Indian Sugar Sector - Cyclical Nature To Structurally Change PDF

Edelweiss Professional Investor Research
Insightful. Independent. Decisive.
Indian Sugar Sector: Tactical Buy - Balrampur Chini Mills Ltd
Debashish Mazumdar
Research Analyst
debashish.mazumdar@edelweissfin.com Date: 03rd April 2019
Table of Contents
Indian Sugar Sector ............................................................................................................................................... 1
I. SY18 (Oct – Sept): A record year for Indian Sugar industry .................................................................................. 3
II. SY19E is expected to be the beginning of a typical two year of downcycle ........................................................ 6
III. Government initiatives to support prices and stabilise the sector ..................................................................... 8
Ethanol: Production and Blending to Take Off Pace .............................................................................................. 11
I. Ethanol blending in India: A flop show in the past ............................................................................................... 15
II. Benefits of ethanol blending to sugar sector and Indian economy ..................................................................... 19
III. Ethanol Blending to pick up pace; Aggressive capacity expansion planned ....................................................... 22
Balrampur Chini Mills Ltd. ..................................................................................................................................... 25
I. Sugar business: Beneficiary of higher MSP and export quota .............................................................................. 26
II. Ethanol Business - Sweeter than sugar now ........................................................................................................ 27
III. Co-gen division – expected to maintain the momentum ................................................................................... 28
IV. Ethanol business to drive profit growth in FY19E and FY20E ............................................................................. 29
V. Rerating on card; Initiating 'Tactical BUY' with a target price of INR 195 ........................................................... 30
Edelweiss Professional Investor Research

Indian Sugar Sector Cyclical nature to structurally change
Indian sugar sector has been known for its cyclical nature and volatility. However, recent Debashish Mazumdar
initiatives undertaken by the Indian government is expected to address the problems of the Research Analyst
debashish.mazumdar@edelweissfin.com
sector. Minimum support price (MSP) has been declared, which will offer a floor to sugar
prices in surplus scenario and keep profitability of the sector intact. Incentives have been
declared to encourage exports and help reduce oversupply thereby supporting prices further.
Further, the government has attempted to create right environment to encourage higher
ethanol production and blending. Hence, we believe the dynamics of the sector are set to
change in a structural manner. Among all the players, we are most bullish on Balrampur Chini
Mills Limited (BCML) and initiate “Tactical BUY” on the stock with a target price of INR 192.
We believe the company with one of the highest distillery capacity, lighter balance sheet and
best RoCE will be a major beneficiary of structural change happening in the sector going ahead.
Sugar: Government measures to structurally change dynamics of the sector
In India, Sugar is largely known as a cyclical sector which typically has two-three years of
production upcycle followed by downcycle. Government determined fixed sugarcane prices
(highest in the world) and market determined supply-demand linked sugar prices normally put
the industry players and farmers under huge stress in a year of high production. With an
intention to change the sector dynamics towards a positive direction, Indian government came
out with a host of policy measures, like, (1) introduction of sugar MSP and increase to INR 31
per kilogram (2) reintroduction of sugar selling quota and (3) providing incentives to encourage
export among others. These steps will moderate the cyclical nature of the sector and will make
it more predictable going forward. Initial sign of structural change is already visible, as over the
last few months sugar prices have already shown some upward trend and sugar companies are
reporting higher profitability.
Ethanol: Production and blending to take off

With a target to reach 10% ethanol blending in 2022E and 20% ethanol blending in 2030E, new
National Biofuel Policy and new Ethanol Blended Petrol (EBP10) Programme were reintroduced.
To bring in sustainability in procurement process and pricing, Ethanol prices are now linked to
cane FRP; prices have been increased twice in the recent times to encourage more production.
Moreover, price and fiscal incentives were decided separately for ethanol produced from
different sources and different routes. Financial assistance were also announced to create new
capacities. Supported by these initiatives Ethanol blending is expected to reach to 6.5% in SY19E
as compared to 3.2% achieved in SY18. For 20% blending target by 2030E, investments worth
INR 6000 cr is planned by Indian sugar companies. Uttar Pradesh based large millers, like BCML,
Dhampur Sugar Mills, Dwarikesh Sugar Industries and Triveni Engineering Industries are
collectively projected to install fresh ethanol production capacity of almost 500 kilo litres per
day (KLPD) over next one year.
BCML is better placed to be benefited, Initiating 'Tactical BUY' with a target price of INR 195
Balrampur Chini (BCML) being one of the largest and most efficient sugar producers in the
country with fully integrated distillery and power capacity is best placed to capitalise on the
positive structural changes witnessed by the sugar industry. In order to capture the growth
opportunities in the ethanol blending space, the company is also expanding distillery capacity
from 130 mn ltr p.a. to 180 m ltr p.a. Led by ethanol division, EBITDA margin of the company is
expected to reach 19% in FY20E as compared to 10% in FY18 and RoCE is expected to improve
to 21% in FY20E against 13% currently. We believe that reduction in uncertainty and increase
in predictability will lead to structural re-rating of the sugar sector and BCML is expected to
benefit from the same. We initiate ‘Tactical BUY’ with a target price of INR 195 by assigning a
target P/E of 9x (equal to the long term average 1 year forward P/E) for FY20E.
Date: 03rd April 2019
Edelweiss Professional Investor Research 1

