Dwarikesh Sugar Industries Limited (532610) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Dwarikesh Sugar Q4 FY '21 Results and Business Outlook Conference Call hosted by Dolat Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Archit Joshi from Dolat Capital. Thank you, and over to you, sir.

Thanks, Mallika, and good afternoon to everybody. Welcome to the fourth quarter and FY '21 Results Conference Call of Dwarikesh Sugar Industries Limited. We have with us today the Managing Director of Dwarikesh Sugar Industries Limited, Mr. Vijay Banka. Without further ado, I'd like to hand over the conference to Mr. Banka for his opening remarks, post which we can have the forum open for a Q&A. Thank you, and over to you, sir.

Very good afternoon. Good afternoon, friends. I'm very happy to be amidst you for this Q4 FY 2021 earnings call conference. We have had our Board meeting on the 12th and the results are there before you. The quarter has been now -- sorry, I will term the quarter as a satisfactory quarter. We've clocked a turnover of nearly INR 600 crores. And this is vis-a-vis INR 463 crores that we clocked in the corresponding quarter last year. On an annual basis, our turnover has been INR 1,846 crores vis-a-vis INR 1,341 crores -- INR 1,342 crores in the last year. So in terms of EBITDA, yes, we have had an EBITDA for a full year basis, EBITDA of about INR 208 crores vis-a-vis INR 141 crores. And then earnings before tax for the full year is almost INR 120 crores vis-a-vis INR 71.5 crores last year. And profit after tax is INR 91.5 crores vis-a-vis INR 73.45 crores. And total comprehensive income is INR 95.20 crores vis-a-vis INR 65.51 crores. And we've been happy to announce a dividend at the rate of 125%, which is INR 1.25 per equity share. So this will -- this being our silver jubilee year, we have taken a step ahead in this direction. The working of the quarter has been generally satisfactory, more so from the ethanol segment, distillery segment perspective. Let me tell you that we have -- this FY, we have clocked the highest production. We've crushed 397.14 lakh quintals of sugarcane in the financial year 2021, which is because we've had early start of the season and late closure of the previous season. So there is an overlap, as you will understand. So this is as compared to 328 lakh quintals that we crushed in the last year. We have sold sugar nearly 49.49 lakh quintals, which includes exports sale of about 16 lakh quintals as compared to 38.78 lakh quintals, which included 9.61 lakh quintals of export sales. So we've had a closing stock of 26 lakh quintals as of the end of 31st March 2021. Our performance in the distillery segment has been satisfactory. During the full year, in fact, even in this year, we have not had the full benefit of the expanded capacity, but yet we have sold about 317 lakh liters of ethanol vis-a-vis 115 lakh -- 116 lakh liters of ethanol in the last year. So our run rate in the quarter was decent. We sold about 1.28 crore liters of ethanol. So although in the -- at the beginning of the quarter, there was a little sluggishness in so far as the oil depots are concerned and their lifting the ethanol offtake, but things have gradually gotten better. So -- and our term loans, long-term loans, as you would know, they are all subsidized loans. We have a loan from the state government, which is at 5% rate of interest, and we have a distillery loan, which is again subsidized by the central government. So we have -- and our rating continues to be A-plus, although we've been continuously striving to get AA. We hope in the near future, we should get it. And generally, things have been all right. I must commend the government for the encouraging ethanol policy, ethanol blending program, which has resulted in sugar mills enthusiastically participating in the program and using instead of the conventional C-heavy molasses, the B-heavy molasses instead and the juice as well. So this has resulted in some sacrifice of sugar production. The season, which is going to be -- which will be getting over soon, we expect that 2 million tonnes would have got sacrificed in favor of ethanol. And this number is going to get higher and higher in the coming years. And we think there is a course correction that is happening in so far as the industry is concerned because exports have also been -- export performance of the country has been very impressive. Out of the 6 million tonnes of exports, 5.4 million tonnes exports have already been contracted to be sold. So we expect the entire 6 million tonnes to be going out of the country much before the target date of 30th of September. So the performance in the external front is good. And insofar as our crushing and production is concerned, in 2 of our units, our crushing is still on. So we should be crushing more or less the same quantity of sugarcane that we crushed in the last crushing season. However, we have been generating B-heavy molasses in 2 of our units. Of the 3, we have been generating B-heavy molasses in 2 of our units. So we are also participating in the sugar sacrifice program by enthusiastically taking up the ethanol blending program. So -- which helps the sugar mills also -- sugar companies also because the revenues can be broad-based and sugar production gets moderated. So all in all, I would term the quarter and the year reasonably satisfactory, although there is scope for improvement. There is always possibility of better performance. We will, of course, strive to achieve that. Thank you very much. I now open the house for asking the questions -- asking any questions that they may have.

[Operator Instructions] The first question is from the line of Anupam Goswami from B&K Securities.

Congratulations on very good set of numbers. Sir, my first question is on the proportion of B-heavy and C-heavy this quarter. And did we sell any B-heavy or any C-heavy from our inventory last -- from last quarter? Or are we carrying any inventory as in currently?

Well, the entire ethanol that we manufactured in this present quarter is from B-heavy molasses. We will not used C-heavy molasses. C-heavy molasses has been either sold to fulfill our levy sale obligations or it's sold in the open market. So we have not used C-heavy molasses at all. We've used only B-heavy molasses for manufacture of ethanol. And stock -- the normal stock would remain at all points in time. In fact, although the ethanol stock towards the year-end was pretty trim, but yes, stock is -- I mean stock of molasses, B-heavy, ethanol, C-heavy molasses, they all remain in business, of course. So some stuff is always there.

My question was on this thing. Last year -- last time, we had C-heavy molasses, and we had to sell C-heavy ethanol due to which our slightly...

That was only in Q3, we have sold a small quantity. Small quantity.

Okay. So we are not carrying any such quantity, as large quantity right now? Okay.

No, no, no. No, even -- because the C-heavy molasses generation has come down drastically because most of the sugar mills are generating B-heavy molasses for their ethanol manufacturing purposes. So the market for ethanol -- market for C-heavy molasses in the open has been reasonably good.

