Dhampur Bio Organics Limited (DBOL) Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to Dhampur Bio Organics Limited Q3 FY '24 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Agrawal, Head, Institutional Equities. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen. It's a pleasure to welcome you on behalf of Dhampur Bio Organics and SKP Securities to this financial results conference call. We have with us Mr. Gautam Goel, Managing Director; and Mr. Nalin Gupta, CFO. We'll have the opening remarks from Mr. Goel, followed by a Q&A session. Thank you, and over to you, Gautam.

Thank you, Navin. Good afternoon, everyone, and thank you for joining us on this earnings con call. We discuss the operational and financial performance for the quarter and 9 months ended 31st December 2023. The company's results and investor presentation have already been uploaded on the stock exchanges and the company's website and we hope you have had the opportunity to go through them. I will be covering the major policy decisions on restricting the diversion of sugar in ethanol and its effect on us as an industry and company, along with the key operational highlights for the quarter. Our CFO, Nalin, will then give an update on the financial performance of the company. The uneven and reduced rainfall in the cane growing regions of Maharashtra and Karnataka and the resultant reduction in yields for 2023-'24, and the potential for further reduction in the area for 2024-'25 in this region would substantially reduce the availability of sugarcane and thereby sugar in the country. This, coupled with the high international sugar prices, the government of India took a cautious stand and curtailed the diversion of sugar into ethanol by restricting the procurement of ethanol from juice and B-heavy. The government capped a diversion of 1.7 million tonnes of sugar into juice -- by way of juice and B-heavy derived ethanol. As per the latest data, the quantity of juice-derived ethanol, which has been accepted in the tender has been revised to 43 crore liters as against the 36 crore liters, a reduction of about 68% and B-Heavy-derived ethanol has been revised down to 115 crore liters from the tendered quantity of 130 crore liters, a 12% reduction. Our current estimates of net sugar production that is post diversion of about 1.7 million tonnes of sugar are in the region of 31 million tonnes of sugar, plus/minus 0.5 million tonnes. We estimate Maharashtra to produce around 9.5 million tonnes and Karnataka to produce about 4.5 million tonnes, up from about 8.5 million tonnes and 4 million tonnes, respectively, due to better-than-expected yields. We are estimating We are estimating UP to produce about [indiscernible] million tonnes [indiscernible] yields and substantial increase in diversion [Technical Difficulty] central parts of UP. The domestic consumption is estimated at 28.5 million tonnes [indiscernible] closing stock to increase by...

Gautam, sir, sorry to interrupt you, but we are losing your audio.

Is it better now?

Yes, sir. Sorry, we are still losing your audio. [Technical Difficulty]

