Setup over four decades back, “Balrampur Chini Mills Ltd”(BCML) is the second-largest sugar manufacturer in India after Bajaj Hindustan with a crushing capacity of 76,500 tonnes of cane per day(TCD, distillery capacity of 360 KLPD and an additional 160 KLPD is on its way and saleable power capacity of 165.2 MW, which is sold to state electricity board. I will explain about the company is further details in the Blog “Balrampur Chini Mills Ltd- Analysis”.
The company is headquartered in Kolkata & led by Mr Vivek Saraogi, MD, who has more than 31 years of experience with the company as well as the sugar sector.
Before reading further, I would request you to just go through the earlier blogs on the sugar industry to better understand this blog.
Although I have cited caution regarding the govt involvement in all the steps for the Indian sugar industry. But, the management of almost all Sugar mills has praised the central govt in particular for the exemplary smooth running of all the schemes announced by them. On top of that, they are receiving payment as per schedule. Even the sugarcane prices were not raised in an election year.
This has built trust that the govt is in for the long haul and it is assumed to be that there is unlikely to be any flip flops.
Also, OMC(Oil Marketing companies such as IOC, BPCL, HPCL etc) contracts are annual and fixed price in nature implying it being immune to crude oil prices.
Balrampur Chini Mills Ltd- Analysis
Indian Sugar Industry- Background
To give a background, sugar industry in India is highly regulated by both state and central govt. Earlier sugar industry was highly cyclical with the profitability totally dependent on prices of sugar. Prices of sugar depended on demand-supply scenario. Because of the cyclical nature of the business, the cane arrears to farmers got accumulated in bad years and was over 25,000cr.
The NDA govt in order to help the farmers, was of the opinion that one needs to strengthen the industry that will in itself be able to clear cane dues.
So, they have started to put in efforts that would reduce the cane dues, reduce pollution, curb oil imports etc. The idea was to encourage the production of ethanol via molasses which is a byproduct of sugar extraction. In addition, MSP for sugar was announced that would protect the downside of the prices. Ethanol pricing was fixed annually and the payment has been regular till date. Ethanol is mixed with petrol. The govt has set the target as 10% and as of now Indian distilleries are able to fulfill only 7.5% of requirement. The govt plans to raise the target to 20-30% in the very near future. Brazil mixes 30% of ethanol in a litre of petrol, thus reducing oil import bills.
Mills also produce power from sugarcane waste called as bagasse.
For all the sugar mills that have distillery to produce ethanol, saw almost half their profits coming from ethanol sales in the last couple of years. So, it is important to know the distillery capacity of the sugar mills.
While making sugar, it is rotated in centrifuge thrice. In the first step, one gets the maximum sugar output(left over is called B-heavy molasses), in the second step you get lower sugar content from B heavy molasses and in the 3rd step is just C heavy molasses.
With the new variety of sugarcane sown across Uttar Pradesh, India has become a sugar surplus country. In order to curb the excess output, the govt is giving remunerative prices to make ethanol from Sugarcane juice and second priority to ethanol made from B heavy molasses and 3rd obviously to C heavy. In terms of benefit of using different variety of ethanol with petrol blending, I dont think there is any difference.
Balrampur Chini Mills Ltd- Analysis
Balrampur Chini Mills Ltd- Plants & Capacities
The company has 10 plants. Eight of them are located in Eastern Uttar Pradesh and two in Central Uttar Pradesh, major cane- growing areas of Uttar Pradesh. The plants are located in proximity to each other resulting in cost-effective logistical operations.
Till 2015, the company had a total cane crushing capacity of 79,000 TCD. Post-closing of their Khalilabad unit in 2015, the capacity was reduced to 76,500 TCD. Four of them fully integrated with distillery and power generation. Also, the plants are located in close vicinity. (150-200km).
BCML is coming up with a new distillery at their Gularia’s plant with a capacity of 160KLPD distillery at an investment of ₹207 cr. Of which 140 cr will come from debt(term loan with 5% interest subvention from central govt) and the remaining 67cr from internal accruals.
This plant will be producing ethanol via B heavy molasses route i.e. around 30% of the total ethanol production by BCML will be via B heavy route.
Balrampur Chini Mills Ltd will have sufficient molasses to meet the demand of the Gularia distillery but post that they will not be having extra to expand any further distillery capacity. {It is a very wise step given the significant increase in Molasses Prices. So, BCML will be able to meet all the molasses requirement inhouse.}
While Dhampur Sugar Mills were able to put up the plant of 100KLPD much earlier given it was a brownfield expansion whereas that 160KLPD of that of BCML is a greenfield project, that is the reason expansion taking longer than usual.