Okay, sir. Got it, sir. Sir, and the next question is on the interest cost. We have repaid our debt quite a high level, but our interest cost is still higher. How has that came out?

Yes. There are 2, 3 reasons for that. Number one, you see last year, we were beneficiaries, the entire industry was beneficiary of buffer stock subsidies, which the government operated. So that was not to be in this season. In fact, it was there for a few months in the beginning of the year. Then number two, last year, we were also beneficiaries of soft loan, which was given by the central government, where there was a subsidy of 7%. So that loan got repaid on the 12th of April 2020. So we've had no benefit of that in this financial year. Number three, last year, our distillery work was on. It was capital work in progress. So some of the costs that we -- interest costs that we had incurred was capitalized. So this year, you see the full impact of interest from the distillery loan that we have taken. This is number three. And number four, of course, we are under a regulated release mechanism. As you would see, we cannot sell more than what is already to be sold by the Department of Food and Public Distribution. So -- and our production numbers -- crushing numbers and production numbers are also impressive. So that's the reason we've been carrying more stock, although the stock levels, as you see when compared to last year, is lesser. But all these factors have contributed to higher interest cost.

Okay, sir. Got it. Got it. Sir, my last question is on the -- if the international prices remains high, right now it's like $0.17 to $0.1756. Do we see any exports beyond the 6 million tonne quota? As in without the subsidy, we -- can it happen and reduce the overall inventory?

Sure. I think the prices, they have touched a high of around $0.18 a day or 2 days ago, but they're back in the $0.17 bracket now. So yes, if the prices go beyond, let's say, beyond $0.18, $0.185 or $0.19, then you may see some response from the sugar mills. They may contract to sell sugar under the OGL, which would obviously be over and above the 6 million quota that the government has announced. So there is a possibility. We will have to wait and watch the price -- international price movement.

[Operator Instructions] The next question is from the line of [ Nimish Sheth ] from GT Advisory.

Mr. Banka, congratulations on good numbers for the quarter. I have a couple of questions. One is on CapEx, one on dividends and third is a bookkeeping question. That's on the sugar stock. You said you have 26.02 lakh quintals closing stock, 31st March 2021. So what is the closing stock value per kilo?

So it's valued at INR 2,965 per quintal.

Okay. Got it. Second question is on dividend policy. For the past several years, you've been giving INR 1 dividend and you've declared the similar number for this year with 25% special dividend. So basically, your dividend is INR 1 for the last many years. Is there some policy that you guys have in mind that, based on profitability, we will ratchet up or ratchet down?

Yes. Certainly, sir. We have taken on record the dividend policy. But the dividend policy factors for the CapEx program that may have, the requirement to plow back the funds, the requirement to knock off the debt. So all those -- these all factors would be considered before declaration of dividend. So let me assure you that there is no cap on INR 1 dividend that we will be giving. The higher the profits and the higher -- the lesser the requirements of plowing back the money into the system, the dividends can always be higher, sir.

Okay. And last question on CapEx. Are we planning any further expansion of our distillery? That's one.

Yes, sir. Yes.

And two, are we planning any brownfield expansion of our sugar plants, TCD-wise, so that we get more molasses?

Yes, sir. So insofar as distillery capacity is concerned, sir, so now we are in this particular ethanol year that is commencing from 1st of November going up to 30th of October 2021. We are equipped to produce and sell about 4.5 crores liters of ethanol. Now there some subtle changes in our capacities in-house in this particular plant we are making. So from the same plant, we will be able to manufacture and sell about 5.5 crore liters of ethanol. So that is number one. Number two, in our third unit, we are evaluating, of course, this untimely second wave of COVID has -- because of that, we are waiting and watching. But the program is on the anvil. And if we take that up, our -- there will be impressive increase in our ethanol production and selling capacity.

Right, sir. Okay.

And so far as your question on the sugar capacities, yes, we have sought approval from the authorities for increasing the capacity. Because as we have seen in one of our units, we crushed for nearly 200 days. So we would like to compress the crushing there -- compress the number of days we crush there. And plus the third unit where we are evaluating the distillery proposal, we would want to -- we are -- we believe -- we'll be evaluating increasing the sugar crushing capacity also so that the distillery can -- if you put up the distillery, it can work on a full quarter basis.

[Operator Instructions] The next question is from the line of Manali from Centra Advisors.

Sir, congratulations on a good set of numbers. Sir, my first question is on how do we see and -- like how do we see an increase in our capacity for ethanol currently?

I just answered that question. We are presently equipped to manufacture about 4.5 crore liters of ethanol, which is going to be ramped up to 5.5 crores in the coming season, in the same plant. And the second is, we are evaluating another -- putting up of another distillery. Like I said, because of the unfortunate second wave of COVID, we will have to wait for a little while before we take some concrete steps. But we are actively evaluating setting up of another distillery to ramp up our capacity.

Okay. And sir, one more question I would like to ask is what would be our breakeven in place if we want to export under OGL?

No, it depends actually. You see domestically, one is realizing a price of INR 3,300 or so per quintal. So it depends on what vision you have. Going forward, do you think this price will go up or it will come down. The advantage in exporting is that you will realize the money quickly. You'll liquidate the stocks quickly. You will get the money quickly, whereas if you hold on to the stock, maybe you will hold it for the next 5, 7, 8 months, whatever it is. And then there is obviously interest cost. So I'm sure if the price is around INR 3,100 one is -- it's worth looking into it, I would say, ex factory realization.

[Operator Instructions] The next question is from the line of Giriraj Daga from K.M. Visaria Family Trust.

My question is related to -- hello, can you hear me?

Yes, yes. I can certainly hear you. Tell me sir.

So my question is like what kind of volumes we are looking for FY '22 in terms of ethanol?

Like I said, the existing plant, we can do about 4.5 crores. So we are already in the month of April, okay. So coming season, maybe about 5.5 crores. So if you're talking about FY '22, anything upwards of 5 crores is what we are looking at.

This year we have sold [indiscernible], right?

This year, we have sold, I'll tell you how much we have sold, about 317 lakh liters we had sold, 3.17 crore liters.

