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, Imba. Good afternoon, everyone, and thank you for joining us on Balrampur Chini Mills Q1 FY '22 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, which has been shared with you all earlier. I would now like to invite Mr. Saraogi to make his opening remarks. Over to you.

Thank you, Karl, and good afternoon, everyone, for joining us on the Balrampur's FY '22 Q1 earnings. I hope in these challenging times, all of you and your families are keeping safe and in good health. I trust all of you have had an opportunity to go through the extremely detailed presentation put up by Pramod and team, which provides details of the operational and financial performance. So I will straightaway begin with briefing you on the current developments in the sector, following which we will take up the company highlights. As per ISMA's latest estimates, India's production for the upcoming sugar season '21-'22 is expected to be 31 million, similar to the production last year. This is after considering a diversion of 3.4 million into ethanol, which was around 2.1 million in the current season. As per early estimates, all our key sugar-producing states, including UP, Maharashtra, Karnataka are expected to report marginally higher sugar production. Domestic sugar consumption, on the other hand, is making a smart recovery on a year-on-year basis despite the second wave of the pandemic. So the consumption is expected to -- anticipated to be about 26 million. Furthermore, the [indiscernible] international price is going to expect a lower output and this has enabled India to export excess sugar. We hope that 6.8 million will be exported by the end of this season in the current sugar year, which is to end on October -- 30th September 2021. With this, our opening stock on 1st October would be about 8.7 million tonnes, which is still higher than the normative inventory or ideal inventory of about 5 million tonnes. Moving on to an update on ethanol, which is now clearly one of our future growth drivers. Till this July this year, OMC has contracted 342 crore liters of ethanol, a sharp increase of over 80% last year, which was at a level of 133 crores liters. Ethanol manufactured from juice and B-heavy molasses is expected to be of 123 crore liters and 196 crore liters -- 123 crore liters expected, okay, which as indicated earlier trans -- turned into a diversion of 2.1 million tonnes. So there's some traction on the 2.1 million diversion that Pramod will discuss later. On an average, current year blending this year of 7% with 11 major states achieving a blending of 10%. Therefore, we are on course to meet our target of 10% blending countrywide. In this segment, we also witnessed significant positive news drop on account of proactive measures taken by the central government. On the World Environment Day in June, our honorable Prime Minister preponed the target of 20% ethanol blended by 5 years to 2025. This will not only help government save foreign exchange of about more than 30,000 crore liters, but will move the country towards a greener fuel. In addition, it will greatly benefit the farmer and the sugar miller by providing a major source of sustainable alternate income. Also pilot basis of 3 petrol pumps have been initiated, supplying 100% ethanol fuel. This will open up a much larger, long-term structural opportunity for the industry. Coming to our company's performance. We have registered subdued performance on -- for the quarter, mainly on account of lower cane crush and lower sales going to lower products. While this is a nonoperational quarter, we have booked all our O&M expenses in the P&L. Further, as you are aware, when we crushed lower cane last year, the impact of that comes in April and May because that is the crushing which does not happen. So this is a one-off, yes, when the sugar season had a short turn and we are hopeful to catch up in the ensuing season. And when we take you through our expansion plan, we'll tell you of our development initiatives also. The distillery segment continued to deliver robust profits owing to high volumes. I'm happy to share that the Board of Directors has approved a fifth consecutive buyback for the company for an amount not exceeding INR 215 crores through the Open Market operation through the exchanges, in line with our policy of distribution of profits to the shareholders. In the past, promoters have always participated in a buyback. But under the proposed buyback, the promoters for the first time decided not to participate. Post successful completion of a buyback, this would result in raising the promoter stake in the company. The Board has also recorded its approval for expansion of distillery at Balrampur for 160 to 330 KL and at Gularia from 160 to 200 KL, which means further augmentation of 200 KL in our distillation capacity. With the Maizapur already under implementation, which is about 320 KL. So 520 existing, 320 Maizapur, 210 fresh will go 1,040 KL and we hope to commission this by November '22 itself, the entire all expansions, which will result in giving up a capacity over 35 crores capacity to make ethanol in this season beginning November '22. Consequently, this would lead to doubling of our distillation capacity, and we would be running all 3 products, juice, B-heavy and a very little of C-heavy, and thereby diverting a large portion of surplus sugar. In addition, the Board has also approved modernization of sugar plants in some locations with setting up of refineries also at a couple of locations. This will help us to sweat our assets better, crush a higher quantum of cane in a reduced time. This will also give us a higher feed availability of feedstock for our distillery, which are B-heavy and juice, which would match and help us produce our end results, 35 crore liters. This is including the grain. This would also lead to economies of scale, both in the sugar and distillery segment. Given the positive structural changes and the industry dynamics, we continue to allocate capital judiciously, generate strong cash flows and keep rewarding all the stakeholders from time to time. I'd now like to hand over the floor to Pramod to take you through the financials.