Sorry about this interruption. So yes, as I was stating, the consumption -- the domestic consumption is estimated at 28.5 million tonnes, and this should result in our closing stock to increase by about 2.5 million tonnes in the region of about 7.5 million tonnes. Going forward, the key factor to watch would be the overall planting in Maharashtra and Karnataka region. It is estimated a further reduction of about 20% from this region. In such an event, we are inclined to believe that the Government of India will further restrict the diversion towards ethanol to ensure adequate sugar supply for the '24-'25 season. Our efforts to keep ourselves abreast with potential developments that could have a material impact on our business have helped us put in place a strategy to minimize the diversion of ethanol into sugar. We believed that in the event of a potential reduction in sugarcane acreage, the Government of India will mandate a reduction in diversion. We, therefore, took steps to augment our boiling house capacities as well as reinstate our C molasses manufacturing capacity in both our Meerganj and Mansurpur units. This year, we refrained from tendering for any juice-derived ethanol as compared to the previous year wherein we had diverted about 0.6 million tonnes of cane towards ethanol. We were also cognizant of the additional loss on B-heavy as compared to C molasses due to the UP government's levy on molasses policy. Initially, we had planned to manufacture C molasses from about 35% of our crushed cane. These numbers will change with more cane going towards C molasses due to the restrictions on diversion of sugar to ethanol. These factors will result in a substantial reduction in ethanol production in this sugar year. The same is reflected in the sales figure for ethanol in the current quarter, which has experienced a decline, decreasing from 17.35 million BL from the previous year's 25.06 million BL during the same quarter. Even though the prices for ethanol supplied from various sugar sources or the alcohol year '23-'24 have yet to be announced, the OMCs have announced an incentive for ethanol derived from C molasses of nearly INR 7 a liter, thereby increasing it from INR 49.41 per liter to INR 56.28 per liter. The price of sugar juice and B-heavy derived ethanol remains unchanged at this point at about INR 65.61 a liter and INR 60.73 a liter, respectively. The government has also imposed a levy of 50% on molasses exports to increase the availability of feedstock for the ethanol program. The government continues to encourage usage of food grains with added impetus on maize for ethanol production as is evident in the rising prices of maize-derived ethanol, which has increased from INR 66.07 per liter to INR 71.86 per liter. As mentioned in our previous call, the UP sugar industry had challenged the methodology for calculating the levy obligations of B-heavy molasses and the matter was sub judice. The industry has subsequently withdrawn its challenge. And as a result, we had to account for a onetime increase in our expenditure amounting to INR 20.52 crores for Q3 FY '24 allocated towards levy obligations related to B-heavy molasses for the molasses year 2022-'23. After adjusting for this levy obligation and a onetime income from sale of premises of INR 14.69 crores, our adjusted EBIT stood at INR 5.11 crores with an adjusted EBIT margin of 1.20% in Q3 FY '24 as against reported negative EBIT of INR 0.72 crores and a reported margin of negative 0.17% in Q3 FY '23. For 9 months FY '24, the adjusted EBIT stood at INR 45.20 crores with an adjusted EBIT margin of 2.56% as against a reported EBIT of INR 39.37 crores and the reported EBIT margins of 2.23%. Our emphasis on cane development has resulted in a much improved recovery trend with a gross recovery standing at 10.80% as of December in the sugar season '23-'24 compared to 10.39% during the same period in the sugar season '22-'23. This improved recovery will have a substantial impact on reducing our cost of production and mitigating the impact of the increase in cane price. The FRP for '23-'24 was increased by INR 10 per quintal and now stands at INR 315 per quintal linked to a recovery of 10.25%. The increase in SAP, the State Advised cane Price was announced post our board meeting. The SAP has been increased to INR 370 from INR 350 per quintal for early variety cane, which is an increase of INR 20 per quintal. This would have increased our cost of production by INR 2.1 per kg of sugar and the P&L would have had an adverse impact of INR 4.3 crores. I now hand over the call to Nalin for an update on the financial performance. Thank you.

Thank you, Gautam. Good afternoon, everyone. I'll begin with the stand-alone financial highlights for Q3 and 9 months FY '24, followed by the segment highlights. Revenue for Q3 FY '24 stood at INR 424.78 crores as against INR 693.79 crores in Q3 FY '23. EBITDA for Q3 FY '24 stood at INR 12.89 crores as against INR 34.01 crores in the corresponding quarter of the previous year. EBITDA margin for the quarter was at 3.03% versus 4.9% in Q3 FY '23. Gautam has already highlighted the reasons for drop in margins, which is mainly on account of lower sales volume in both sugar and ethanol segments and additional levy for the last season. EBITDA margin for the quarter comes to 4.41% after adjustments of onetime impact of additional levy and other income. Profit after tax for the quarter stood at loss of INR 4.16 crores vis-a-vis INR 13.74 crores of profit during Q3 FY '23. We recorded a revenue of INR 1,766.44 crores in 9 months FY '24 with a growth of 2.05% from INR 1,731.12 crores in the same period last fiscal. EBITDA for 9 months FY '24 stood at INR 74.54 crores 9 months FY '24 as against INR 97.31 crores in 9 months FY '23. PAT for 9 months FY '24 stood at INR 7.6 crores versus INR 30.08 crores during 9 months FY '23. Now moving to the segment highlights, beginning with the Sugar segment. Revenue in the Sugar segment stood at INR 237.8 crores in Q3 FY '24 as against INR 568.13 crores in Q3 FY '23. Sugar segment's contribution in revenue was at 47% as compared to 70% in the same quarter last year. Sugar segment EBIT stood at a loss of INR 9.17 crores in this quarter as against INR 10.75 crores of profit in the same quarter last year. We crushed 14.48 lakh tonnes of sugarcane during Q3 FY '24 as against 14.1 lakh tonnes in the same quarter last year. Sugar production in this quarter stood at 1.38 lakh tonnes against 1.02 lakh tonnes in the same quarter last year. We sold 0.31 lakh tonnes of sugar against 1.08 lakh tonnes in the same quarter last year. Average sugar realization stood at INR 40,142 per tonne in this quarter, up from INR 37,874 per tonne in Q3 FY '23. Sugar inventory as on 31st December '23 stood at 1.07 lakh tonnes valued at INR 34,445 per tonne last year -- sorry, this year. Sugar inventory stood at 0.96 lakh tonnes valued at INR 35,969 per tonne as on 31st December '22. We generated 99.73 million units of power in Q3 FY '24 against 105.28 million units in the same period last year. We exported 37.48 million units at an average realization of INR 3.44 per unit in Q3 FY '24 as against 49.58 million units at an average realization of INR 3.3 per unit in Q3 FY '23. Now moving to Biofuel and Spirit segments. This segment reported a revenue of INR 110.98 crores in this quarter as against INR 131.15 crores in Q3 FY '23. Biofuel segment reported EBIT of INR 7.25 crores as against INR 20.05 crores in the same quarter last year. Biofuel segment contributed to 22% of the total revenue as against 16% in Q3 FY '23. We produced 195.05 lakh bulk liters of ethanol in this quarter, out of which 168.94 lakh bulk liters was derived from B-heavy. There was no diversion towards syrup-derived ethanol in this quarter. In Q3, last fiscal ethanol production stood at 245.64 lakh bulk liters with 165.5 lakh bulk liters derived from syrup and 67.75 lakh bulk liters derived from B-heavy. Ethanol sales were at 173.47 lakh bulk liters of ethanol at an average realization of INR 58.87 per BL in Q3 FY '24 as against 250.63 lakh bulk liter of ethanol sales at an average realization of INR 58.81 per BL in Q3 FY '23. Out of 173.47 lakh bulk liters sales in this quarter, 168.47 lakh BL are from B-heavy at an average realization of INR 60.04 per BL. Ethanol stock as on 31st December '23 stood at 12.43 lakh bulk liters as against 5.58 lakh bulk liters as on 31st December '22. In the country liquor segment, we reported a revenue of INR 161.94 crores in Q3 FY '24 as against INR 114.57 crores in Q3 FY '23. Segment EBIT stood at INR 2.86 crores as against INR 1.45 crores in the same quarter last year. We sold 6.87 lakh cases of country liquor this quarter as against 4.83 lakh cases in Q3 FY '23. Average realization net of excise was at INR 280.15 per case as against INR 248.41 per case in Q3 FY '23. Our long-term loans stood at INR 238.27 crores as on 31st December '23 as against INR 249.53 crores as on 31st December '22. The company has repaid long-term loans of INR 19.16 crores during the quarter. Long-term loans -- long-term debt equity ratio stood at 0.28x. Net working capital stood at INR 253.13 crores as against -- sorry, as on 31st December '23. Long-term and short-term rating of the company continues to be assigned -- assigned at A+ by CARE. With that, I would request the moderator to open the floor for questions and queries.