3.17 crore. And this our total industrial, I'll call it, 5.5 crore.

No. It's 4.5 crores, our capacity is, but this capacity was created during the year. It was not there right from the beginning of the year. So now we are at 4.5 crores. We are ramping up the capacity to 5.5 crores from the same plant. So 4.5 crores, we are already equipped. So partly, we will be manufacturing and selling at 4.5 crore liters capacity and partly at 5.5 crore liters per annum capacity, so which means upward of 5 crore liters is what we think we should be able to sell in FY '21-'22.

No, understood. Sir, I was just looking at answer like 3.17 crore of ethanol last year, and you had a total distillery sales of about 5 crore liter. So that remaining was the alcohol part, ENA and...

No, no, no.

Am I getting it wrong?

Yes, yes. It's not like that. We are manufacturing only ethanol. Industrial alcohol -- within industrial alcohol, we are manufacturing only -- yes.

So this 3.17 crore can go to 5 crores.

Yes, yes. We produced about 308 crore -- 308 lakh liters of ethanol, and we have sold 317 lakh liters of ethanol.

And this number will go to 5 crore liter?

5 crores in FY '21-'22, yes.

And FY '23 can be 5.5 crores plus unless we setup new capacity?

FY '23 is too early. Like I said, we are evaluating setting up of another distillery. So if it fructifies, then the -- obviously, the numbers will go up.

So my second question was related to that. So when I look at the new capacity, any indication you can give in terms of whether it will be like the -- as of now the industry is going with the direct sugar syrup also. That is one aspect. New players are also contemplating combined with the food grain as well as the sugar. So any thoughts on which side you will be tilting towards?

No, no. We will be using sugarcane juice, and we'll be using B-heavy molasses. So during season, we will try and use sugarcane juice and during off-season, we will be using B-heavy molasses. Insofar as grains is concerned, you see the Eastern U.P., the availability of grains is plentiful, whereas in our area where the plant is located, there the availability of grains is not all that easy. And once we are in the market, the prices of grains will go sky high. So which is the reason why we cannot be depending on using grains in the off-season.

Understood. Understand. Sir, just one clarification. That's more of academical purpose. The direct sugarcane refinery can operate throughout the 365 days? Or it can only operate during the sugar season?

During the season. Although there are some technical studies that are going on to see that the sugarcane juice can be preserved. But even if it is possible to preserve the sugarcane juice, the storage will pose monumental challenges.

The next question is from the line of Sanjay Manyal from ICICI Securities.

Just one question about this 5 crore liters, which you have mentioned. So we can assume that this entirely will be B-heavy?

Yes, yes, entirely will be B-heavy. B-heavy.

So whatever the distillery requirements you have, you will be doing through molasses, certainly molasses?

Yes, yes, yes. Exactly.

Okay. And just one thing on the sugar recovery. So what exactly is the decline in the sugar recovery season or what is expected in the full season by the time we'll end it?

So it's -- this year, the sugar recovery numbers are very misleading because most of the people have used B-heavy molasses for manufacturing ethanol. So they've generated B-heavy molasses. Now we also have generated B-heavy molasses in 2 of our plants. Now the sugar has -- the sugar sacrifice can range from 1.3% to 1.7%, 1.75%. So depending upon what kind of sacrifice one takes, so that will obviously decide the recovery. Now if you ask about our recovery, we have had a gross recovery of 12.4% in the last crushing season, which is season '19-'20. So this year, we -- our gross recovery should be down anything between 0.10% to 1.15%. That was because whatever setback that most of us received during the -- in the first phase of the crushing when we were using the ratoon crop, so that drop in the recovery stays. So -- but anyways, there has been improvement in the recovery in use of plantation crop. But I'm guessing most of the sugar mills will report a drop in the recovery of about 0.1% to 1.15% insofar as the gross recovery is concerned. Net recovery becomes irrelevant according to me in these times because what we need to see -- what is important is the gross recovery.

Right, right, sir. And about the -- specifically about the monthly quota, if I just see the last 2 months. I know it may not be a very right indication, but we have 2.6 lakh tonne inventory. So if I just take out the domestic quota, what kind of quota we can expect in the next 12 months, say, for financial year 2022?

See, it's difficult to say, okay. Actually, the formula of the quota was tweaked for a couple of months, which is where the units from U.P. were adversely impacted, but there has been course correction in the month of May. So May quotas are really better for us. So we -- you see when the central government is deciding the quotas, the Department of Food and Public Distribution, obviously, they take into consideration our production numbers as well as our stock numbers. So then the distribution that is done is a very fair and equitable distribution. So we have been getting releases in the region. Like this month, our release has been in excess of 3 lakh quintals. So we expect such releases to continue in the coming months as well.

Okay. Okay. Which means that you will still require at least 70,000 to 80,000 tonnes of exports in the next season as well?

Yes, yes, yes. I mean, if and when the exports are announced, we'll be actively -- we would want to actively participate so that we can liquidate our stock faster. And someone had asked me about participating in the -- participation on the OGL platform. Again, we are watchful. We will see what is the price parity. And accordingly, we will take the call.

The next question is from the line of [ Dhwaneet Chawla ], an individual investor.

First of all, I would like to congratulate on the quarter gone by. And looking at the current trends, it's seeming that we are actually doing pretty well. So my first question is actually with regards to the impact of the second wave of COVID virus. I heard that there's some local restrictions being imposed in U.P. And has it affected any of our production? As I understand, it's an off season. So it might probably not have a big impact. My second question is with regards to, can you give us a distribution between how much B-heavy molasses and how much C-heavy molasses we are actually having. And thirdly, I wanted to know, on the cogeneration front, is this kind of export around 56 watts, which we are doing, is it sustainable? Or it varies season to season?