Thank you, sir. Good afternoon, everyone. A very detailed PPT presentation has already been uploaded on the website of stock exchange as well as the company's website, wherein all financial performance including the quantitative details have been given. So for the benefit of only the largest portion of time at our disposal for Q&A session, we would not like to repeat the financial numbers as such. We can straightaway go ahead to the Q&A section. I would now request the moderator to take it foreward the call.

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

Just have 1 question. After this CapEx, would it be safe to assume that you would be able to divert 10% of your sugarcane towards the juice and probably 75% to 80% towards the B-heavy?

Yes. So Pramod, what is our target?

After this expansion, around 11% of cane is expected to be diverted...

To juice.

To juice.

And B-heavy?

B-heavy, around 75%.

Right. Yes, you caught the numbers absolutely right.

Right, right, sir. Sir, another thing which I would like to ask you. In last con call, you mentioned about the new variety you would be introducing. So in the upcoming season, what would be the percentage of your catchment area or the sugarcane crushing, which you as such basically will be from the new variety?

Okay. So just let me think with this question, all right. Just let me take you through both the cane and the expansion of sugar because this clearly, I guess, is well understood. So on the cane, let's understand the two. This is in actually disadvantaged area. So we'll be working very, very double hard because we are deploying capital into a [ setup ], we are deploying capital into machinery and refurbishments. And for which we've not only been taking a variety, but a large program of disease management also. So the new variety, which you're talking about is [ one MAEQ ]. There are other new varieties also coming up. And gradually, I think about more than 1/3 will go to the new variety this year and it will multiply thereafter. And probably booked even higher, maybe 60%, 70% when we begin our crushing for the expanded program. Plus, we are going to ensure that with the slew of business management measures, whatever is there will also get managed. So our call is that we crush about [ 8.75 ] this year. We're targeting 10 next year. And hopefully, we will do a delta of about 10% to 15% beyond that in '22, which would then first utilize all our assets to the fullest. In sugar, what we've done, even though technically there is no expansion, but there is an inbuilt daily crushing improvement because our 3 old plants were -- they are very old and their daily crushing was not matching up to the rated capacity. So we have refurbished it and we're looking to -- we've just got the permission, we'll refurbish it, so that daily crushing capacity will get to our rated level. Because of these 3 plants grinding lower year-on-year owing to machinery, which needed replacement is being done at one go. With that, we will also be unleashing measures, which will improve recovery in these plants plus put up refinery, which will give us a higher realization of sugar. If you say refined sugar sells as INR 75 to INR 80 higher than the regular calculation of sugar. So we want to ensure that we produce sugar at the lowest loss, which means at a higher recovery from the factory. We sell the sugar in the highest best possible realization owing to higher percentage of refining sugar. We improve our capacity utilization on a daily basis. We work hard on canes so that our entire cane comes to a quantity, which not only frees that sugar plant, but give us enough byproduct for our visibility utilization. So this program is being unleashed holistically together with a massive cane development program also to ensure that whatever we are doing, convergence at one go in November '22, the beginning of which you will see in the entering season is our post.

Right. Perfect. Sir, just one last thing I want to ask about our overhead spend because what I understood that this year, we have -- it means the trade costs have been -- from last 2 years our trade costs have been higher because of the exports. And probably this year, because of some accounting, the numbers are higher. So just want to understand how the trajectory will be going ahead in terms of our trade spend or other overhead expense.

Pramod will answer that.

Sanjay, in my view, this has direct connection with the export quantity. If we don't get ourselves engaged in physical export, then there won't be any incidence of transportation expenses or [ production ] as far as sugar is concerned.

Correct.