Indian Sugar Sector: Government Measures to Structurally
Change the Dynamics

I. SY18 (Oct – Sept): A record year for Indian Sugar industry
Sugar production in SY18 jumped 60% YoY to 32.5 mn tn
After two consecutive years of decline, sugar production in India jumped 60% YoY to a record
level of 32.5 mn tn led by Maharashtra and Karnataka. However, consumption stood fairly stable
like previous few years at 25.4 mn tn.
Record production and stable consumption led to 12% decline in sugar realisation in SY18
35 Consecutive Drought and Record high production put 40

two years of cane FRP rise pressure on prices in SY18
lower push the prices
30 35
production up by 140%
push the between
25 30
sugar price SY08-10
(INR / Kg)
(MN Tn)
high
20 25
15 20
10 15
5 10
SY02 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11 SY12 SY13 SY14 SY15 SY16 SY17 SY18
India Sugar production India Sugar Consumption Ex Mill Price
Source: ISMA, Industry Data, Edelweiss Professional Investor Research
Average sugar realisation dropped 12% in SY18 due to supply glut

Average ex-mill realisation of sugar companies in India declined by 12% YoY to INR 32 / kg in SY18.
Drop in prices were significant between September, 2017 to May, 2018 on account of record
production and stable consumption. Companies like Balrampur and Dhampur reported 24-25% fall
in average realisation between Q3FY18 and Q1FY19.
Balrampur’s average realisation fell by 24% between Q3FY18 Dhampur’s average realisation fell by 25% between Q3FY18
and Q1FY19 and Q1FY19
40 38
37.28 35.94 37.03
38 36.12 36
36 34
34 32
32 30
(INR Cr)
(INR / Kg)
30
28 28.11
28
28.42 26
26
24 23.9
24 24.28
22
22
20
20
Q2FY17
Q3FY18
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q4FY18
Q1FY19
Q2FY19
Q2FY16
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Source: Company Data, Edelweiss Professional Investor Research

SY18 experienced record high Sugarcane production of 395 mn tn
Sugarcane production in SY18 rose 29% YoY to a record high output of 395 mn tn primarily due to
record high yield of almost 80 tonnes per hectare (10% YoY increase) against long term average of
68 tn / hectare along with an increase in area under cultivation.
Record yield and increase in area under cultivation resulted in record high sugarcane production
6 Cane yield reached to record high 85
levels of 80 tn / hctr
80
5
75
(Tonne / Hectares)
(MN Hectares)
5
70
65
4
60
4
55
3 50
SY02 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11 SY12 SY13 SY14 SY15 SY16 SY17 SY18
Area under cultivation (MN Hectares) Sugarcane Yield (Ton/ Hectares)
High Cane production and record high recovery leads to 60% rise in Sugar production in SY18
Higher recovery rate not only helps in higher production but it also help companies to reduce the
cost of production in a rising raw material and falling sugar prices scenario. Recovery rate, which
has improved significantly over the last two years with improved variety of sugar cane, rose to
11.3% in SY18 compared to 11% in SY17.
Improved Recovery rate on higher cane production leads to historical high Sugar production
450 11%
Recovery rate improved by 130
bps between SY13-18 to reach 11%
400 11.3%
11%
350
(MN Tn)
11%
300 11%
10%
250
10%
200 10%
SY18
SY02
SY03
SY04
SY05
SY06
SY07
SY08
SY09
SY10
SY11
SY12
SY13
SY14
SY15
SY16
SY17
Sugarcane production (MN Tonne) Recovery Rate