Yes. To answer your question -- first question. The second wave of COVID, unfortunately it's spread across the country, and it's spread the mofussil areas also, the rural areas also. And U.P. also, we cannot say that it remains unaffected, unlike the first wave where there was minimal impact on the rural area. But our sugar industry, since it is classified as an essential -- sugar is classified as an essential commodity, so the government provided a support when the first wave hit the country. So there was a restriction on the movement of goods, et cetera, but we were exempt. In any case, sugarcane was allowed to be transported and allowed to be crushed also. Similarly, in the second wave, our crushing is on. Out of the 3 units; 1 unit, our crushing got over on the 24th of April. In the other 2 units, our crushing is continuing and should get over any time between the 15th and the 20th of May. So the crushing remains uninterrupted. The government is very clear, because it involves the interest of the farmers. So whatever standing crop was there, it needs to be picked up and crushed, number one. Insofar as the sugar demand is concerned, when the first wave hit the country, that time there were some demand disruption, there was some demand disruption. In the second wave, we are yet to feel any kind of demand disruption, although the market has been slightly subdued, I must add here. So by and large, if you ask me, yes, COVID has not impacted our industry. What was your second question about?

About -- with respect to B-heavy molasses and C-heavy molasses.

C-heavy molasses, yes. So we have generated B-heavy molasses in 2 of our units. And as a result, we have taken off -- we have sacrificed about 34,000 metric tons of sugar production so far in this season now -- vis-a-vis 5,300 metric tons of production that we sacrificed in the previous season. So we have been using B-heavy molasses. Whatever B-heavy molasses, the storage, whatever closing stock of B-heavy or C-heavy we have is the normal closing stock. Nothing extraordinary, not much. So ethanol offtake, again, because of the second wave of COVID impact, it is slightly subdued at the moment, but is expected to become normal very soon. And what was your third question?

No, sir, my third question was actually with regards to -- I just wanted to understand that in the coming quarter, is this kind of momentum which we are having, is that sustainable?

Yes, yes, it's sustainable. I mean, I wouldn't be able to talk more on a quarter-to-quarter basis. But yes, on an annual basis, this momentum is sustainable.

[Operator Instructions] The next question is from the line of [ Ashish Agarwal ] from Crescita Investments.

Sir, my question is with respect to your -- how do you see the ethanol opportunity? Obviously, you've given some opening remarks. But if you could just elaborate on that, say, a 3- to 5-year vision. Because there's so much that we are hearing about what the government is planning in terms of 20% blending, then E100. I mean how do you see the space plans panning out? And how do you see the opportunity? And how do you see yourself in that opportunity?

Sure, sir. So let me start by saying that, yes, 2 important problems that were plaguing the industry was, one with regard -- one a short term and one a long term. And the short term, of course, the problem has been of burgeoning stocks, higher stock levels, problems of liquidation of stock. And secondly, the continuous high production of sugar because of farmers preference to grow more and more sugarcane, it being a very remunerative crop for them. So to address the short-term problems, government has embarked upon this export strategy where every year, last year also, they set a target of 6 million tonnes of exports. And this year, again, they've set a target of 6 million tonnes of export, which is likely to be successfully completed. So this will help moderate the stock level. So from a high of -- this season, we are going to produce -- the country is going to produce about 30.5 million tonnes of sugar, consumption being 6 million tonnes. So there is a surplus stock of 4.5 million tonnes. So -- and the 6 million tonnes going out, 1.5 million tonnes of stock levels get moderated. So in the coming years -- so we have seen enthusiastic participation of the sugar mills in the ethanol blending program. Hitherto the conventional system was to use C-heavy molasses and to make ethanol out of that. But now we have seen more and more sugar mills using B-heavy -- generating B-heavy molasses for making ethanol. And we have also seen sugar mills using sugarcane juice directly for making ethanol. Now this is where this program is going to get -- gather momentum in the times to come. Last year, we sacrificed 1 million tonnes of sugar production. This season, we expect to sacrifice 2 million tonnes of sugar production. And this number is going to grow bigger and bigger in the times to come, such that with more sugar mills participating, taking up the B-heavy molasses route and the juice route, you will see in the times -- in a couple of years from now, you'll see a sacrifice of about 4 million tonnes of sugar production at least. So which means when this happens, exports -- I believe there may not be such a dire need to push for the export agenda, maybe there can be a surplus of about 1 million or 2 million, that's how the balance is expected to be restored in the country. So ethanol program is gathering momentum. Presently, about 7% ethanol blending is happening, and this number is going to get better and better. Government has already set up a higher target, 10% by '22-'23. So every sugar mill are -- and the prices are reasonable for selling -- manufacture of B-heavy molasses and for manufacture of molasses -- ethanol from juice directly, the ethanol is priced reasonably good. So we will see increased participation of sugar mills. So we will also push the bandwagon, we will also be increasing our molasses -- ethanol production. We will try and sacrifice more sugar, moderate our sugar production. So this is how the situation is panning out and which is encouraging news for the industry because we were purely seen as a commodity player. So now we have an interesting twist to the story of the ethanol story. So these things are going to get better and better in the times to come. And government is committed to the ethanol blending program for the next 8, 10 years at least.

Sure. And the other related question is, obviously, to drive such a large-scale investment in production of ethanol would require substantial CapEx. So I mean, if you could just throw some light on the kind of profitability of an ethanol plant? I mean what does it take to set up one and the kind of payback period?

Yes. So a lot of companies have come forward to expand their footprint in the ethanol space. They are setting -- incurring CapEx. So the problem is not so much about the good companies who are able to get the bank finance. The problem is of the companies whose numbers are not very healthy. There again, the government has stepped in and has worked out a tripartite mechanism, where the oil companies are one of the participants to the agreement and the bank and the borrower, all 3. So there is a -- they have ring-fenced the ethanol collection such that a portion goes to the ethanol manufacturer, a portion goes to the bank towards repayment. So this is a very encouraging development. So yes, so we should see a lot of ethanol capacities coming up here. You must have also heard that there are a few companies like Renuka Sugars, for example, they have set up sugar mills only to manufacture ethanol and not sugar. Of course, they may have the flexibility to manufacture sugar as well, but their agenda is to manufacture presently only ethanol. So you are seeing such encouraging response to the government policy. If you ask me payback period, yes, payback period could be anywhere between 4 to 5 years. It all depends on what kind of opportunity cost you consider for the molasses.

