Dalmia Bharat Sugar & Industries Ltd

Overview

At the outset I would like to highlight that the Company is in a phase of aggressive expansion especially in the distillery segment and has sown the seeds of a significantly higher trajectory of profitability growth in the coming years.

Perspective

Before dwelling further on other aspects, it is imperative to review the government's National Biofuel Policy 2018. The policy articulated a higher blending ratio of ethanol with automotive fuel and empowered sugar companies to switch from the manufacture of sugar (which was earlier seen as mandatory) to ethanol. This forward-looking policy has proved to be a win-win for all stakeholders in the industry value chain. It has ensured that the benefits of bio-fuel manufacture translate to cane farmers in the form of timely and adequate compensation, helping build the country's agricultural sector from the grassroots upwards and reinforcing the rural economy. The policy has provided the country's sugar industry with a second wind; a number of companies have invested aggressively in their distilleries; within just a few years, even as the larger proportion of revenue is being derived from sugar, the proportion of profit is being largely derived from distillery operations, enhancing shareholder value. The increased use of ethanol in automotive fuel (estimated at around 11% today and likely to increase to 20% in the next couple of years) has already begun to moderate vehicular pollution through a better fuel combustion in automotive engines, benefiting society. The enhanced use of ethanol has helped moderate oil imports with positive implications for the country's foreign exchange reserves and currency strength.

I cannot think of any policy that has had such extensive multi-stakeholder upside as this one, transforming the health of the country's sugar industry in a compressed period of time. The outcome is that a cyclical sector has turned sustainable and is likely to remain so across the foreseeable future.

Performance

The performance of your Company during the last financial year was built around the backdrop of this positive sectorial landscape. Your Company reported a revenue growth of 8%.The Company reported an EBITDA margin of 15%. Increase in cane prices last year resulted in a higher opening inventory carrying cost for the year without a commensurate increase in sugar prices.

Transformation

I must take this opportunity to explain a profitable churn in the Company's revenue and Balance Sheet profiles that should translate into enhanced value across the foreseeable future.

The proportion of revenues being derived from distillery operations increased during the last financial year – from 24% of overall revenues to 31%. Besides, the Company's distilleries operated for an average 314 days, delivering an average (across distilleries) capacity utilization of nearly 100%.

This increased distillery revenue proportion had a transformative impact on the Company's Balance Sheet. The manufacture of sugar is compressed within a period of five months; the sale of that sugar often extends across 15 months. During this period, your Company (as also the sector) needs to store the sugar in its factory. This storage represents blocked inventory that can only be progressively liquidated as per the sugar release advice received from the government. While the sugar lies unsold, the Company is required to invest in working capital (and short-term debt correspondingly mobilized) on its books. This increases the interest outflow and moderates profits. This is how the Company operated for years, becoming a part of its legacy, culture and practice. This reality has begun to transform. Thanks to the government's permission to companies to move from the manufacture of sugar to ethanol at will, your Company has begun to ‘sacrifice' the production of sugar and utilize the cane syrup to manufacture ethanol instead (or utilize the molasses generated from sugar manufacture to do the same). This one switch has transformed the dynamics of the sugar industry and our Company for an important reason: ethanol enjoys a ready market and does not need to be inventorized. The Company can generate immediate revenues and get remunerated in less than a month by oil marketing companies. This quicker revenue inflow has helped your Company moderate its working capital (and related debt) outlay. The result is that the more ethanol we manufacture, the less short-term debt on our books (in addition to interest subvention on long-term loan to set up a distillery, which is an additional bonus). The result is that the Company's peak working capital outlay has increased from Rs 794 Cr to H 887 Cr. Correspondingly, interest outflow moderated from Rs 35 Cr to Rs 38 Cr even as the Company's revenues grew by 8%. Interest cover (an index of how effectively we cover interest payment through our EBITDA) strengthened from 17x to 23x. The Company's credit rating was maintained at the same level.

The growth of this one business – distillery – has transformed your Company's financial foundation. If one removes concessional debt from the Balance Sheet, the quantum of long-term debt was Rs 401.17 Cr as on March 31 2023. Your Company's debt-equity ratio strengthened from 0.17 to 0.15 despite an ongoing expansion programme.

The conclusion that I would want our shareholders to take note of comprise: your Company's growth is being driven by internal accruals; your Company is generating adequate surplus to plough into aggressive capacity growth; this capacity expansion is expected to graduate the Company to one of the largest ethanol producers in Uttar Pradesh in 2024. This capacity expansion is expected to provide the Company with a large and liquid foundation that should translate into a sustainably enhanced shareholder value.

Capacity expansion

Given a positive industry environment, where the government intends to procure an even larger quantum of ethanol, the priority is for an opportunity-driven Company like yours to commission additional distillery capacity.

Your Company possessed a distillery capacity of 710 KLPD as on March 31 2023 following an expansion of 110 KLPD that was commissioned in October 2022. The Company is presently engaged in increasing Jawaharpur grain distillery capacity of 110 KLPD to 250 KLPD that should get commissioned by December 2023. Given the industry optimism, your Company announced yet another expansion – making it two expansions in the pipeline – of 300 KLPD at Nigohi that is expected to be commissioned in September 2024.

I must assure our shareholders that these expansions – even as they have been planned with speed – will only enhance the value of their holdings for the following reasons. One, the sharp increase in distillery capacity – from 600 KLPD as on March 31 2022 to 1150 KLPD as on March 31 2025 – will translate into an estimated 33 Cr liters of ethanol throughput per annum, which provides the Company with enhanced revenue and profit visibility. Two, with virtually all our molasses-based distillery capacity having been optimized, we will commission around 550 KLPD distillery capacity around grain, which will be our future growth driver. Three, the ratio of sugar capacity to distillery capacity (following our expansion programmes) will be among the lowest in the industry with correspondingly positive upsides for our capital efficiency. Four, our distilleries will be fueled by bagasse generated from within, obviating the need for the procurement of fossil fuels – a cheaper and cleaner way to grow our business.

Five, we will sustain the switch from sugar to ethanol until sugar realisations rise to the point where it becomes significantly remunerative to produce sugar over ethanol.

Outlook

At Dalmia Bharat Sugar, we have aggressively invested in building productive and profitable assets through net worth as the best way to remunerate shareholders. By doing this, we believe we would be putting capital to the best use. This policy will be sustained across the foreseeable future.

We believe that we are building a foundation that should translate into sizable and sustainable long-term growth that should enhance value for all our stakeholders in a sustainable way.