But you can notice that our distillery volume is going up, so that transportation cost will continue to increase in accordance to the volume of alcohol. So that is the debit side of the profit and loss account. And whatever we get the reimbursement from the oil marketing company, that was reported under revenue from operations.

Just to explain the thing for that. The government, as you've seen, has started rationalizing the transport given to us for BCML. So if there was a loss of, let's say, INR 1.25 from our profit, the loss will come down to INR 1.

[Operator Instructions] Our next question is from the line of Kaustubh Pawaskar from Sharekhan by BNP Paribas.

Yes. First, considering the one disruption because of the lower cane availability and the lower crushing, so what will be the overall crushing you're expecting for FY '22?

Around 9.5 crores, Kaustubh.

In the FY '22. Because the season will go now. So our target, Pramod, is closer to 10 crores.

That is for sugar season?

Sugar season. Definitely.

Sugar season, 10 crores is the target for balance sheet, which is around 9.5 crores.

Okay, okay, okay. And sir, for last 4 years, we have been seeing that the SAP prices have been remaining stable. So considering next year's election and if there's a change in the government, do we expect SAP to go up?

So see, let me give you our expectation on the entire politics front, and promote this is just our expectation based on government's past conduct. So I'm just qualifying to everyone that this is borne out of the government's last 4, 5, 6 years conduct. So what the government does, I'm talking of the central government, they take up the MAEQ, which is the export quantity. They decide on the subsidiary given. So they first decide the quantity and the subsidy, then they also decide the MSP, that is the minimum selling price. Then they also decide the ethanol price based on FRP. So basically, the sense and the feeling is that with the ensuing UP elections, state government might raise the price, though in a very reasonable way. And again, this is borne out of our CM's conduct -- of the CM's conduct. Even in the central election year, he did not raise the cane price. The FRP is 20 -- sorry, the MSP's pending revision from over a year, and we are hopeful that for the fact that they would want areas over the country and in UP, we're hopeful for a revision thereof. MAEQ also, we are, as per past conduct, hoping for a repeat of the same quantity. Depending on the export price, the quantum of subsidy might be lower. So the quantity may be 60 less, the subsidy may be lower. All in all, if there is a cost escalation, my basic -- our basic feeling in-house is if there is a cost escalation, it should get covered by the improvement in realization.

Okay, okay, okay. And sir, what is the MSP improvement you are expecting? Because in the presentation, it has been mentioned that INR 32 to INR 33 is what the expectation is. So you are expecting on that line?

So right now, we are selling at INR 34 today as of now. And we are hoping that in the time to go ahead, we should be able to keep the price. Hopefully, price would stay here at current year.

Okay, okay, okay. Now a question was on MSP. What is expectation over there?

MSP, currently INR 31. The government is -- last request was about INR 33, INR 34.

INR 33, okay, okay. And sir, last question on the ethanol front. Just as that the production capacity is almost doubling by end of November. So in that context, what will be the production expectations or capacity utilization from FY '23 and '24? What will be the capacity utilization we are expecting?

So we are hoping for this closer to 10 crores to 11 crores, 11.5 crores and that's when we'll be able to utilize our capacity fully. And that's what we are working on. 11.5 crores cane crushing. And basically, our idea, as we said, is to crush this 11.5 crores within April so that the quantity of cane doesn't reduce. The moment we take farmer needs to be beyond May, he starts receiving on cane plantation. So if you crush it within April, you will get your best recovery, maybe first week May at best. Our quantities are, therefore, planned to crush that quantity and that's where the daily capacity utilization has been improved. And we have -- as promoters walk their talk and not participating in the buyback just to put in our little bit of confidence in this program on the table in front of everybody.

We'll take our next question from the line of Rajesh Majumdar from B&K Securities.

Sir, I had a question regarding the cane availability. Basically, all the steps that we're taking regarding our distillery expansion, et cetera, is contingent upon a larger amount of cane and you have already elucidated the measures you've been taking on improving the cane yield and new varieties, et cetera. However, one question is always is posed, which is why is the largest player in the industry not trying to get additional cane area from stand-alone mills, which are not able to expand distillery capacity and is content with a 4% market share. Is there something that constrains us from getting additional cane area under this method?

In our efforts, we continue to pursue what we have said also. These are nitty-gritties, which hopefully should lead to us. So we are leaving no stoned unturned is what we can tell everybody.

