Balrampur Chini Mills Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Seasonally weak quarter, operationally strong: Crushing grew 16% in the prior season, cane area is up 10-11%, and the CO 0238 variety risk has been aggressively reduced to an expected 25% of area, down from a peak above 80%.
• Policy tailwinds are firming up: Ethanol prices are expected to rise at least 3% across all feedstocks, and the new UP molasses policy levels the playing field by removing feedstock preference for levy obligations.
• Inventory valuation provided a one-time boost: Sugar inventory was valued at INR 37.60/kg, up sharply from INR 35/kg last year, because the market price on the reporting date was significantly higher.
• Capex cycle is complete, for now: All planned distillation capacities are online and management sees no purpose in further expansion until crushing crosses the 12.5 crore quintal mark, which is at least a year away.
• What to watch next quarter: The SAP announcement and ethanol price notification, both expected within weeks, which will set the margin framework for the full crushing season.

Cane Supply & Crop Health

• Area and crushing growth: A 10-11% increase in area under cane is expected to drive a concurrent increase in crush volume, with management targeting around 11.5 crore quintals this season and 12-12.5 crore quintals within a year.
• CO 0238 risk nearly eliminated: The high-yield but disease-prone variety that peaked at over 80% of the company's cane area is projected at only 25% in the coming crushing year and is expected to fall to single digits in the 2024-25 season.
• New variety introduction: The company will crush a sizable quantity of CO 015023 for the first time in the second half of the season, diversifying its varietal mix.
• Pest control gains: Top borer infestation, which hurt yield and recovery last year, is now at a negligible level across the company's command area.
• UP's structural advantage: Unlike Maharashtra, where yield is suffering from a stunted ratoon crop and scanty rainfall, UP farmers have irrigation resources and a lower water table, making the crop easier to revive in a deficit year.
• Yield visibility timeline: Management expects to understand the ratoon crop yield across UP, Maharashtra and Karnataka within 15-20 days, which will give the first read on roughly 50% of the season.

Avantika Saraogi: "So this is a projected figure, of course. So, we expect only 25% of 238 variety. ... In the coming crushing year. And the peak was 80% plus. So, you can imagine the downturn. And in the season, beyond that, we would see it in single digits."

Ethanol: Policy, Pricing & Feedstock Strategy

• Price increase expected: Management expects ethanol prices to rise on all three feedstocks (C-heavy, B-heavy, and Juice), with the average minimum increase not less than 3%, tracking the expected percentage hike in FRP.
• New UP molasses policy levels the field: Effective 1 November, the government removed feedstock preference for levy obligations, setting a uniform 26% reservation across all feedstocks, which eliminates the prior disadvantage for B-heavy molasses.
• Grain ethanol economics are attractive: The grain price announced for DFG is described as "pretty remunerative," and the company produced 1.53 crore liters of ethanol from rice in Q2, all sourced from the open market.
• Blended realization dynamics: Grain ethanol realization was around INR 58.50 per liter in Q2, but the blended alcohol realization is pulled down by ENA prices, since the company converts levy molasses into ENA and books the equivalent quantity.
• Sugar diversion calculus: Management may increase C-heavy ethanol production to improve sugar output, while juice production will continue because it remains decently remunerative.
• Distillery asset deployment: The Maizapur distillery will run fully on juice during the season and switch to rice with some maize filler in the off-season; Balrampur and Maizapur juice distilleries are now fully online.
• Expansion threshold: Management sees no purpose in adding distillation capacity until crushing crosses 12.5 crore quintals, which may happen a year after the current season, and believes juice ethanol prices need to be INR 73 per liter-plus to attract fresh capital toward juice-based distillation.

Vivek Saraogi: "Prices will increase on the ethanol front on all three feedstocks, C-heavy, B-heavy, and Juice. How much the increase? The average minimum should be not less than 3%."

Sugar: Inventory, Exports & Diversion

• Inventory valuation jump: Sugar inventory was valued at INR 37.60/kg because the market price on the reporting date (INR 40/kg) was much higher than in prior years; last year the same inventory was valued at INR 35/kg when the market price was INR 35/kg against a cost of INR 40/kg.
• Export window shut: The government has decided not to allow sugar exports for the time being, which keeps all production in the domestic market.
• Diversion quantity so far: Based on the tender filled to date, diversion stands at 31 lakh tons, and management believes the government may offer a revised or enhanced window to change that quantity.
• Government's net sugar view: Management believes the government will take a practical view on ethanol and that the attempt should be to make at least 2.9 crore tons of net sugar.

Power Business & Capex

• PPA exit delivering accretion: One unit has already exited its power purchase agreement with a positive payback, and a second unit will begin selling power on the open market from December at a pricing that is INR 1 per unit-plus accretive over the PPA rate.
• Tariff revision hope: Management is positively inclined toward a power tariff revision expected in 2024.
• Capex cycle complete: All capacities and efficiencies envisaged have been fulfilled, and both juice distilleries are fully online.
• Future capex under discussion: The company is actively looking at future capital allocation options and will announce details when the Board clears them, but no specifics were shared on the call.

Accounting & Policy Risk

• B-heavy molasses loss booking: Previously, B-heavy molasses was valued at INR 1,000-1,100 in inventory but was required to be sold at the levy price of around INR 200, creating a loss that was booked in the P&L during the September quarter.
• Levy policy challenge: Management acknowledged that all policies will get challenged legally but offered no guarantee on outcomes, while asserting confidence in the company's accounting practices.
• Penalty on ethanol shortfall: Management expressed hope that there will be no penalty for not completing counter-obligations on ethanol contracts.

Vivek Saraogi: "Balrampur will account for what is to be accounted. You get the cleanest balance sheet in the country, in my view. So, we take pride in our accounting. So don't worry… There's nothing to worry, guys. And all policies will get challenged. We'll do our legal bid, what happens? That one, I can't guarantee."

Guidance & Commitments

Key Metrics