[Operator Instructions] The first question is from the line of Darshit from RoboCapital.

So I just had a couple of -- I just needed an outlook on sugar prices and the overall industry going forward in the next year or so.

Is that the only question you have? Or would there be any more questions?

Like that's the only question. I just need an idea on the overall landscape of sugar...

Sir your audio is not clear. Can you please speak through the handset.

Now is it clear?

Yes.

So yes, that's the only question. I just needed the outlook on the entire sugar industry going forward in the next year or so.

Yes. So we believe, the sugar industry outlook with this change in government policy, we don't anticipate any sugar deficit happening for this year and for next year. The sugar production numbers are in the region of 31 million tonnes to 31.5 million tonnes. And this would increase the opening stock next year or closing stock this year by about 2.5 million tonnes, in the region of 7.5 million tonnes. So even if there is -- we do anticipate a further reduction in the overall cane availability in Maharashtra and Karnataka. The cane availability, the current estimates are -- next year, the overall Maharashtra, Karnataka region could see a further drop of about 2 million tonnes. So we would still be in the region of 29-odd million tonnes of sugar production. Government has an option to, about 1.7 million tonnes of ethanol that got diverted, in the event the situation in Maharashtra and Karnataka looks especially bad, they can mandate a further reduction in this diversion of ethanol. So we do not anticipate any sugar shortage. The cost of production has definitely gone up. We do expect post elections, the prices should tend to go up a little bit to reflect this increase in cost of production. But overall, now with this post reduction in diversion, there is no shortage, we don't see any runaway price -- the threat of any runaway price hike at this point. Currently, the prices have come down substantially from the peak of October. I believe Maharashtra is selling in the region of INR 34 to INR 34.5 per kg. Prices up north in the UP region are in the region of about INR 37.5 to INR 38 per kg. INR 37 plus/minus INR 0.50 would be my number for UP right now. Hopefully, the prices should stabilize around these levels with a potential for an upside post election. That would be my goal.

Next question is from the line of Vikram Suryavanshi from PhillipCapital.

Sir, I need your view on recovery for us because I think if you look at 10.8% recovery is still lower than historically what we used to do in these cases. So, how is the outlook for recovery improvement the way you are doing the cane development process? And what would be the expected cane crushing this sugar season?