Yes. Basically, I mean, we're just happy with the 4% market share being the largest there. And I'm sure there are many smaller mills which are not able to expand into distilleries because of financial constraints or whatever. And are we not looking at them seriously in terms of acquisitions?

So instead of trying to acquire somebody and crush 50, 70 lakhs cane in that factory, we want to increase our cane by 2 crores quintals and use it in this facility only. It's like almost buying 2 factories. In fact, there is a program, one should wait to see how it's unleashed. The rationale, we put trends there on the table both in our presentation and hopefully in our talk right now. We do continue all the efforts in all directions.

Okay. So my other question is regarding the refining. What we understand is that very few refineries are able to make money. And that, too, we are in inland-based plant and not port-based. So given the dynamics of the sugar refining business...

No, no, no. Let's me explain the refinery. The refinery within the factory -- within the sugar factory, so if you make refined sugar within your factory, you select a higher price in India. So there is no port base, nothing. It is within Balrampur refinery is being set up. It is but within Kumbhi one unit that refinery is set up. So there is no movement outside the factory area to put up any assets.

Okay. So in that case, you need to create a new brand for assets in terms of the refinery business?

Higher Selling price is the target for the sugar mills. Pramod, what are the...

If refined sugar fetches a higher price in comparison with the northern white plantation sugar.

In India.

Which means additional contract basically to build the brand, et cetera. What is the kind of return on investment that you're looking at in terms of the refined sugar business?

So it's very difficult to pick up parts and pieces. We've indicated a payback of about 3.5 years for that entire investment. And some part of it was essential for long-term fairness and reliability and operational peace of mind.

Right. And the total outlook just on refined. So how much is the total outlook in just the refined sugar part?

We'll have to get back to you.

We'll take the next question from the line of [ Akkun Tetta ] from YES Securities. There seems to be no response from this line. In the meanwhile, we'll take our next question. That's from the line of Achal from JM Financial.

Yes. You said that all these expansions will be done by November '22. So FY '23 will be like partially utilizing this. But if I had to ask you, sir, FY '24, assuming everything is normal and as per the plan with respect to external factors, what would be the cane crushing, and consequently, the sugar production volume? How much, sir, are we planning to kind of divert eventually in FY '24? And what would be the production at the distillery -- in the distillery segment?

So basically, see, what we said is we want to achieve about 11.5 crores cane crushing, 35 crore ethanol volume. That should be the sustainable model going ahead. That is the program for which all the access, cane development, distillery, sugar expansion is being put up.

Right. I mean what I'm trying to figure out, you did say that your 10% juice diversion and 75% B. But I was just curious to know in terms of what would be the sugar volume in that case? And how much of that would be the refined sugar, so to say, which can have a 75%, 80% higher realization?

Achal, for the basis of the program we just discussed over the year, we expect sugar production in our company will be in the region of around 11 lakh. Once this 11.5 crores quintal of cane is available for crushing, we will be producing 11 lakh tonnes of sugar and 35 crores of ethanol including [ EM ].

Understood, understood. My second question, this is a theoretical question. You are probably the only company, which is kind of embarking on this on an aggressive way. But what is the theoretical possibility in terms of the capacity we can go up to in the distillery segment if the policies are favorable?

We just told you, 35 crores.

Sir, that is the current plan, sir. I mean I'm just saying theoretically, can this become 50, 55 crore liters? Is that a possibility one can look at even though the probability could be far less, but still a possibility?

We need to put more efforts for that, not yet. So with the current investment, this is 35 would be -- this current investment is good for the quantity of cane and the quantity of distilleries, which are set. Anything more will require new investments.

New investment in the cane crushing as well, right?

Yes, yes. So the feedstock, I told you, is the 11.5 crores around quintal of cane, so that you can make 35 crore liters of ethanol.

Understood. And any thoughts on the grain-based ethanol? And if not, could you give us a sense of your perspective on the same?

Our major field would be producing around 5 crores liter of ethanol out of grain.

Yes, yes. I understand. I was more asking from a stand-alone grain-based ethanol, given the possibility of government looking at far more aggressive expansion in that segment.

So having invested so much capital, let's wait for the results and see how things play out and then tomorrow is open for further reinvestment in grain if that's what you're asking.