Rising Cane Cost with declining Sugar prices lead to increase in farmer arrears
While sugar prices witnessed decline in SY18, Fair and Remunerative Price (FRP)/State Advised
Price (SAP) continued to rise. This increased the backlog of sugar companies’ dues payable to the
farmers in the current season.
FRP almost doubled but sugar prices remained stagnant over …as a result, cane arrears reached almost INR 20,000cr
last 8 years… by February 2019
275 38 25000
255
255 36
235 34 20000
215
32
195 32 15000
30
(INR Cr)
(INR / Kg)
(INR / Qntl)
175 30
28
155
26 10000
135 130
115 24
5000
95 22
75 20
SY10 SY11 SY12 SY13 SY14 SY15 SY16 SY17 SY18 0
SY12 SY13 SY14 SY15 SY16 SY17 SY18 Feb,
FRP (Per Qntl) Ex- Mill Prices (Per Kg) 19
Source: ISMA, Media reports, Edelweiss Professional Investor Research

II. SY19E is expected to be the beginning of a typical two year of downcycle
Sugar production to remain flat in SY19E and is expected to fall to ~27 mn tn in SY20E
According to ISMA’s recent estimates, sugar production in SY19E is expected to fall by ~5.5% YoY
to 30.7 mn tn. ISMA’s earlier estimate was 31.5 mn tn of sugar production in SY19E. The downward
revision in estimates was mainly due to reduction in yield per hectare. However, our recent
discussion with the industry experts and sugar dealers suggest that sugar production is expected
to remain in the range of 31.5 – 32 mn tn in SY19E. So, SY19E is the beginning of typical two years
of down cycle in the sugar production. Some advance estimates are suggesting the production in
SY20E will be maximum ~27 mn tn, which is almost similar to the consumption levels.
Sugar Production will be almost close to consumption in SY20E
34 32.5 32
32 30.7
30
27
(MN Tn)
28 26.5
26 26
25.4
26
24
22
20
SY18 SY19 (ISMA Exp) SY19 (Edelweiss Exp) SY20E
India Sugar production India Sugar Consumption
Source: ISMA, Industry Data, Media Reports, Edelweiss Professional Investor Research
…due to two consecutive years of high inventory levels and cane arrears
Historically, two consecutive years of high inventory has led to significant drop in production next
year. Sugar inventory levels in India was at decade high levels of 11 mn tn in SY18 and is expected
to increase further to 13 mn tn in SY19E, which will be equal to 172 days of domestic consumption.
Despite lower production in SY20E, buffer stock would remain at 135 days levels.
Higher inventory levels in SY18 & 19E may lead to lower production in SY20E
2 consecutive years’
14 high inventory always 300
13
lead to lower
12 11 11 11
11 production next year 11 250
10
10 9 9
8 200
7 8
8
(Days)
7
(MN Tn)
6 6 150
6 5
4 4
4 100
4
2 50
0 0
SY05
SY08
SY11
SY14
SY02
SY03
SY04
SY06
SY07
SY09
SY10
SY12
SY13
SY15
SY16
SY17
SY18
SY19E
SY20E
Sugar Inventory levels Equivalent of days of Consumption


High cane arrears in one year has also led to low sugar production in the next year. Currently, cane
arrears is around INR 20,000 cr, which is expected to affect cane cultivation next year and hence
lower production in SY20E.
Cane arrears and sugar production has an inverse relationship

25000 High cane arrears always put pressure 35
on next year’s cane cultivation 33
20000 31
29
(Mn Tn)
15000 27
(INR Cr)
25
10000 23
21
5000 19
17
0 15
SY12 SY13 SY14 SY15 SY16 SY17 SY18 Feb, 19
Cane Arrear Sugar Production
Sugar prices are expected to move up in SY20E in anticipation of low production

Sugar prices in India are expected to rise going forward with production almost matching
consumption in SY20E. Moreover, sugar prices have already shown some upward trend due to hike
in MSP by the government.
Sugar prices have already started showing upward trend Balrampur’s average realisation has started improving
35 40
34 38
33 36
32 34 32.21
31 32
(INR / Kg)
(INR / Kg)
30 30
29 28
28.42
26
28
24
27
22
26
20
01-06-2018
01-07-2018
01-08-2018
01-09-2018
01-10-2018
01-11-2018
01-12-2018
01-01-2019
01-02-2019
01-03-2019
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Source: Bloomberg, Company data, Edelweiss Professional Investor Research

III. Government initiatives to support prices and stabilise the sector
Sugar sector’s cyclical nature
Sugar is a cyclical industry, which typically has two-three years of production upcycle followed by
two-three years of downcycle. Sugar cycle is largely more determined by supply than demand.
Following image shows chain of events which lead to production upcycle and downcycle
Indian Sugar Industry Cycle

