Balrampur Chini Mills Limited (BALRAMCHIN) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to 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.

Thank you, Stansford. Good afternoon, everyone, and thank you for joining us on Balrampur Chini Mills' Q3 and 9M FY '20 Results Conference Call. We have with us today, Mr. Vivek Saraogi, Managing Director of Balrampur Chini Mills; and Mr. Pramod Patwari, CFO 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 discussions. Before we begin, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation, which was shared earlier. I would now like to invite Mr. Saraogi to make his opening remarks. Over to you, Vivek.

Good afternoon, everyone, and thank you for joining us on the conference call. Let me start by giving you an update on the current developments in the sugar sector and key highlights, after which Pramod will guide you through the financial performance of the quarter. As per the latest estimate, India's production is expected to be around 26.5 million, lower by 20% expected due to a sharp fall in production in Maharashtra and Karnataka, while UP is expected to produce almost the same quantity as the previous season. Maharashtra had slow start to the threshing season due to damage caused by heavy rains and floods. State produced 3.46 million, up to 31st January, lower by 51%. Similarly, Karnataka produced 2.79 million, lower by 17% as compared to 3.37 million during the same period last year. UP on the other hand recorded a higher production of 5.5 million as against 5.2 million in the same corresponding period. So with an estimated production of 26.5 million this season and an opening stock of 14.5 million, we will have a total availability of 41 million. Out of this, we are expected to consume 26 million to 26.5 million export for 4.5 million to 5 million. Therefore, we should be able to consume about 31 million out of the same. Hence, the inventory will come down to 10 million. So this is from an inventory level of 14.5 million on 1st October 2018 -- I mean '19, our -- the inventory on 1st October 2019 was 14.5 million. We are expecting it to be 10 million on 1st October 2020. On the global front, we have seen lower production in Brazil, China, Thailand. The biggest fall was witnessed in the largest producer of Brazil, which is expected to produce 26.5 million. Production in Thailand is expected to be as per latest estimates in Dubai conference yesterday's, down to 9 million, expectation.

Lower than that.

Sorry?

Lower than 10 million.

Lower than 10 million. This would -- therefore, the prices also we are seeing is hovering around $0.15, which is the recent high. And this would encourage exporters from India -- millers from India to export model. Coming to the domestic scenario, both Central and State Government have taken several proactive measures to maintain a stable sugar demand supply scenario. UP government decided to keep the SAP unchanged at 315, which was a major relief to the industry. Also, the Center retained the same FRP. Government is also reviewing actual exports made by millers against MAEQ for the quarter October to December, and have recently announced that it will be assigning the unexported MAQ -- MAEQ to the millers who are willing to take additional MAEQ. That includes people like us. Moving to the ethanol scenario, I'm happy to share government continues to push ethanol blending in petrol and has ensured the program is shaping up well. Industry has the potential to replace 10% of India's petrol demand, which will enable the country to significantly reduce dependence on imports, while promoting the use of environment-friendly fuel. Also, in the process, India would be able to sacrifice 1 million to 1.5 million tonne of sugar. This is via the B-heavy program. There has been a slight delay in the offtake in ethanol, that is because the contracts came in a little late, but the government and the OMCs are making all efforts to make it up. And I'm very certain during the contractual period, the entire contracted quantity would be lifted. As industry is now moving towards [ BAB ] route, you will see industry supplying much higher quantity going forward. We have delivered -- now back to the company's performance. We have delivered a stable financial performance in the current scenario, based on positive contributions from sugar segment. Sugar segment continues to deliver stable performance on account of stable realizations, improving volumes and controlled cost going to stagnant SAP and higher recoveries. The Distillery segment delivered a muted performance on account of lower volumes, as I've explained, that was initially going to the lower offtake. And there is a higher transfer of pricing of molasses. Here, I'm pleased to share that the additional capacity of Gularia has been commissioned of 160 KL. The Distillery is producing more than 100%. We have gone up to 110%, and the facility has been commissioned very well. The facility will meaningfully contribute to our performance in the coming season. In keeping with the trend of the last few quarters, the Cogen segment continues to report subdued results. This is a factor which is beyond our control. We are in litigation against the government -- against UPRC in the High Court for the sudden reduction in the tariff. To conclude, I would like to state Balrampur has delivered a stable performance during the quarter. While lower production in the current season will help stabilize sugar prices, normalized rains this year indicate next year's crop could be better. However, it's too soon to comment on next year's production. From the company's perspective, we focus on value creation through our well-integrated operations, strong balance sheet, robust cash flows, dividend payout policy and prudent CapEx spends. These are part of our long-term vision. I'd now like to hand over the floor to Pramod.