Right. Okay. So you're not averse to grain-based ethanol, so to say, on a stand-alone basis?

Out of the 35 crores, 5 crores would be grains. So if we were averse, we won't do it.

Fair point, fair point. And can you help us understand what is the status of this -- currently, we are bearing the extra freight cost for the ethanol we are supplying to depots. So what is the current state the government was suppose to kind of rework that. Is there any update on that, sir? And what is the gross rate and how much are we getting reimbursed? And what is the net impact?

Achal, that has been adequately disclosed in the presentation, the gross amount as well as the realization and the net impact. Recently, the government policy has modified the rate. And on that basis, we are expecting a further recovery of around 14.5 paisa per liter. We are in touch with all marketing companies further rationalization.

Our next question from the line of Archit Joshi from Dolat Capital.

Pramod, a very detailed presentation, thank you for that. Sir, in modeled up in my head about what you said earlier about achieving a 35 crore ethanol production number. And the sugar production number is also not materially different from what we are producing right now. While we know that there is some amount of crushing capacity that will be provisioned for manufacturing ethanol in the new distillery, wouldn't increasing the capacity of the distillery unit from 520 from 842, 1,050, wouldn't you require more sugar cane crushing to manufacture the incremental ethanol that we are targeting, which will subsequently lead to a lower sugar production from the 1.1 million tonnes that we are targeting right now? So if you can just explain what kind of sugar crushing -- sugarcane crushing capacity would we have after all the modernization and improvement projects are done? And how much will we be able to crush sugarcane only for sugar manufacturing for the 1.1 million tonnes that we have said?

So I think this is a detailed calculation Pramod would like to explain to you. But basically understand, a, if the quantity of cane is rising, your availability of molasses is rising. Two, if you are diverting juice, you're taking a return to recovery, our envisaged recovery will be much higher than last year's recovery as well. So it's a detailed calculation. So what we've told you will match down on you can do off-line with Pramod. It's a very detailed presentation.

Sure. I'll take it with Pramod offline. Sir, just one last question. In the presentation on Page 31, you have mentioned in the fourth row that the sugar recovery pre-B-heavy diversion. It appears to be lower than the sugar recoveries that is post B-heavy diversion. Am I missing something here? It's usually the other way around, right? I mean, after you divert more molasses towards B-heavy ethanol, your sugar recovery should typically drop, which is not being represented over there. Please help me understand that.

Just a minute. Pramod?

Actually, [indiscernible] graph, which is thereafter 2 slide [indiscernible] by mistake. So if you look at page -- if you look at subsequent slide there on Slide #42, right numbers are there.

So 41 is a mistake, you're saying?

Yes.

Okay. Yes, good. Well thought. So there has been a bit of a mistake figure there.

Our next question is from the line of Manish Ostwal from Nirmal Bang.

I have a question on ethanol -- our ethanol business. So sir, when we -- the country reached 25% blending, our unit profitability in ethanol will remain the same. And what are the variables to change that unit profitability?

I didn't get your question.

So my question is, sir, when the country reached a 25% blending by 2025, our unit profitability in ethanol business will remain the same or it can change? And if it changes, what are the variables for change?

Manish, first of all, the target as of now for [indiscernible] is 20%, not 25%.

Yes.

And if the country is able to produce that much of ethanol, that means there will be a significant conversion of sugar into ethanol, which will take away around 6 million tonne of sugar from the system. That itself will result into sugar prices going up from its normal level. As far as Balrampur Chini is concerned, we have indicated that post expansion of all these facilities, distillery revenues could be in the range of 35% to 40% of overall revenue. And profitability will again be going up. The proportion of profitability from distillery business will go up.

Okay, sir. And the second question is what is the current -- the projection on our capital -- return on capital employed for ethanol business, sir?

It depends. Whether we use C-heavy -- C-route molasses, B-route molasses or the use of juice route, we have given an indication that all these efforts will have a payback period of around 3.5 years.

Our next question is from the line of Bhavin Chheda from Enam Holdings.

A very, very good presentation covering all the aspects of the industry and the company. Sir, just on the peak potential number, what you spoke about cane crushing 11.4 crore quintals, which will allow you to do a distillery of 35 crore liters. So should we expect fiscal FY '24 you will be able to do it since your expansion is getting over in November '22?