The next question is from the line of Ankit Sancheti from Kotak Asset Management.

A couple of questions from my side. One is, can you share what are the current ex factory realizations for sugar? And how do you see it panning out over the next 3, 6 months?

See, ex factory realization, let me go back a little bit, ex factory realization during the last quarter was not very impressive. It was just about INR 3,150 or so, not much. Typically, it so happens that when the crushing season is on and when there is a lot of production of sugar in Maharashtra, you see some pressure on the prices because the sugar of Maharashtra finds inroads into the northern states as well. But with that, having said that, now, we have seen improvement in the prices from the month of April onwards. So we have -- we -- presently, the ex factory prices are around INR 3,300 -- INR 3,200 to INR 3,300. And we see the prices sustaining at these levels, if not improving.

Because we were given to understand that ex factory prices have been now inching towards 34 -- around INR 3,400. Is it...

What you heard is for -- what you have -- you must have heard is for the refined sugar. Yes, refined sugar gets sold at that price, INR 3,400. There's always a INR 80 to INR 90 premium for refined sugar. So we do not manufacture refined sugar. So our realization is around INR 3,300.

And any specific reason why we don't sell refined sugar?

No, we don't make. It requires CapEx. So we have not yet incurred that CapEx. So there are not many mills who are manufacturing refined sugars. There are very few sugar mills. So -- yes.

Second question was, I understand that last year, you manufactured 3.17 crore -- or you sold 3.17 crore liters of ethanol. And as per your current capacity, you can manufacture and sell around 4.5 crore liters of ethanol in FY '22. But I was not able to understand how will this 4.5 crore is going to be ramped up to 5.5 crore liters of ethanol. Will it require further CapEx?

No, no, no. There are very some small subtle adjustments, little CapEx. Some of governmental approvals were pending. So once these come, our capacity will be 5.5 crores.

Okay. Okay. So on a steady state, our capacity is 5.5 crores liter of ethanol in any given year?

Yes, yes. From here onwards -- or from the month of October when the new ethanol season commences, our capacity will be, in this plant, 5.5 crore liters per annum.

Okay. Third thing was, you mentioned that for Unit 3, you were looking for more capacity at the sugar also. Okay. So can you say what approval are required?

No, we need approval from the central government as well as the state government. A lot of governmental approvals are required. So the reason why we have sought approval is, our plant is operating at -- our installed capacity is 7,500. So sometimes we operate beyond 7,500. So it's always wiser to have certificate for a higher capacity. Number one. Number two, the saying in the sugar industry is higher the capacity, your higher -- the draw of sugarcane will be higher. If the sugarcane comes from within the same company, the area will get higher sugarcane, more sugarcane. So it will work both ways actually. And we will not be -- we will -- we have not yet evaluated, but not much of CapEx may be required for this purpose. I mean it's not like -- for example, if you have spent INR 300 crores a year, we'll need a CapEx of another INR 100 crores, it may not be in that proportion.

No. So just trying to understand, Unit 3, what is the current sugar crushing capacity?

Our total crushing capacity in the first unit is 6,500, where we have sought approval to increase it to 7,500. The second unit is 7,500, it remains at 7,500. In the third unit, we have -- our capacity is 7,500. We have sought approvals to raise it to 10,000 TCD.

Okay. And typically, these approval takes how much time?

Having said that, I must add that it doesn't mean that we are immediately increasing the capacity. There is no plan -- immediate plan to do any increase in the capacity as such.

No, sir. Okay. But just trying to understand, does it take a considerable lead time to get approval from the...

Yes, yes. At least about 5, 6 months, it takes.

Okay. 5, 6 months. I mean, it's not that it will take 2, 3 years?

No, no, no. 5, 6 months. So there are certain approvals required from the state government. They recommend to the central government that yes, capacities can be increased. And there are, of course, other related approvals like drying of the groundwater, effluent, et cetera. These are many other approvals that are required.

Okay. So at this point in time, we are looking or considering to increase capacity in Unit 3. Is that the right understanding?

No, no, no. Not the sugar capacity. Not the sugar capacity. We are looking at -- we are evaluating setting up a distillery at the third unit.

And what level of distillery can come up at this unit 3?

The production -- the present capacity can support a distillery which when used -- when juice is used, it can support 175 KLPD distillery. And if B-heavy molasses is used, it can support 140 KLPD of distillery.

And another clarification I required was, one of your competitor, DCM -- I was wondering, one of your competitors has mentioned that as per existing excise policy of U.P. state government, the sugar mills are not allowed to manufacture ethanol from cane juice. Any thought on that? Is it a right -- is it the same view which you have? Or that is why you are not setting up cane juice backed ethanol capacity?

No, no, sir. Let me clarify. Number one, there are no competitors in our business. All of us are friends, okay? Number two. Number two, it was perhaps allowed in the year 2018. Companies are -- sugar mills are now allowed to use juice as a feedstock for making ethanol.

As per you, there is no policy changes with...

No. No policy impediment to use juice for manufacturing ethanol.

Because they mentioned it in just their call 2 weeks back.

That must be some time ago, sir. Some time ago.

Okay. Okay. Okay. And just on this, coming back to Unit 3, 175 KLPD capacity based on C-heavy molasses...

Based on juice.

Based on juice, sorry. How much CapEx will be required for this?

So if we set it up, it will cost us anything between INR 225 crores to INR 240 crores.

INR 225 crores, INR 240 crores if we set up with the juice-based ethanol. And if we set up for B-heavy, it will be similar CapEx?

No, no, no. Let me clarify, sir. See, there are 3 kinds of feedstock, which can be used in distillery, okay? One is conventional C-heavy molasses. The second is B-heavy molasses, and the third is cane juice directly, okay? Now the constraint or the bottleneck, if you ask me, is the effluent treatment facility. Okay? The boiler, the utilities and the effluent treatment facilities. So the same utilities or the effluent treatment facility is good enough for 175 KLPD of distillery if based on juice, 140 KLPD of distillery if based on B-heavy molasses and 100 KLPD of distillery if based on C-heavy molasses. So what I'm trying to say is, if you are using C-heavy molasses, the conventional molasses, it's got -- its pollutants are more toxic and you need -- the incineration is a little tedious job. However, when you use B-heavy molasses, if for example, you have a 40-tonne boiler and you are using C-heavy molasses, which may suffice, and it may be equal to treat -- incinerate effluent generated by the 100 KLPD plant. But the same boiler can incinerate effluent generated by 130, 135 KLPD of distillery if based on B-heavy molasses. You got my point?