Higher sugar Lower
production profitability
High sugarcane Higher sugarcane

production arrears
Improved Lower sugarcane

profitability production
Increase
Lower sugar
in sugar
production
prices
Source: Industry Data, Edelweiss Professional Investor Research
Government initiatives to make the industry less cyclical and more predictable
Anticipating surplus sugar production this year, the government came out with a host of policy
measures in order to (1) stabilise domestic sugar prices, (2) prevent cheaper imports, (3) encourage
surplus stock clearance, (4) improve net realisation and cash flow of sugar mills, and (5) encourage
timely payment to farmers thereby reducing cane arrears. These steps are expected to moderate
the cyclical nature of the sector and help the industry to be profitable and more predictable.
Introduction of MSP to cap price decline in a year of huge surplus

MSP on sugar was introduced in June 2018 to reduce pressure on sugar mills in oversupply year
thereby supporting farmers and price was fixed at INR 29 / kg. Recently, MSP was again hiked to
INR 31 / kg. Due to higher recovery rate, current cost of sugar production is INR 29 – 30 / kg in
Uttar Pradesh. Hence, business is profitable for the millers even in the current year of huge
oversupply.
Historical evidence suggests that whenever inventory levels has crossed 9-10 mn tn in India, sugar
prices fell significantly in next year. However, this time sugar prices got a floor of INR 31 / Kg due
to MSP despite record high sugar inventory of 13 mn tn. Thus MSP has helped reduce cyclical risk
of the sector dramatically and made the profitability more predictable.
High inventory led to fall in sugar prices historically

SY06 SY07 SY14 SY15 SY19E
Inventory Levels (Mn Tn) 3.69 11.07 7.47 9.10 12.52
Ex Mill Prices (INR / Kg) 15.8 12.1 29.2 24.9 31.00
Higher production in Higher production in MSP providing

SY07 lead to 23% YoY SY15 lead to 15% YoY a floor to the
fall in sugar prices fall in sugar prices price this time

Financial performance of sugar companies also got impacted significantly by the fall in sugar prices
in the previous years of high production. However, with the increase in sugar prices even in a year
of huge surplus, margin performance of the companies reported significant improvement in
9MFY19.
Sugar companies are reporting strong performance even in a year of high production
INR Cr SY06 SY07 SY14 SY15 9MFY19
Industry Revenue* 4640 4442 8814 8233 8194
Industry EBITDA* 960 367 511 400 1127
- EBITDA Margins (%) 21% 8% 6% 5% 14%
*Companies considered: Balrampur, Dhampur, Triveni and Dwarikesh
Export incentives to reduce inventory levels
Under the Minimum Indicative Export Quota (MIEQ) scheme, five million tonnes of duty free
export of sugar is allowed from India to reduce oversupply. However, exports is not competitive as
cost of sugar production is highest in India when compared to other large producer countries due
to high cane cost.
India pays highest cane price among large producers

42
27
25 24
(USD / tn)
Brazil Thailand Australia India
In order to encourage exports, the government announced a special incentive of INR 14 / quintal
of cane (5% of the FRP), which will be directly transferred to the farmers’ account and will also
reduce cost pressure on the millers. The government will also pay a subsidy of INR 10 - 30 / kg on
sugar exported to the millers depending on the distance from the port. All these put together,
translates into benefits of INR 8 - 8.5 / kg to the millers and reduces the price gap between global
sugar prices and cost of production in India.
Government is incentivising the export

INR / Kg
Global sugar prices 22
Government incentives 8
Effective realisation to miller 30
Current cost of production 30
In SY19E, 3 mn tn of sugar is expected to get exported from India and will reduce the closing stock
to that extent thereby supporting prices.

Re-introduction of Sugar selling quota to control supply
After a gap of five years, the government reintroduced mill-wise sugar selling quota system in June
2018 in order to reduce oversupply in the market and stabilise domestic sugar prices. Since
introduction of the scheme, sugar selling hovered around the actual quota decided by the
government. Hence, prices stayed above MSP most of the times.
Quota and actual sales moved in tandem since June 2018 Prices remained above INR 31 / kg since June 2018
25 35
34
20 33
32
(Lakh Tn)
15 31
(INR Cr)
30
10
29
5 28
27
0 26
01-07-2018
01-06-2018
01-08-2018
01-09-2018
01-10-2018
01-11-2018
01-12-2018
01-01-2019
01-02-2019
01-03-2019
Jun-18
Nov-18
Dec-18
Jul-18
Aug-18
Sep-18
Oct-18
Feb-19
Jan-19
Sugar selling Quota Actual Sugar sales
Source: Industry Data, Bloomberg, Edelweiss Professional Investor Research
3 mn tn of buffer stock announced

The government announced creation of 3 mn tn of buffer stock for one year that would result in
estimated expenditure of INR 1,175cr. The reimbursement under this scheme would be directly
credited to farmers’ account for the arrears that are to be paid to the farmers.

