quarter. And Pramod better can explain in the next quarter what will have been the picture on the write-back. So we will do in the next quarter so that the analysts who follow us on quarter-to-quarter basis will not be in any kind of gray area in the future.

Sure, sir. Sir, my second question is on the distillery volumes. I mean definitely one would have expected higher volumes in terms of offtake. Specifically what has impacted the volumes in this quarter? Because I also understand that we maintain a pretty positive view, as far as distillery is concerned, which is why we are also putting up additional CapEx. So I mean, number one, are we expecting a very strong, I mean, fourth quarter and probably FY '22?

[indiscernible].

[indiscernible].

So what happened. Typically in this quarter the tender, et cetera took a little time. So Pramod, quarter -- I mean, last year, if you compared this quarter offtake and this year.

It is better in this quarter in comparison to...

Yes...

You have to see December quarter compared to last quarter. Having said that, there will be the makeup because there is a transition time if we move to B-heavy in many factories. So this is going to be there, but if the season starts early, the offtake will be better. So we should see a distillery offtake again in 12 months.

[indiscernible]. Sure. And whatever that we have missed in this quarter will be made up in the fourth quarter.

Yes. Since -- Pramod has already given you the yearly figures in the beginning of the call. You said 16-plus number...

16 to 16.5.

16.5, okay.

Sure, sir. And sir, with respect to the global prices of sugar, I mean we are in a pretty good driving spot, as you mentioned earlier. What is really driving the prices upwards? I mean given that -- I'm sure that everybody is aware of the fact that we will be exporting about 5 million to 6 million tonnes.

Pramod, do you want to answer this, global prices?

Up to April or May, to the time [ we will continue to the ] market, there is a critical shortage of sugar, which is pushing up the prices. This is one of the reasons. Apart from that, the currency factor is also playing. Thailand is low. Europe is low.

Brazil is also having some truckers strike, and Brazil is also lower than anticipation. [ Isn't that a fact ]?

Next year, Brazil production is expected to be on the lower side.

Right. So now let me explain, let me get to the bottom of things and try to explain what has happened in sugar and what's happened in our company. Production is definitely going to be lower than anybody... [Technical Difficulty]

We request all the participants to please stay connected while we reconnect the management. Ladies and gentlemen, the line for the management is reconnected. Thank you. And over to you, sir.

Yes. So let's understand what is happening. Lower volumes and lower recoveries will drive the costs up. Lower recovery not account for B-heavy. The other lower recovery, 0.2 or 0.3, that is going to be a cost escalation. Lower volume leads to a typically a little higher cost of production. So these two are your negatives. Your distillery volume, our distillery volume which was envisaged for the next year might take a bit of a dip. So your volumes go down. Your prices and your recoveries [ go down your cost index ]. Now let's see the positives -- so this is definitely a negative and this is something beyond our control. It is a weather condition and impacting all over UP. Now let us look at the positives. Last year, what we sold in the global market was at a lower price. And we had to recover money out of the government, which came after a long time. This year, we have made -- we have regained [ this well ] in our company; and we have made a profit, a decent profit, after selling our license at a margin beneficial to us. Two, we are hoping for a higher realization based on these lower production numbers, beginning April. And maybe, in my personal view, we'll see the impact from March onwards. So we should see a much higher pricing going ahead. Three, the higher pricing could also get a tailwind from the MSP announcement. I am saying our view, irrespective of the MSP announcement, we should get a higher price. If there is an MSP announcement, which we are very confident it would happen, we will get a still better price. And fourth, UP's cane price still remains unannounced. And if, hopefully, there is no increase there, that would be a very big tailwind. So these are factors we are dealing with, positive and negative.

Sure. Sir, one final question from my side is in the months in October and November, the government has increased ethanol...

Sudarshan, can you speak a bit louder, please?

Yes, sir. In the month of October, November, the government has raised the ethanol prices, I mean, from [ 59 to 62 ], et cetera, I mean, across various -- so this thing. My understanding is that, given that everything comes from cane, shouldn't it be logical that around the same time the MSPs of sugar should have also increased? Otherwise, the profitability between the segments would kind of be -- would completely change.

So the government does not deal in this manner. Technically you are absolutely right. In the past, we have done both together. The fact that they have increased ethanol price means in their mind there is the fact that MSP price would increase. If you see that 6% increase of price -- Pramod, B-heavy [ exactly going to what ]?

6%.

6% is about INR 3. 66% of that is INR 2. So this itself is telling you that MSP revision of INR 2 would happen. So if you see INR 3 ethanol price, that's equal to about INR 2 sugar price, right? So that is the ratio. Your point is very valid. The government didn't do it because of inflation. The inflation had peaked during the time when this was to be announced. Hopefully, now with inflation coming down, things should be better.

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

Can you hear me, sir?

Yes, loud and clear.

Okay, great. First question is with respect to export. What is our allocation for us in terms of the exports, MAEQ?

2.5 lakh tonnes.

2.5 lakh tonnes.

2.5 lakh tonnes. So have we sold off the entire quantity -- license for the entire quantity? Or there is still some pending, sir.

Yes. No, we sold off everything.

Okay. And so that may be you've sold the entitlement and you will be able to sell the sugar in the domestic market whenever possible. Does this -- I mean, since you sold this -- sorry. Please go ahead, sir.

So yes -- sorry. Sorry. Complete yourself.

What I wanted to check: If I see last time around, we physically exported sugar, and hence we got the higher domestic releases. So given now we have sold the entitlement, are we entitled for higher releases versus the domestic market, or not really, this time around?

We are entitled because our B-heavy has not -- gone up very distinctly.

Okay. The releases are also driven by the B-heavies as well, sir.

Yes, yes, yes.

Could you please elaborate what is the mechanism here, sir? Like...

No. See, that's very detailed calculation. Let's not [ into that ], but as per policy, you're entitled on both accounts.

Understood, understood. Secondly, at 16.2 cents per pound, what is the net export realization according to your calculation, sir?

Yes. We were just telling you. So your first observation was also correct. The fact that you sell your license, you make money is one separate profit center. And you have that entire domestic sugar physically with you to sell in the domestic market. So...

[ Contributing themselves ].

[indiscernible]. So it's almost coming to INR 30 ex factory.

INR 30.

[indiscernible].

Okay. So the domestic -- or realizations today from export is almost INR 30.

And this is including the subsidy or excluding, sir?

No, without a subsidy. We're just rechecking. It could be INR 29 to INR 30 without subsidy.

[indiscernible].

[indiscernible].

This is for March quarter only, which will [ open and completed April ].

So the price actually relevant is 15.5. This is the May contract.

The May contract.

Okay, [ what should work is ] 15.5 cents actually, okay, got it.

So let's take it 28.5 is [ where people are getting competitive ].

[ Right ].

Plus INR 6. There comes my bullishness on the pricing. Your export price is 34-plus. Your production is much lower. The stock government thinks is not the stocks actually in the system. North is the production belt. Deficit in production is in the North. Come March onwards, you will see [ mills themselves ] -- UP shutdown from February end, start shutting down. March onward, I'm very positive prices.

Understood, understood. In terms of the -- for the distillery for the ethanol, what is our contracted quantity which we've already finalized, sir, for the season?

[indiscernible].

[indiscernible].

In the [ first round ]...

[indiscernible]

We finalized about 13.1 crores. Now if you're aware, ethanol tender comes every month. So right now we have tendered up to 13.1 crores.

And will you have the mix between B and C, sir?

Sorry...

The mix B- and C-heavy, will it be 70-30, 80-20?

We'll just get back to you.

I think it should be 70% to 75% will be B-heavy.