Sweet Diamond- the workings of the Sugar Sector

Contributed By- Sidhant Daga

The Kolkata Chapter of the CFA Society India hosted Mr. Pramod Patwari- CFO at Balrampur Chini Mills Ltd.  on the 15^th December 2018. He explained to the audience in great detail the intricacies of the sugar industry.

The key highlights of the event are:

Industry Specific

• Patwari expects lower sugar production from Brazil in comparison to earlier estimates on account of climatic conditions and higher switch to ethanol.
• India’s sugar production for the 2017-18 season was ~32.5 million tonnes, up ~60.89% as compared to 20.2 million tonnes produced in previous season
• India is expected to produce around 30 MT of sugar in the current sugar season.
• The government has taken steps like creation of buffer stock, incentivised export targets for supporting the sugar companies.
• India is the largest consumer of sugar and 2nd largest producer of sugar in the world.
• Patwari expects diversion to B-heavy to increase in coming years.
• The diversion through B Heavy route during current sugar season is expected at 0.5 MT, which is expected to increase to 1.5 MT in the coming years.
• UP has replaced Maharashtra as the no. 1 sugar producing state in India. It was partly led by the high-yielding varieties like Co-238 and others that not only gives a higher per hectare yield but its average sugar recovery is also more than existing varieties.
• Recovery going forward is difficult to forecast as it depends on various factors like monsoon, temperature, soil condition etc. But based on historical trends the variation in recovery factor is around +/- 0.5% YoY.
• Ethanol pricing is announced every year for the contract period December- November and is not affected by changes in crude prices as the same has been delinked.
• Ethanol business only makes sense when it is integrated with sugar production, not otherwise as procuring the required raw material i.e. molasses from outside may not make the project viable.
• B heavy molasses are expected to help in reducing sugar production and there might be increase in price of molasses due to higher demand by the new distilleries coming up in India.
• Opening inventory of 10.6 MT may come down to 9.6 MT by end of next season. Further, if buffer stock is maintained till end of next season the available inventory for sale in domestic market will be around 6.6 MT.
• Patwari stated that growing health awareness will not stop sugar consumption much, as only direct consumption might go down but indirect consumption will still continue to grow.
• Patwari stated that India’s Sugar Consumption is growing at CAGR of ~ 2% Direct consumption accounts to only 30% of total consumption.
• He also said that the ethanol blending rates currently stand at only 3-4%, whereas, in Brazil it is about 26%. Govt. is now aiming to increase the blend rate to ~ 20% . One can expect the blending rate to increase to ~8% by next year on the basis of quantity of ethanol committed by the sugar mills.
• It is expected that MSP of sugar may rise based on increase in FRP as earlier when MSP was fixed FRP was Rs. 255 per qtl. and now the same has increased to Rs. 275 per qtl..
• It was said after procuring the cane, it is the company’s choice to produce sugar or not (diverting the same to B-heavy molasses or production of Ethanol direct from cane juice), hence they can slightly influence the sugar prices.

Company specific

• Patwari said that BCML’s main strength is their integration model, their cogeneration and distillation activities which provides the Company great hedge.
• Company’s new distillery of 160 KLPD at its Gularia Unit to be functional from Dec 2019.
• BCML has gone through a structural change, earlier during the best of the times, the company used to earn around Rs 225- 230 crs at the PAT level, now it can earn ~ Rs 300 cr at the PAT level even at the worst of the times.
• ’s secret sauce is that their debt level is always under control. Management is debt averse and they are aware of the fact that sugar is a commodity and they can’t sell it at higher prices than the market rate.
• Investment in NBFC was just for diversification purposes.
• Patwari said worst seems to be over for the company, “downside is protected”.

Link to the presentation used by the speaker –

https://chini.com/wp-content/uploads/2018/11/BCML_Corporate_Presentation_September_18.pdf