Ethanol: Production and Blending to Take Off Pace

Brazil: A benchmark in Cane-based Ethanol production globally (a Case Study)
Evolution of ethanol industry in Brazil

Brazil has been the world’s largest sugarcane producer for many decades. Post 1973 oil crisis, when a spike in world oil
prices drove up its foreign debt, Brazilian government introduced the National Fuel Alcohol Program, known as Proálcool in
1975 to phase out use of fossil fuels, such as gasoline and increase the share of ethanol produced from sugar cane.
In the early stages, the government offered a significant subsidy to ethanol producers. Proálcool included a high ethanol
blending mandate, and required that E100 fuel (96% pure ethanol and 4% water) or hydrous ethanol be available at the
retail level. In addition, E100 can only be used in flex-fuel vehicles (FFVs), which can be fuelled with any mix of ethanol or
gasoline, and the government provided a tax incentive to purchase FFVs. Moreover, the government ensured that E100 is
cheaper than the conventional E25 at the gas station and ethanol prices would never be higher than 65% of the gasoline
price.
Between 1976-1992, the blending rate of ethanol was regulated by the government and remained in the range of 10-25%.
Post 1992, the government set the minimum and maximum blending rate depending on the sugarcane harvest and ethanol
production.
In early 2000, Brazilian government started playing a minimal role and let the market decide ethanol prices. Since then,
prices of three major commodities—sugar, gasoline, and ethanol—drive domestic ethanol production and consumption in
Brazil. Even though higher mandatory blending provides a buffer for ethanol producers, the volatility in hydrous ethanol
use could create price movements in the ethanol market.
The Evolution of Ethanol Production in Brazil
40
1975 Late 80's
35 2003
Proacool Launch Reversion in oil price
Flex Fuel Vehicles
High Deregulation of the
30 were launched
governmental sector
25
1973
20 1st oil
price
15
shock
10
0
73/74
75/76
77/78
79/80
81/82
83/84
85/86
87/88
89/90
91/92
93/94
95/96
97/98
99/00
01/02
03/04
05/06
07/08
09/10
11/12
13/14
15/16
17/18
GOVERNMENT-DRIVEN MARKET-DRIVEN
Brazillian ethanol production (billion liters)
Source: UNICA, Edelweiss Professional Investor research

The journey of Sao Martinho (SM): The largest sugar producer in the world
Sao Martino (SM) is one of the largest and oldest sugar companies in the world with 24 mn tn crushing capacity per year. It
also boasts the largest sugarcane processing facility in the world with a processing capacity of 10.4 mn tn p.a. SM has
established itself in the sugarcane industry by having major market share in sugar, ethanol and power sectors.
SM and BCML Revenue

SM’s Revenue grew by 12x over last 12 years
contribution
4,000
3,436
Segment
SM BCML
3,500 Contri
3,000 Sugar 47% 78%
2,500 Ethanol 46% 10%
(Brizilan Real Mn)
2,000 1,534 Others 8% 11%

1,500 1,183
1,000
500 282
0
FY10
FY06
FY07
FY08
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
SM’s EBITDA grew by 21x in last 12 years.. ..and PAT grew by 23x during same time
1,800 1,705 55% 600 20%
1,600 50% 491
500 15%
1,400 45%
1,200 400
40% 10%
1,000
(Brazilian Real)
35% 300
(Brazilian Real)
800 5%
563 30%
600 464 200 133
25% 105 0%
400
100
200 78 20% 21
0 15% 0 -5%
FY12
FY06
FY07
FY08
FY09
FY10
FY11
FY13
FY14
FY15
FY16
FY17
FY18
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
-100 -10%
EBITDA EBITDA Margins PAT PAT Margins
Market capitalization doubled since listing; Average P/E of last 11 years

Sao Martinho & Balrampur Chini
was 16x
7,000 26
6,150
24 SM BCML
6,000
22 Revenue (INR Cr) 6184 4400
5,000
20 EBITDA (INR Cr) 3069 452
4,000 3,483
(Brizilian Real)
3,013 18 - EBITDA Margins 50% 10%

3,000
(X)
1,839 16 PAT (INR Cr) 884 232

2,000 14 - PAT Margins 14% 5%
1,000 12
0 10
M Cap (INR Cr) 11069 3160
FY18
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
1 yr frd P/E (x) 13 6

M Cap 1 yr forward P/E Avr 1 year forward P/E
Source: Bloomberg, Edelweiss Professional Investor Research