Thank you, sir. A very good afternoon, everyone, and thank you for taking your time out in joining us today on Balrampur Chini Mills' earnings conference call. I will briefly take you all to the company's operating and financial performance for the quarter under review. During the quarter, we delivered a stable performance despite the challenging environment prevailing in the sector. The sugar segment delivered a strong performance on back of steady realization. The Distillery segment delivered muted performance on account of lower volumes and increase in the transfer pricing of molasses. We have registered healthy performance in the Sugar division with revenue increasing by 38% Y-o-Y to INR 1,153 crores in Q3 FY '20. PBIT grew by 134% to INR 49 crores during the quarter. Sugar sales during Q3 FY '20, including MAEQ, were higher at 31.99 lakh quintals as against 23.60 lakh quintals in Q3 FY '19. Pre-sugar realizations for the quarter stood at INR 33.32 per kg as compared to INR 31.94 per kg in Q3 FY '19. I would like to highlight here that BCML has fully contracted, which allocated MAEQ quota of 2.29 lakh metric tonnes. In Q3 FY '20, revenues from Distillery division dropped by 16% to INR 103 crores and PBIT declines to INR 40 crores on account of lower offtake and increase in the transfer pricing of molasses. The molasses transfer price last year was INR 150 per tonne, and the same has been increased to INR 3,500 per tonne. During the quarter, we sold 19,318 kiloliter of ethanol at an average realization of INR 44.07, which is a blend of C-heavy generated ethanol and; B-heavy generated ethanol, as compared to 28,149 KL at an average realization of INR 41.63 per BL in Q3 FY '19. As mentioned by Mr. Saraogi, there was a delay in ethanol uptake leading to lower volumes in Q3. However, we should catch up in Q4 to a large extent. So we are on track to deliver around 1,15,000 to 1,20,000 kiloliters for financial year '20. As of 31st December 2019, our stock of molasses stood at 11.81 lakh quintals versus 10.52 lakh quintals during the same period last year. In the Cogeneration business, revenues for the quarter dropped by 27% to INR 109 crores. PBIT for this segment stood at INR 15 crores. In Q3 FY '19, we sold 11.22 crores unit at an average realization of INR 3.11 per unit as compared to 14.73 crore unit at an average realization of INR 4.98 per unit. As on 31st December '19, stock of bagasse stood at 1.16 lakh metric tonne as compared to 1.59 lakh metric tonne as on 31st December '18. Finance cost for the quarter were higher at around INR 8 crores as on 31st December 2019. Long-term debt of the company stood at INR 464 crores, which includes SDF loan of INR 5 crores and balance our term loans avail under State Government and the Central Government schemes, which carries interest at subsidized rates. Long-term and short-term rating of the company stand at AA and A1+, respectively, as signed by ICRA and CRISIL. This brings us to the end of our opening remarks. We would now like to address any questions or queries you may have in your mind.

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

Just a few questions on the export side. So if my calculation is right, you probably would have done somewhere around 60,000 tonnes of exports this quarter?

Sorry?

What kind of quantities you have done export this quarter, Q3?

Yes, we have done 9.07 lakh quintals of exports during this quarter.

Okay. And what is the expected in Q4? And if anything would be sort of spillover to Q1 next year?