This recovery for this quarter that we said -- the gross recovery is actually higher than our last 2 years' recovery at this quarter. If you see the recovery in November, December is at its lowest. So we are running about close to 0.51% -- close to 0.41% higher as of 31st December. And we do see a continuous increase in our recovery as compared to the previous 2 years. So, I think our recovery -- if the current trend continues, we do expect our overall recovery to be in the region of -- to be higher by about 0.6%, 0.65%, which is also what we mentioned in our opening remarks. We expect this increase in recovery to more than offset this increase in cane price. So this is actually a result of our cane development efforts and agro-climatic factors. We also are monitoring and benchmarking our recoveries from our peers in our region. And I'm happy to note that our recovery is amongst the top sort of 5 percentile. So we have a higher recovery as compared to our peers or amongst the top sort of levels in the industry around the region. Our expected cane crush is about slight to maybe about 4% to 5% higher than last year. This is what we were expecting prior to start of season. But with this increased diversion and lower ratoon yields, we still expect the number to be higher, but I would imagine maybe it might not be 7% to 8%, could be 4% to 5%.

Okay. Got it. So gross recovery for a full year season basis could be higher than 11% or so?

It should definitely be higher than that. Last year, we were 11.03%. If you see last year, we were -- and year before last, we were 11.3-odd percent. This year, as of 31st December, I would imagine, yes, the trends are positive and they are continuing to show us an increasing trend as compared to the previous 2 years. The delta is only increasing, not decreasing.

Got it. And second on the distilleries that we have. Are these flexible to have multi-feed and can we use surplus capacity for grain-based kind of a thing or it will take some CapEx?

As of now, our distilleries are not multi-feedstock. We do -- we are continuing to study and evaluate, converting some of our distillery capacity into a multi-feedstock for next year. We are eligible for interest subvention loan if we were to decide to go ahead with this. We're continuing to study it very actively and discussing with the board, and hopefully, we should have some decision on it sooner than later.

Okay. But is it a time consuming and slightly bigger CapEx or it can be managed within the season if we decide to go ahead?

So we expect -- if we were to go ahead and decide to do this, we would want it to be commissioned prior to start of next year. We don't expect any greater -- we don't expect too much of ethanol diversion -- sugar diversion into ethanol next year. I mean we expect the numbers -- if the sugar balance sheet remains the way it is, we expect the numbers to be similar to this year's numbers. So we've that option available to us and we also are very cognizant of the fact that there has been a lot of policy volatility. There was a ban on rice export. The maize prices have gone up through the roof. So it should show a positive value addition if we go down this path.

Understood. And lastly...

If you recollect, we've been a bit cautious on this [indiscernible] because that's the reason why we deferred our distillery in Meerganj. And I think the decision did pay off because one needs to be a little bit cautious rather than being a bit more aggressive. That would be our view. Sorry, last question.

What is the bagasse sale? Because the way we are developing surplus power and I guess we are also selling bagasse in the open market. So, was there any bagasse sale in this quarter? Or on a full year basis how much would be that broadly? If you can give us some idea about that.

We continue to sell bagasse. Last year, we sold a substantial quantity of bagasse, this year too. The prices have been softer in bagasse this year as compared to last year. So Nalin, would you have the exact numbers of the bagasse sales for this quarter?

Yes. So last year, in this quarter, we had sold of bagasse 0.6 lakh tonnes we sold in this quarter versus 0.4 lakh tonnes last year in this same quarter.

And how much would be average realization...

Average realization is down by around 25% to 30%. Last year, it was around INR 3,250 per tonne. And this year, it is in the range of INR 2,200 per tonne.

Next question is from the line of Manu Jindal from Thorin Technology.

I have 3 questions. The very first question is when you say country liquor, like do we derive this country liquor from B-heavy or C-heavy molasses? Like that is my first question. And the associated question would be like what is the impact on the margins when we manufacture country liquor vis-a-vis when we would have manufactured, say, ethanol with molasses, right? So this is the first question.

So do you want to ask all your questions, Manu, and we can answer them together?

Sure. The second question would be regarding sugar prices. When you just now mentioned that you are expecting post elections to have some surge in sugar prices, would it be -- like why is it that? Would it be more due to ethanol diversion or would there be any supply shortage? And my third question is regarding the current capacity of 312,500 liters of biofuel when you say. So is it like that same capacity can be used for -- to manufacture ethanol from B-heavy and syrup or is there a separate bifurcation to that number, 312,500 liters? So these are the 3 questions.