What India can learn from Brazil?
Brazil’s ethanol production system is unique. Majority of the country’s sugar mills are flexible and can produce more sugar
or more ethanol depending on the price premium of one over another. This flexibility is a key reason for Brazilian ethanol
industry’s success. Brazilian experience of ethanol production provides several important lessons about what to do and what
to avoid for creating and strengthening biofuels industry.
(1) Próalcool boosted ethanol production on a large scale, which helped (a) reduce country’s dependence on oil imports, (b)
reduce energy insecurity and economic constraints and (c) increase the share of renewables in the total power generation
mix.
(2) The government remains the main factor behind success of ethanol industry in Brazil with measures including mandatory
blending policies, financial incentives aimed at increasing the competitiveness of ethanol, and partnerships with the private
and research sectors.
(3) Greenhouse gas (GHG) emissions from Brazilian vehicles has reduced significantly post launch of FFVs. However,
consumers have shown sensitivity to price changes of ethanol and gasoline. In other words, they shifted consumption of both
depending on their prices regardless of the environmental impact.
(4) Despite lower GHG emissions, ethanol production has had negative social and economic impact. Low wages, bad work
conditions and child labour are among the main problems created by the sugarcane industry in Brazil, which need to be
urgently addressed with adequate policy and enforcement measures.
(5) 2G ethanol has the potential to significantly increase sugarcane productivity without increasing cultivation area. 2G
biofuels therefore show the potential for avoiding many of negative environmental impacts observed in the production of
traditional ethanol, and thus may be considered as a more sustainable fuel option.

I. Ethanol blending in India: A flop show in the past
Biofuel can be produced from two broad sources
First generation (1G) biofuels are made from sugar and vegetable oils; whereas second generation
(2G) biofuels can be manufactured from lignocellulosic biomass or woody crops, agricultural
residues or waste like rice & wheat straw, cotton stalk, etc.
Sources of 1G and 2G biofuels

Organic Molecule To Be
Classification Raw Material
Converted to Ethanol
C and BH molasses
Sugary
SJ and MCJ
(Glucose, Fructose, Sucrose)
1st Generation Sweet sorghum (stalks) juice
Grains (Corn, Sorghum, Rice, Wheat, Millet)
Starch
Cassava
Lignocelluosic biomass (bagasse, Sugar cane trash,
Cellulose and hemicellulose
2nd Generation Corn cobs, Rice straw etc.)
Complex Mixed Organics Pet coke and Municipal solid waste
Cane-based ethanol can be produced in three different ways

Cane-based ethanol can be produced in three different ways — conventional route (C-grade
molasses), B-grade molasses and directly from cane juice.
 Conventional Route / C-grade molasses - Conventionally, sugar is extracted in three stages

with very little sugar left to be extracted after the third stage. Left over after the third stage is
the molasses, which has very less sugar content. These molasses are processed in a distillery
for ethanol generation. One tonne of sugarcane crushing normally yields 11 – 11.5 litres of
ethanol in the conventional route.
 B-grade molasses route - Under this route, the sugar extraction process is stopped after the
second stage and the molasses post second stage, which is still rich in sugar content, are used
for extraction of ethanol. Under this route, one tonne of sugarcane crushing normally yields
22-25 litres of ethanol but total sugar production gets compromised to get higher ethanol.
 Direct sugarcane juice route – Under this process, extraction of sugar does not happen and the
entire sugar content is used to produce molasses, which are in turn used to generate ethanol.
Under this route, one tonne of sugar cane will result into 55 - 60 litres of ethanol.
Ethanol produced from three different methods of production

C Heavy/
B Heavy Direct Cane Juice
Conventional
Cane Crushed (Units) 100 100 100
Sugar Production (Units) 11.5 10 0
Molasses Production (Units) 5 7 20
Ethanol Production (Litre) 1.1 2.1 6.1


India made progress in ethanol production only recently; still lots of ground to cover
While India has become one of the top producers of ethanol in recent years, it still lags two largest
producers-- US and Brazil--by a huge margin. From 350 mn ltrs of production in 2014 (0.4% of the
global production), total ethanol production in India reached 1,250 mn ltrs in 2018 (1.2% of the
global production). As against this, USA (61,000 mn ltrs) and Brazil (30,000 mn ltrs) put together
formed 83% of the global ethanol production in 2018, up from 87% produced in 2010.
2010, total world Ethanol production 2014, total world Ethanol production 2018, total world Ethanol production
was ~88,000 mn liters was ~93,000 mn liters was ~1,09,000 mn liters
Argentina 125 Argentina 671 Argentina 1150
Thailand 451 Thailand 1,058 Thailand 1480
India 50 India 350 India 1250
Canada 1,350 Canada 1,931 Canada 1,817
China 2,050 China 2,404 China 4,467
EU 4,575 EU 5,470 EU 5,413
Brazil 26,201 Brazil 23,432 Brazil 30,094
USA 50,338 USA 54,181 USA 60,945
- 20,000 40,000 60,000 0 20,000 40,000 60,000 - 20,000 40,000 60,000 80,000
(MN Liter) (MN liters) (MN Liters)
Source: USDA Foreign Agricultural Services, Industry Data, Edelweiss Professional Investor Research
Ethanol blending initiatives never succeeded in India in the past