Yes, sir. I got it. Like how -- sure, sir. Go ahead.

Yes, the lead time is about a year or so. Once having decided, it may take a year for execution.

And in terms of making -- finalizing decision on the same, do you think it will take a couple...

No, we are waiting for -- we -- this second wave of COVID has pushed us a little back. So we'll wait for a couple of months to take a decision.

If we take a decision by, say, Diwali of this year, so the capacity will be...

Yes, one year from there. We should be able to catch up the ethanol year '22-'23.

The next sugar season? Next to next, not this one but next sugar season?

Yes, next season. Yes.

The next question is from the line of Resham Jain from DSP Investments.

So sir, just a few questions. So first is on your comment on exporting under the OGL route. So about $0.185, you think the -- there is a viability of exporting because it is more than the domestic prices. Is that a fair understanding, above INR 3,500?

No, sir. It is not more than the domestic prices. It is definitely not more than the domestic price. Domestic price is around INR 3,300. If it is above $0.185, the realization -- ex factory realization may be a little above INR 3,000. So then you can -- then it sets your thought process on. The sugar mills will be compelled to think, okay, should I participate or not participate. Because then the question is, if they hold on to the stock and sell as per the monthly release mechanism, they will have to wait for some time before the sugar gets sold, stock gets liquidated. And here, they will have an opportunity to quickly sell, realize the money and liquidate their stock faster. So what I'm saying is that, that kind of a threshold is one where it will set the thought process on and among the sugar mills. I'm not saying that there will any equality with the domestic selling price.

Okay. Okay. Understood. INR 3,000, and then just a sacrifice of carrying costs. So that should...

Yes, yes. So then sugar mills may perhaps think. I'm not saying that they will think. It's my feel that, okay, sugar mills may start thinking, okay, let's look at it.

Understood, sir. Understood. Sir, my second question is on the overall closing stock for the industry. How -- what is the current trends, which we are getting on the closing stock for current year?

Sir, we should end up with a closing stock of a little above 9 million tonnes. You see our association's initial estimate of sugar production was 30.2 million tonnes. Already, we've crossed 30.2 million tonnes. We might end up with a production of about 30.6 million tonnes or 30.7 million tonnes. So we may have closing inventory in excess of about -- in excess of 9 million tonnes.

And sir, given the kind of CapEx infusion which is happening on the ethanol side, we will be able to sacrifice another couple of million tonnes of sugar next year, next sugar season?

Yes, I think the number will be impressive. We've seen a sacrifice of 1 million tonne last year, 2 million tonnes this year and the next year's number would be not plus 1 million tonne, it should be more accordingly.

So you're saying more than 3 million tonnes?

Yes.

Okay. And sir, what according to you will be the comfortable closing stock because if it moves below certain threshold also, a different kind of measures can be brought in by government. So what according to you will be the right kind of closing stock for the country looking at the past?

According to me, 3-month stock should be a comfortable closing stock. So 3 months stock is somewhere -- 3 months consumption, sorry, 3 months consumption is current -- that kind of a stock would be, according to me, an optimum stock level. So which means about 6 million to 7 million tonnes. So if that happens, nobody loses sleep, the government is also comfortable that there cannot be runaway increase in the sugar prices. The industry can also be comfortable and industry also -- I mean, there will be no downward pressure on the selling price of sugar.

The next question is from the line of Rushabh Doshi from Proinvest Nirimiti Investment Advisors.

Congratulations on the quarter. So I have 3 questions. One is more of a bookkeeping question. Like it's related to the segmental results. I just wanted to understand how the accounting holds for that. So my assumption is that while manufacturing ethanol, sugarcane is first crushed and is boiled. So the expenses related to that, before -- everything before B molasses, is that accounted in the sugar segment and the rest of it is accounted in the distillery segment. So is that assumption correct?

See, the cost incurred at the distillery obviously is loaded on the ethanol cost, on the cost of ethanol manufactured in the distillery. As far as the molasses transfer from sugar to the distillery is concerned, it is done on opportunity cost basis, at what -- what is the sugar content, what is the eventual price at which sugar -- the sugar that has been sacrificed will get sold. So it is a combination of factors, not just one factor.

So like for the last quarter, like -- so sugar is not so profitable so compared to ethanol. So...

Yes. So the interesting development in this particular quarter has been that whatever ethanol that -- molasses that we transferred to the ethanol division, most of it got used. There was very little closing stock of molasses in the distillery segment. And whatever ethanol we manufactured, most of it got sold. So that is why you see better performance of the distillery segment. Sugar segment, if you see -- if you ask me a question as to why the margins are lower, sugar prices have not been all that good throughout the year. I mean particularly in the last quarter, our realization, if you see our presentation, has been in -- marginally in excess of INR 3,100. And if you take the blended average of sugar sold domestically and sugar exported, our realizations are lesser than INR 3,000 at any case.

Okay. So just to conclude, like all costs for distillery are -- is reported in that segment only?

All directly attributed, the costs are reported accordingly.

My second question was like, what is the price differential like for exporting for a company which is doing at in U.P. compared to someone doing it in Maharashtra or Karnataka?

There's not much of a difference. It's just that transportation cost, for example, if we transport our sugar from our plants to, let's say, a port in Gujarat, I mean Kandla Port, we may incur a cost of about INR 2,000 per metric ton. So somebody from Maharashtra, of course, they have many other options of ports. So if they sell, maybe they'll be able to sell it for -- transport it for, say, INR 1,000, to INR 1,500 a metric ton.