Okay, okay, thanks, Manu. So Manu, basically the country liquor that is your first question, what is the raw material, till last year and to -- a bit of this -- and for this quarter, we were using B-heavy molasses, which was produced last year to make country liquor. Going forward, we expect to use C molasses to make manufacturing -- to manufacture country liquor. Now on the margin impact, the margin on country liquor has substantially reduced. If we sell -- opportunity -- the ENA realization for country liquor for us is in the region of about INR 25 to INR 26 a liter, whereas we could have sold this equivalent alcohol in ethanol sector today at about INR 56.5 a liter. As we have mentioned multiple times, country liquor business is purely because of the government of UP's levy molasses policy. If we were not doing country liquor, then we would be forced to sell ENA at about INR 19 a liter or molasses -- B-heavy molasses at about INR 1,400 or C molasses at INR 1,100 a tonne, which is leaving a substantial value addition for the country liquor manufacturers. Ergo, we have decided to venture into this business, and I'm happy to note we have a sizable volume. We are in the top 10 country liquor sellers in the state. As I mentioned in my opening remarks or the second question, we don't expect a big surge in sugar prices this year because of the change in policy where they prevented more diversion of sugar into ethanol. But we do expect the prices to go up from here to maybe a more reasonable level, keeping in mind the increase in cost of production. And so there may be a little drop in production next year. But I would not be inclined to suggest that there would be a big surge in price. Prices should -- could remain stable to maybe firm up a little bit post election. Current capacity for biofuels, you're right in presuming that the capacity we quoted is for B-heavy molasses. If we were to make C molasses, this capacity would be down to 250,000 liters per day. Does this answers all your questions?

Yes, sir. Just a last question. When the government took out this decision to not divert any syrup towards ethanol manufacturing, just wanted to understand that if all the capacity of 312,500 is dedicated towards B-heavy, then what impact did we witness by this regulation? Like did we have any material impact on this?

So see, one is the nature of distillation. When you make C molasses across board, the capacity comes down by about 25% to 30%. The government decision was basis more on account of preventing sugar from being diverted and to conserve sugar for the country. Now when you don't divert B-heavy, when you divert B-heavy, you also have more raw material for the entire off-season. Roughly -- when you make B-heavy, roughly you make 5.5% to 6% B-heavy per tonne of cane versus 4%, 4.5% of C molasses per tonne of cane. So you get an additional quantity of B-heavy molasses, which can make you run for a greater number of days from the same amount of cane. So all of us who are making C molasses, we will certainly find we have idle distillery capacity, which is what is -- and people who are fundamentally related businesses, their idle capacity will be substantially higher.

Next question is from the line of Nitin Awasthi from InCred Equities.

I have a few questions. May I go one by one because I think they are a little varied on different spaces, so I'd rather go about them one by one rather than giving it all in one go and confusing everyone. Is that okay?

That should be fine, Nitin.

Yes, okay. So firstly, basis your presentation, investor presentation, your inventory is valued at roughly INR 34.4 a kg sugar. So I'm expecting that this will get revised to somewhere around INR 36.5?

Yes, yes, that's correct.

Nalin-ji, you want to answer that?

Yes, that's correct. As of now valued at INR 34.4, then adding INR 2.1, so this will revise to the INR 36.5.

Okay. Great. And also your sales you have done is around 3 crores -- roughly 3 crore kgs of sugar. So that should be -- the cost of that production so basically gross profit shrinkage should happen by around INR 6 crores. Is that a figure close to correct or not correct?

Sorry, come again, come again, please. Yes, we sold 3 lakh quintals that is 3 crores kg of sugar at an average realization of INR 40. But...

Yes. So that was the selling price. Now you have obviously put purchasing price to that and derived your gross profit, whatever the price is basis transfer pricing. So I'm assuming that price also goes up by INR 2. Your gross cost of the said sugar goes up by INR 6 crores. Is that correct?

So no, so in this quarter, Nitin, we sold 1 lakh quintals, 10,000 tonnes of sugar, which was produced last year. Current season which is valued at INR 34.5 is just 20,000. So impact would be around INR 4 crores to INR 4.25 crores.

Understood. Sir, that explains a lot the differences. So not confused anymore on that. Okay, sir, great. This was on the specific sugar part. Secondly, I wanted to understand, you are one of the largest country liquor players in Uttar Pradesh as of now. And I understand the reason for being in country liquor is that there is a levy policy by the state government, which makes it more profitable to be in the country liquor business rather than not be in the country liquor business. However, you have substantially increased your capacity. Now would all of this capacity actually be required for the levy purpose or a good proportion of this capacity you can sell country liquor at market prices?