Blending ethanol with gasoline is environment-friendly and helps reduce India’s dependence on
oil imports. Despite these advantages, ethanol blending policy, first announced in January 2003
(5% blending rate targeted) failed to deliver. The first National Biofuel Policy got unveiled in
October 2008 which targeted 5% ethanol blending on an immediate basis and 20% by 2017.
India could achieve only 3.2% blending rate even after a decade of policy announcement. Policy
flip-flops around ethanol pricing, cyclical nature of cane production and most importantly lack of
willingness to implement policies effectively has affected the ethanol blending programme in India.
Ethanol blending in India never achieved the target

1400 4%
4% 4%
1200
3%
1000 3%
3%
800 2%
(MN Litres)
2% 2% 2%
600 2% 2% 2%
400 1% 1%
200 1% 1%
0%
0 0%
SY09 SY10 SY11 SY12 SY13 SY14 SY15 SY16 SY17 SY18
Ethanol Fuel Consumption Blending
Source: USDA Foreign Agricultural Services, Industry Data, Edelweiss Professional Investor Research

National Biofuels Policy introduced in 2018
In June 2018, Government of India (GOI) and Ministry of Petroleum and Natural Gas (MoPNG)
formally notified the National Biofuels Policy 2018. Salient features of the policy are:
 The policy clearly categorised biofuels as 1G, 2G and 3G in order to extend appropriate financial
and fiscal incentives to each category.
 India’s ethanol blending programme was always based more on sugar molasses, and not
directly from sugarcane, corn, or any other potential raw material sources. The new biofuels
policy has increased the scope of including other raw materials.
 Price of ethanol got delinked with global crude prices and linked with sugarcane FRP. MoPNG
is authorised to increase ethanol prices once FRP is increased by the central government.
 A previous provision for oil and marketing companies (OMCs) to cover goods and services tax
and transportation costs will also incentivise ethanol producers.
 With a thrust on advanced biofuels, the policy provides viability gap funding scheme of INR
5000cr in six years in addition to additional tax incentives, higher purchase price for 2G ethanol
bio-refineries as compared to 1G.
 The policy encourages setting up of supply chain mechanism for biodiesel production from non-
edible oilseeds, used cooking oil and short gestation crops.
 Roles and responsibilities of all the concerned ministries/departments with respect to biofuels
has been captured in the policy document to synergise efforts.
New Ethanol Blended Petrol (EBP) programme
 The new EBP programme stipulates procurement of ethanol produced directly from B-grade
molasses, sugarcane juice, and damaged food grains such as wheat and broken rice.
 Separate pricing has been decided for three different routes namely conventional, B-grade and
directly from sugarcane
 The government has allowed production of ethanol from damaged food grains and OMCs are
offering differential pricing
 GST rate on ethanol reduced to 5% from 18% earlier to boost production.
 Control of production, movement and storage of ethanol has been passed on to the central
government under the new scheme in order to ensure smooth implementation of EBP
programme and to facilitate centralised monitoring.
 Under the new programme, ethanol blending target of 10% by 2022 and 20% by 2030 has been
proposed. And 5% blending of biodiesel with diesel by 2030 is also proposed.

Ethanol administered price revised upwards twice in last one year
The Cabinet Committee of Economic Affairs (CCEA) fixed the ex-mill price of ethanol derived out
of C-grade molasses at INR 43.46 / litre on June 27, 2018 compared to previous price of INR 40.85
/ ltr. Ex-mill price of ethanol derived from B-grade molasses and sugarcane juice routes was fixed
at INR 47.49 / ltr.
With revision of FRP from INR 255 to INR 275 / quintals, government further raised the ethanol
price in September 2018 to incentivise ethanol blending. Ex-mill price of ethanol derived out of B-
grade molasses was increased to INR 52.43 / ltr and price for ethanol derived from sugarcane juice
increased to INR 59.13 / ltr. Price of Ethanol derived out of C-grade molasses was kept unchanged
at INR 43.46 / ltr.
Importantly, increase in ethanol prices has been more than FRP increase to incentivise the millers
to increase production.
With the increase in FRP, Ethanol Price Revised Up Twice