The capacity of the Babhnan distillery was enhanced from 60 KLPD to 100 KLPD in 2016-17.
With the utilization of B-heavy molasses, the company expects lower bank borrowing and lesser working capital.
Gularia plant was commissioned in 12th Jan 2020. The total distillation capacity of the Company now stands at 520 KLPD.
Latest distillery capacity of Indian Sugar mills
Latest sugar value chain pricing
Balrampur Chini Mills Ltd- Analysis
Of the total sugar produced 12% is refined sugar which fetches better margins.
BCML’s procurement to cane-crushing period stood at a mere 4-8 hours. Dhampur Sugar’s cane to crush period is mentioned to be within 24 hours but not the exact period. The shorter this period the better as cut cane loses its sucrose content fast.
Over the years, the capex done by the company has been towards improving the efficiency of the plants. They spent ₹225 cr towards incinerator boilers. But if you look at the overall industry, almost all the companies have invested in the same fashion. As per new govt policy, these distilleries need to be zero liquid discharge. Without which these distilleries will be running a fewer number of days.
Over the years, the company has educated farmers on improving agricultural practices and worked with them on increasing the acreage of early maturing variety of sugarcane which enhances sugarcane yield. As of now, the procurement area under early maturing variety stands at over 70%. The company makes all the payment to its famers digitally.
Increased promoter shareholding via buybacks.Current holding is at 41.1%. No shareholding is pledged.
Balrampur Chini Mills Ltd- Analysis
Integrated plants
Large size bringing in economies of scale
Low long term debt
Very low-cost debt
Self-sufficient in terms of molasses for distilleries
Clean structure- No subsidiary, only 2 associate company
Derisked from dependence on Sugar business via Ethanol & Power
Promoter shareholding is increasing via buybacks
Investment in Education Finance company- They acquired 50% stake in ‘Auxilo Finserve Private Ltd’, an education financing NBFC with a total expected investment amount of ₹175 cr in 2018. Of which Balrampur has already invested ₹75 cr.
Since this is a totally unrelated sector, it doesn’t make any sense for it to fit with the parent co. Let’s see how this pans out.
Also, have one more associate company called ‘Visual Percept Solar Projects Pvt. Ltd’ (45% stake) into solar power and the remaining 55% is held by Vallabh Bhansali’s company.
Overall, lower promoter holding compared to other companies.
Promoter participating in the buyback selling their shares. If someone is so positive about the sector and business and despite taking good amount of salary, why would they want to sell their shares. {After reading the book Masterclass with Super Investors, it highlights that Promoters selling their shares is not necessarily a bad thing}
Balrampur Chini Mills Ltd- Analysis
Balrampur Chini Mills Ltd- Financial Analysis
The revenue for 2019 was low on account of govt’s new policy of monthly release quota. 2017 was an exceptionally good year for the sugar companies and that is quite visible for the numbers.
In 2016, the company decided to write off an amount of ₹169 cr claim under the New Sugar Industry Promotion Policy, 2004 SIPP for reimbursements, which was currently lying as incentive receivables. Even after 4 years of trying to get it, it seemed unlikely that they will get it.
Coming to line item no 16, the interest rate (obtained by dividing Interest expense by total debt), looks really low. While reading the annual report, it seems the company has taken good advantage of SEFASU(Introduced in 2014) & SDF loans.
In order to verify that I checked for BCML interest rate for 2013 & 2014, the interest rate figure came out to 9.7% and 8.7% respectively.
While for Dhampur Sugar, during the same time, similar figures stand at around 9-10%.
BCML had brought down the debt to significantly lower levels by FY18. But with the cheaper loan available, the company increased its borrowings. As on Aug 2019, the company had a term loan of ₹365 cr @ 5% and SDF loan of 10.7cr @ 4%. But still such low level of interest rate doesn’t look comforting to me and same can be said for the tax rates.
In terms of revenue split, BCML generates 78% revenue from sugar business, 9.5% from distillery(Ethanol) & 12.5% from power. But in terms of profit around 50% is contributed by Ethanol business.
Few years back, sugar mills were totally dependent on sugar for their profitability but with power & ethanol business, the sugar businesses are becoming more derisked.
Overall, the company seems to be best placed in the Indian sugar industry. Low debt, integrated plants, and additional distillery coming up by December 2019 will be able to take advantage of the large scale of the company.
The company is the most valued among its peers but that is due to the positives associated by the company.