Okay. And my last question is like based on what I've read is that for the current vehicles running on petrol, a blending rate of around 13%, 14%, these engines can take up that ethanol level. But anything above that, it would be difficult to use in our current engines and there will be some issues with the fuel pump and other gaskets. So like would we have a different blend if we go above -- if we go at 20% levels, like it's a different category as a fuel pump? Or like how would it work in the future?

Any blending percentage above 20% would require some changes in the vehicle fuel pump, et cetera. I mean -- so we are -- 20% blending is, we have some distance to go. So -- but the government, ministries -- concerned ministries, they are all working with the automobile manufacturers also on this particular issue that what if one has to blend more than 20%. But having said that, I must say, there are many more years left before we reach that kind of percentage. If you see the Brazilian example, you will find -- you can walk -- you can take your vehicle into a petrol station, fuel station and ask for whatever fuel that you want. Their vehicles are all on flexi fuels. But yes, as you mentioned, yes, beyond 20% blending in India, the vehicles are not so far designed to have that kind of percentage.

The next question is from the line of Mridul Shah from Aamara Capital.

Many congratulations on the quarter gone by. Sir, just wanted your thoughts on 2 things: a, with this ethanol blending program coming into full throttle now, how do you see the composition of the 3 verticals of the sugar sector changing? And the reason why I'm asking this is because going forward, what -- how can this sugar cycle actually neutralize? There have been wide varieties in terms of, there were upstream, downstream. So how do you see that normalizing? And b, with respect to -- there were some regulations that from 2023, the subsidies, which are allowed for exports, that would be removed. And I think PM Modi had also gone on to record to say that we'll be pulling out subsidies. So any thoughts on both these things from your end, sir?

I'll answer your second question first. Yes, there are some constraints insofar as subsidizing exports beyond 2023. So up to 2023, we are still a developing nation. So we can -- the government can perhaps encourage the exports by offering subsidies, et cetera. Okay. So with 2023 in mind, so the way we are going ahead is that we are trying to moderate our sugar production and increase our ethanol production. So as I had mentioned in my earlier -- I mean, I just mentioned a little while ago, that the sacrifice of sugar of 2 million tonnes should go up to 4.5 million, 5 million tonnes by about 2023. If it happens, it's very good. So then you will see production and consumption level almost similar. So -- and if at all, there is a need to export, the export may not be so high. And if India is not in the export market, it's -- maybe the international prices will also stay put at a reasonable level. So in the times to come, we see moderation of sugar production, increase of ethanol production. And with moderation of sugar production, I see not so much of downward pressure on the selling prices of sugar. Maybe there will be no need for monthly release mechanism as well. Maybe there will be no need for the MSP, that MSP support that the government is extending. So there will be -- if and when that happens, there will be -- I see healthy profits also from the sugar segment. And distillery segment, in any case, is expected to be already good for the sugar companies and is expected to -- expected to sustain at these levels or better levels in the times to come. Power segment, yes, we are all on the defensive bet there. So nothing significant or better can -- is expected to happen in the power segment. So sugar segment working, which is rather subdued for most of us, should get better once the stock levels of sugar become reasonable, and we should not -- thereafter, we should not see any downward pressure on the selling price of sugar.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, I just wanted to understand now, given you're sacrificing sugar production and ethanol is on a high group, how do you see the revenue share of ethanol in overall scheme of things in maybe next 2 to 3 years?

See, sugar will continue to be a dominant segment, no doubt about it. I mean even in the year that has gone by, our sugar segment revenue is almost 80% of the total revenue. So sugar segment is expected to be dominant segment. If -- I've really not examined how much low the contribution from the sugar segment can go, but I don't see things immediately going below the levels of 70% or so. So distillery segment, yes, it will get better. And the distillery segment, the advantage is the margins are so much better there as compared to the sugar segment. But sugar segment will continue to be dominant segment. I mean, let me give you my example. For example, I have crushed about -- I should be crushing about 375 lakh quintals of sugarcane this year. So I'm generating B-heavy molasses in 2 of our units. So I'm sacrificing sugar production of 34,000 metric tons, which is less than 10%, if you ask me. So -- but yes, these numbers will undergo radical changes. But in any case, sugar segment will continue to be a dominant segment in the times to come.

Fair enough. Understood. And in terms of distillery margins, like 40%, 41%, when the focus is on distillery production overall for the most of the sugar mills, so do you see -- so how do you see that the margin trend in the ethanol segment from this 40%?

No, it's not. 40% is way too high, I don't think it's 40%. But yes, 30% to 40%, it all depends on the company and the way they price their transfer of B-heavy molasses or the sugarcane juice. It will all depend on that. So these margins are sustainable. I don't see there to be any problem there.

Understood. Understood. And do you see also, because there is a shift of production from sugar towards -- more towards ethanol. So as you were talking about the sacrifice overall in the industry, the margins, that is 2.5% in the sugar segment. So is there -- so what's the scope there in terms of improvement in margins?

No, no, that's what I was answering a little while ago. I said once -- now the sugar price stands -- are there where they are, is all because of government support, because of the MSP, because of the monthly release mechanism. So that is because we are still carrying a overhang of stocks. So once the overhang of stock is diminished, once that level comes down, so then you will not see so much of pressure on the selling price of sugar. And that is when you will see some decent margins coming out of the sugar segment also.

The next question is from the line of Dhwanil Shah from I-Wealth Management.

Sir, a couple of questions I had. First was on the B-heavy molasses part. So sir, what was the quantum this year we did?

See, we generated -- let me tell you, 1 second, if I can -- I will not have the number off hand. In 2 of the units where our crushing has already been about 2.5 crore quintals of sugarcane. So there we have generated. So typically, the molasses generation is 6%, okay. So which means about 15 lakh quintals of B-heavy molasses we would have generated from these 2 units. 15 -- and 15 lakh quintals can support the production of 4.5 crores plus.

So sir, this year, we did close to 3 crore liters, we sold, right?

Yes.

So out of that, how much would we be B-heavy?

Out of it, max -- again, I don't have the number, but whatever we sold in the second -- third quarter -- you see the first quarter, whatever we sold was all from C-heavy molasses. Second quarter, whatever we sold was from C-heavy molasses. Third quarter, a very paltry quantity that we sold was C-heavy molasses, rest from B-heavy molasses. And then the fourth quarter, everything that we sold was from B-heavy molasses.