Our obligation is around 2.3 lakh tonnes of sugar, which we expect to complete within 31st of March.

Okay. So almost everything will be done in Q4, the remaining?

Whatever is left out of this 9 lakh quintals will be done in March quarter.

Just to add to that. As we said in our opening remarks, the government is reallocating quotas from mills who have not done to mills who want to do. So we are in the process of obtaining further exports, and we hope to get back soon on that. And the prices are very, very encouraging.

Right. So what kind of additional exports you have asked from the government?

So I don't think that is appropriate to be said today. But we should -- government is looking to reallocate the export quotas, Pramod, by when? 20th?

Suppression is around 6 to 7 lakh quintals.

Yes, by when?

6 lakh to 7 lakh tonnes, maybe in a week's time.

Ah. In a week's time, we should be able to get back on that.

Okay. And sir, as far as this monthly sale quota mechanism is concerned, what I understand, your January quota is somewhere around 1 lakh tonnes, and February is a bit less, whereas most of the other mills have got the consistent -- UP mills have got the consistent quota, those -- at least those who are doing B-heavy and -- specifically UP-based regimens. So why this lower sale quota in February?

See, first of all, the overall quota in February is lower. Secondly, our January quota is much higher than the other. So it -- over a quarter, you will see it reasonably average out.

Okay. Okay. Fine, sir. Sir, on the power front, though our tariffs have revised downwards, but even our volumes have gone down. So have we sold more bagasse this quarter?

Yes. So we are now running a protocol via which we look to make power to run our sugar operation and Distillery, whatever is necessary, and we try and sell as much bagasse as we can because that is A, cash down, power payment take 6 to 9 months to come; B, whatever conversion cost we are getting via the power route, the moment we cross that and we can sell in the market, we sell in the market keeping in mind our requirement. So our job is to do business, enhance revenue and profitability of the company, and that is our focus.

Okay. And sir, where that sale has been accounted? In which segment it has really gone?

Bagasse sale, which segment?

Bagasse sale revenue gets captured in the Sugar segment.

Okay. Okay. Perfect, sir. Sir, now we -- you have mentioned that you are doing more than 30% -- diverting your sugarcane more than 30% to B-heavy. Is it possible to even scale up further maybe in next season? Can we do like 50% B-heavy? And we have the sufficient capacities so that our Distillery volume can go up to 17 crores odd? Is it possible if we do somewhere around 50% diversion?

So this year, as Pramod said in morning's interview that we're almost reverting 40%. It is not 30%. And it will be our endeavor to increase this.

And 17 crore units are possible next season?

I'm not ruling it out, but we'll get back to you. Let us do it. They -- understand, we are doing 3 distilleries fully on B-heavy. There is a fourth Distillery, and we will explore that and get back also for next year.

Okay. Okay. And sir, just one last probably on the crushing side. Is it that, that crushing has gone up this year because most of the millers, what I have seen the numbers -- what most of the companies have reported numbers that the crushing probably has gone up this year. So probably your tail -- the tailwind is down, but would it be safe to assume that for a overall season it will be higher than last year?

Basically, East UP starts a little late. And this year, there was rains so started late. Our crushing won't be lower than last year, it would be higher than last year. And if you account for our B-heavy diversion and the loss there, our recovery will be definitely much higher than last year. So assume we're not doing B-heavy, our recovery may have been 12%.

Right. Right, sir. Right. And sir, what would be a blended realization of -- sugar realization concerning the exports? Sir, because what I mentioned 30 -- what I understand INR 33 is probably your domestic one. So what would be the blended realization?

Pramod, what is our quarter's realization for the domestic market?

Domestic market is INR 33.32 per kg.

Domestic is INR 33.3.

And it won't be fair to have a view on the blended realization because...

Exports [Foreign Language] exports?

Export subsidy gets captured in the other operating income.

Yes.

Okay, okay, okay. But considering the subsidy of INR 10.4, our realization would be somewhere around INR 30 or more than that?

