Magadh Sugar & Energy Ltd

The combination of enhanced environment responsibility and business profitability represents a robust platform that should deepen our sustainability across the coming years.

Overview

I am pleased to present my performance perspective for 202324 and prospects.

Your Company has been in existence for 10 years and I can state with assurance that we are at inflection point. Your Company seeks to do two things: broad base operations to emerge progressively de-risked from an excessive dependence on sugar, and scale its business. We believe that this represents a coming together of volume growth and value-addition that should translate into a sustainable increase in stakeholder value.

I must start by explaining why these two initiatives - broad basing and value-addition - are at all necessary. During the last few years following the announcement of the National Biofuel Policy, the conventional Indian sugar industry embarked on the journey of evolution towards biofuels. The result is that conventional sugar companies that once derived a majority of their revenues from sugar began to be perceived as bio-energy companies. This transformation has translated into enhanced stability, reducing your Company's excessive dependence on a commodity product, helping mainstream what

used to be perceived as a side stream business. The result is that futurefacing sugar companies are now generating a declining proportion of revenues from sugar, reducing their dependence on fluctuating market realisations. On the other hand, these companies are generating a growing proportion of their revenues from distillery operations entailing the manufacture of ethanol. The manufacture of ethanol is generating increased realizations, assured offtake, quicker receivables and better profitability. The big picture is that companies that increased the proportion of revenues from ethanol have reduced the debt on their books and begun to post superior capital efficiency around smaller Balance Sheets.

Mainstreaming the business model

At Magadh Sugar, we believe the time has come to deepen our exposure in non-sugar businesses that could strengthen our recall as a progressively mainstreamed player within the bio-fuel sector.

These are some of the initiatives embarked upon by your Company during the last financial year to reorient its brand and personality.

First, your Company announced its decision to commission a 100 KLPD grain-based distillery in Hasanpur.

This decision was prompted by a number of external triggers: the proposed unit will be located in the maize bowl of Bihar, assuring farmers of abundant offtake and assured realizations. In view of this, we expect to operate the plant through the year as opposed to a molasses- based distillery that would have been operative only as long as the Company's molasses was available for captive consumption. Besides, the proximity of maize farmers will moderate logistic costs; the ability to produce ethanol through the year is expected to enhance the proportion of revenues from this profitable product.

Second, your Company's 75 KLPD Sidhwalia distillery is being turned into a multi-feed facility before the start of the forthcoming sugar season. This will ensure that this distillery operates at least 330 days, strengthening revenues and profitability.

Third, your Company is increasing the licensed crushing capacity at its Narkatiaganj facility from 7500 TCD to 10,000 TCD. This increase will not only generate more sugar; it will also strengthen molasses output, enhancing the capacity to service a captive 80 KLPD distillery. Besides, the enhanced molasses availability from within the system will reduce your Company's dependence on inward molasses supplies from Sidhwalia at higher logistical costs. Your Company's decision to invest in an incineration boiler is expected to concurrently enhance the number of operational days of the distillery from 270 to 330, enhancing revenues and profitability.

Derisked approach

Your Company is cognizant of the need to enhance capital expenditure without straining the Balance Sheet. Your Company will borrow H120 Crore of debt to finance the expansion, resulting in peak long-term debt of H280 Crore. On the other hand, we expect that your Company's total assets should increase from H670 Crore to an indicative H1,200 Crore by the time the project is commissioned. Besides, the capital expenditure is expected to attract government support, reducing the break-even point. In view of this, we believe that the projects will sustain the underborrowed nature of the Balance Sheet even at peak debt levels.

This represents your Company's commitment to growth with responsibility and sustainability.

This expansion will help moderate your Company's sugar exposure from 85% of overall revenues to around 70% across the next few years, with a corresponding increase in the quantum of ethanol. The latter is expected to help the Company enhance cash flows, marked by quicker payments from oil marketing companies. In turn, this is expected to reduce the short-term loans on your Company's books and shrink the size of the Balance Sheet required to grow operations.

A smaller Balance Sheet and enhanced revenue mix are expected to increase capital efficiency and stakeholder value.

Big message

The big message for all stakeholders is that your Company is broad basing portfolio risk across more products and raw materials while enhancing scalability. We believe that the outcomes of this approach should translate into enhanced revenues, margins and cash flows on the one hand and a deeper association of the Company with bio-fuels on the other.

The combination of enhanced environment responsibility and business profitability represents a robust platform that should deepen our sustainability across the coming years.