Got it. So last 2 quarters, mainly were the B-heavy molasses?

Yes. Hereafter, only B-heavy. No C-heavy.

Okay. Okay. Got it. And sir, this year, recovery rate, sir, I just missed that point. What was our recovery rate this year?

Sir, the recovery rates have been lower this year. Last year, our gross recovery rates like -- let me tell you here after when sugar mills are getting into ethanol by generating B-heavy molasses, so the net recovery rates are irrelevant. They don't -- I mean, they don't offer any kind of comparison. So gross recovery rates is what one must see. So last year our -- last season, our gross recovery rate was 12.4% across 3 units. So this year, our recovery rate should be lower. We are yet to conclude our season. We are yet to work out our recovery rates, but it should be lower by at least about -- at least 10 to 15 basis points.

Okay. Okay. Got it. And sir, just wanted to understand further around our -- the segment calculation. Because as you also said into the earlier participant's question you were replying to that because of the different pricing, different accounting, the segment profitability changes. Right? So sir, now if I'm just seeing yearly, and I'm taking a 2, 3 years' view, right, so in terms of gross margins or EBITDA margins, can you just help us to understand that how directionally will we be going ahead from here?

No. I think whatever margins we are getting in the distillery segment, those margins are sustainable. If at all, we were -- they come down, they come down marginally because of, again, the adjustment on account of the transfer pricing. Otherwise, those margins are sustainable. In the power segment, I don't see any of the margins undergoing radical change as such. So far as sugar segment is concerned, as I mentioned, if the sugar prices are better, if there is -- sugar production is moderated, if there is no downward pressure on the selling price of sugar, then we should see some improvement in the margins of the sugar segment.

Sir, just to sum this up. So last 2, 3 years, whatever we saw directionally, we should be adding towards better profitability in terms of our margins going...

If sugar prices...

If sugar price is what it is today, sir?

Yes, yes. True. I agree with you.

Okay. And sir, with the Brazil, a lot of news and -- about sugar -- crushing cane has been dropped by 30%, 35% there because of the bad weather. And even the ethanol prices globally are surging. So does that have any impact on us and overall on the industry?

Yes, it does sir.

Because our ethanol prices are fixed, right, sir?

No, no. It does impact because there is lesser production of sugar in Brazil, the international prices of sugar firm up. And that has helped in the quick contracting of the export target that the government has set. Since the margins have been better, the mills have been in a better position to contract the export sales. Had there been pressure on the -- had the international prices been lower and even if we consider the subsidy of INR 6,000 a metric ton, there was a possibility that the things may not have been so viable at all, if the international prices are a bit lower. So international prices have supported the export program, number one. And they also have a sentimental impact on the domestic selling price of sugar. So they do help the domestic sugar industry.

The last question is from the line of Anshul Saigal from Kotak PMS.

My question is that you referred to...

Sorry to interrupt, Mr. Saigal. Sir, your voice is breaking, sir.

Is it better now?

Yes, it's better now. Yes.

Okay. My question is that you referred to the inventory levels in the industry being high, which is leading to good sugar prices lying the same. Now from -- at what inventory level -- first, what is the inventory levels today? I'm sorry, I've just dialed in, if you spoke about it earlier. Secondly, at what inventory level would the industry be comfortable? And when do you estimate, given that most of the -- I mean given that ethanol volumes are rising and cane is being kind of moving through a good ethanol production, by when do you estimate that inventory level in the industry will taper down to equilibrium level.

Sir, presently, it is all about -- sorry, it's all about perception. So if there is a perception that the stock levels are going to be higher, the prices start -- accordingly start behaving. So now the inventory levels are -- closing inventory level for season 2021 is expected to be about 9 million tonnes and above, okay? So I had answered this question a little while ago. According to me, a inventory level of 7 million tonnes should be comfortable both for the government -- 6 million to 7 million tonnes should be comfortable both for the government and for the industry. For the government because they will be not so worried that there can be a sudden and unexpected shortage in the sugar available in the country because there is enough supply -- enough sugar in the pipeline. And for the industry, because there will be no undue pressure on them to panic sell the sugar. So 6 million to 7 million tonnes according to me is a comfortable level. Though some may say that it can -- the industry can -- country can manage with a closing inventory of 5 million tonnes as well. So it all depends. So at these levels, I think both industry and the government should be comfortable. And then -- that is when we will see some healthy margins accruing in the sugar segment.

Okay. Got it. And in your assessment, given the way ethanol production is going up, by when should we be able to reach that level? In the next 2 years?

That is what the target is, because beyond '23 subsidizing export will be difficult according to me because of the WTO positioning -- WTO norms coming into place. So I think there's a sense of urgency both on the part of the government as well as on the part of the industry to somehow see that more of sugar is sacrificed, more of the sugar production moderated and more ethanol is produced. Because as far as ethanol is concerned, there is absolutely no paucity of -- I mean there is no paucity of demand whatsoever because we are still at 7 percentage level. So we can give more and more ethanol. So there is this urgency and collectively, we are trying to address this problem that before '23, we should moderate our stock levels.

Right. And for the industry, in the next 2 years, by FY '23, should we be -- I mean, would we be producing around 8 crore liters ethanol? Is this a possibility?

How much? 800 -- no, 8 crore liters is a very small quantity you're talking about. 8 crore liters, even one company can offer. I think -- yes, so 800 crore liters.

800 crore liters.

Yes, yes. I think so, yes. I think so, yes.

Thank you. I would now like to hand the conference over to Mr. Vijay Banka for closing comments.

Thank you, friends. Your presence and participation in the conference has been very encouraging. I mean your active participation and your probing questions, they help us improvise -- help us improve our working, and we'll be really happy to participate in the conference. And we also are extremely -- I must express my sense of gratitude for you all for having reposed confidence in our company and for having -- trusting us and believing in us. So we will continue to put in our more and more efforts to improve our working. And I'm sure, directionally, the industry is on the right path. Things should get better from here onwards. Thank you very much.

Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.