For the first -- this quarter, it was INR 19.90.

Plus INR 10.5.

Plus INR 10.5.

Plus INR 10.5. Okay.

So it's like INR 20 plus INR 10.5, almost. So that is INR 30.5 for the export and INR 33.3 for the domestic.

Correct.

Right, Pramod?

Correct.

Yes.

And what would be our contracted, say, price -- the entire quantity average -- contracted price for the export?

Between the region of 20 -- maybe INR 20 or slightly higher than INR 20. Slightly.

So we have done entirely raw sugar, nothing...

We've done a combination of last year sugar and raw.

[Operator Instructions] The next question is from the line of Aman Sonthalia from AK Securities.

Sir, my question is that few of the mills in the South India, in Karnataka, are producing ethanol directly from sugarcane. So whether our companies are also thinking in that line? And whether it is -- what is the economics of that?

So right now, we are not thinking of going from juice. So we will wait and see the economics of that. We are in the process of studying that, but our Distillery capacity, as our previous participant asked, our idea is to exhaust that via B-heavy, which is a much better option.

Okay, sir. And sir, next year, again, the production is expected to shoot up. So in that scenario, how is the international market is looking? And whether it will be a [ job ] export next year also?

So let's keep it simple. We have lived with 14.5 million in inventory. This year, we'll be down to 10 million. Assume next year production goes back to 32 million. I'm saying worst. Consumption, let's say, goes to 27 million, we should fall to sacrificing maybe 1 million in B-heavy and 4 million in export. So basically, you would remain, again, after 1 year, you might still stay at only 10 million inventory.

Okay, sir. So within the 27 million is possible -- the consumption is possible?

Yes, yes, why not?

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

Sir, assuming the current ethanol price in Brazil, can you give us what would be the parity price between ethanol and sugar out there?

Ethanol parity price?

INR 0.145.

It should be around INR 0.145 for ethanol parity.

Okay. So now it has already breached that, so global prices are likely to move. Would that be your safe -- will that be a safe assumption?

Let's not try to correlate one-to-one. Basically, today's INR 0.15, assume we get more quota, our selling price could be INR 22.5. Pramod, closer to INR 23?

INR 23.

Raw sugar will sell at INR 23, plus INR 10.5 for the additional quota would take me to beyond INR 33.5 in export. So, a, millers would be very interested to export; b, you are in a regime of a quota; c, production is lower. Hence, there is a bullish stroke tailwind to the whole arrangement. Having said that we have enough stocks. So I would say prices in production period might remain around INR 32.5. The moment production stops in Maharashtra, which is March middle, we could get back to INR 33.5, maybe even INR 34. But these are assumptions. One cannot -- these are views and assumptions based on 30 years of experience.

Sure, sir. That's very helpful. Sir, one final question. How quickly Brazil can shift from ethanol to sugar?

They could do immediately.

Immediately. Okay.

The next question is from the line of Keshav Lahoti from Angel Broking.

Sir, I understand that there is a molasses internal transfer happening between sugar and Distillery segment, that's why the Distillery profit is low. But when I try to combine the sugar and Distillery profit, last year you made INR 11,348 lakh profit in Distillery and sugar combined together, which have reduced to INR 8,819 lakhs. So what I'm missing?

See, when we transferred molasses from Sugar division to Distillery division, the Distillery -- for Distillery division, the raw material -- the transfer price becomes a raw material cost. And the credit is given to the Sugar department. Now sugar, as you know, is being sold over a period of 12 to 14 months. So the value of high credit given to the Sugar department is captured in the form of cost of inventory, which can result into profit only when the sugar gets out. However, in case of Distillery, the moment it is produced, alcohol is sold immediately. So it's only a question of time lag, actually.

So nothing have happened due to subsidy of government? This profit is affected due to subsidy of government in cost of material?

Nothing on account of government subsidy. As we discussed, the transfer price of molasses becomes the cost in Distillery as a result of which, the profit is down in the Distillery. But the credit will be given in the Sugar segment. The profit will be accrued only when that sugar gets sold in the market. There is only a time lag.

Okay. Yes. Yes. Understood. Next year, when you will be operating the new Distillery, is it fair to assume that it will be operational for 330 days and the margin will be 70%? Be it in either sugar or Distillery, the margin would be kind of 70%, what you did in FY '19?

No. This is...

Distillery will definitely operate at full capacity. However, the kind of margin what you are mentioning, which we achieved in FY '19 was, again, a function of low molasses prices. As we have already migrated to a new price mechanism, which is based out of market realism, so the profitability margin in Distillery can be -- will be on a lower side. But at the corporate level, it will be okay.

Exactly. See, what is cost to now is revenue to the other division, no?

Yes. So that's what I'm asking. Is it 70% margin? Whether the profit will be sitting in Sugar segment or Distillery? At the corporate level, what will be the margin? So assume that Distillery does INR 100 more revenue to you with the new Distillery, what will be the profit coming from it, either in Sugar on Distillery segment?

It is not possible to express margin at a corporate level.

Like this, yes.

It is not possible.

Okay. What is the industry estimate for ethanol using B-heavy?

Before -- I think tender is ongoing.

Second tender is ongoing. Maybe in a week's time, we shall...

Yes, in a week's time, we should be able to tell you.

Okay. So what will be the diversion in B-heavy you're expecting in the industry in the next year from your experience?

Let's wait and see the...

Our tender quantity.

Yes, tender quantity.

I think within a week, if you talk to Pramod, he'll be able to tell you a lot.

The next question is from the line of Koundinya from JM Financial.

This is Achal. Sir, could you please elaborate a bit with respect to the B-heavy route, given this is the first quarter where we are talking about the B-heavy route? A, in terms of what kind of recovery rate for sugar? You kind of indicated in the interview, but I just thought on the data. In terms of the recovery rate for molasses, recovery rate for sugar and the transfer pricing?

So Distillery recovery from B-heavy, the units which are doing, is approximately above INR 32. And for the C-heavy, nearly it's INR 25?

INR 23.

INR 23?

INR 33.

So regular is INR 20, I mean INR 24, yes. Regular would be INR 24, that is the C-heavy. And recovery via the B-heavy route in Distillery is INR 32 plus. Pramod?

B-heavy is INR 7,000 a tonne.

INR 7,000 per tonne. Okay. And what would be the recovery rate in case of B-heavy route for sugar?

Over by 1.6% approximately.

1.6% approximately.

Okay. Okay. And would it be possible to just give a ballpark estimate of the conversion cost from -- for the molasses into alcohol ethanol?

It will remain the same as it was in the last year.

Roughly about INR 8, INR 9 a liter?

Yes, INR 8, INR 9, but that will take care of also freight incidents also. INR 9, including freight incidents. And if you will eliminate freight, then it will be INR 7 only.

Yes. It can be INR 8, Pramod. INR 8 minus INR 1, I think.

And the realization include freight or it's excluding freight?

There is a little bit of loss on freight. The government, if suppose, gives you INR 1 a freight, since we tender to all parts of the country, freight is actually INR 2. Am I right, Pramod? You're talking of that extra incidence between the reimbursement of freight you get and you spend. That is debited to your cost. Right.

Yes. Right.

Understood. And you said 40% for the current year heavy route. Did I hear it, right? And it could be higher in the...

Yes. Coming season. Next year, it could be higher.

Yes. How much would that be? Let's say, you have a very remunerative ethanol price for B-heavy. So what is the maximum you can go up to, sir, in terms of your capacity?

Maybe 50%, 55%.

And in that case, the ethanol output could be around 18 crore liter or could be more than that?

No, it could be around that level.

Understood. And with respect to exports. When you say the realization is about INR 20 a kilo, is there any additional freight cost because that INR 10.5...

No, it's all included. It's net realization.

This is the net realization for us.