SY18 Price / SY19 Price/Ltr as SY19 Price/Ltr as of
Ethanol Price % Hike % Hike
Ltr of June,18 Sept,18
Conventional 40.85 43.46 7% 43.46 0%
B- Heavy Not fixed 47.49 52.43 10%
25%
Direct Can Juice Not fixed 47.49 59.13
Cane FRP Announced 255 275 8%
Source: Media Reports, Industry Data, Edelweiss Professional Investor Research
Ethanol prices were linked to FRP
not with global crude prices.
Increase in Ethanol prices were

higher than the increase in FRP.
Soft loan and interest subvention announced and extended to support new ethanol capacity
In June 2018, the government announced a soft loan of INR 4,400cr and provided an interest
subvention of INR 1,332cr to mills for the next five years, including a moratorium period of one
year, to augment ethanol output. In February 2019, the government cleared an extra soft loan of
INR 15,500cr and agreed to bear an interest subvention of INR 3,355cr. In order to incentivise
molasses based standalone distilleries, the government also allocated INR 2,600cr.
Till date, food ministry has received application worth over INR 13,400cr and has approved loans
amounting to INR 6,000 cr.

II. Benefits of ethanol blending to sugar sector and Indian economy
Ethanol blending to help reduce sugar demand-supply imbalance
India has been surplus sugar producer for the last few years. In a scenario of fixed raw material
(cane) price and market determined finished good (sugar) price, sugar companies made huge
losses leading to arrears in a surplus year. Availability of sugar for consumption will come down
due to conversion to ethanol, which will help reduce demand supply imbalance. In SY20E, it is
estimated that around 2 mn tn of sugar will get diverted for ethanol production.
India became a structural surplus sugar producing country

35
30
25
(MN Tn)
20
15 Except SY17, sugar production in India was always higher

than supply and is expected to remain so over next two years
10
SY08
SY19E
SY20E
SY02
SY03
SY04
SY05
SY06
SY07
SY09
SY10
SY11
SY12
SY13
SY14
SY15
SY16
SY17
SY18
India Sugar production India Sugar Consumption
Source: ISMA, Edelweiss Professional Investor Research
10% ethanol blending will reduce India’s oil import bill by $1.7 billion annually
India is the third largest oil consumer in the world. About 80% of the domestic oil consumption is
imported and oil import forms more than 30% of India’s total import bill. India’s annual oil trade
balance is $92 billion, which is more than 50% of the total trade balance. At 6% ethanol blending
rate in SY19E, India is estimated to save $1 bn of foreign currency outgo. At 10% ethanol blending
rate target, overall saving to the import bill would be $1.7 bn, 1.8% of India’s oil trade balance.
India to save $1 bn foreign reserve due to 6% ethanol blending in 2019

Current
Potential Potential
Blending
Blending @10% Blending @20%
@6%
India's Gasoline Consumption (MN Gallons)) 11028 11028 11028
Gasoline Saved due to Ethanol Blending (MN Gallons) 331 551 1103
Crude Saved due to Ethanol Blending (MN Barrel) 17 28 55
India Crude Basket Prices ($ / Barrel) 60 60 60
Forex savings ($ Mn) 993 1654 3308
Oil Trade Balance (Import-Export) ($ Mn) 92000 92000 92000
Savings as % of Oil trade balance 1.08% 1.80% 3.60%
Source: Fuel blending in India- learning the way forward: Report, Edelweiss Professional Investor Research
Except SY17, sugar production in India is always higher than supply and is expected to remain so over next two
years

Higher Ethanol production will make Sugar mills more profitable
We believe that ethanol blending will help sugar companies to make higher profit even in a surplus
year. An integrated sugar unit with ethanol production capacity under C-grade route will generate
13% more revenue as compared to an unintegrated unit.
A conventional sugar production unit gets INR 68 from sale of molasses by crushing one tonne of
cane. But an integrated sugar plant gets 10.6 litres of ethanol from the same amount of molasses
and books revenue of INR 461, which is atleast 6x higher than the conventional unit. 60% of this
incremental distillery revenue directly flows to the bottomline.
Standalone Sugar Unit gets INR 3753 revenue from 1 tn of cane crushing
Quantity Rate Revenue
(Tn) (INR / Tn) (INR)
Sugar Cane Crushed 1
Sugar @ 11.5% 0.115 31000 3565
Baggase @ 7% 0.07 1600 112
Molasses @ 4.5% 0.045 1500 68
Press Mud @ 3.5% 0.035 250 9
Total Revenue 3753
Total By-product Revenue 188
Integrated Sugar Complex gets INR 4251 revenue from 1 tn of cane crushing
Quantity Value Added Units/ Rate Revenue
(Tn) Products Ltrs (INR / Tn) (INR)
Sugar Cane Crushed 1
Sugar @ 11.5% 0.115 31000 3565
Baggase @ 9% 0.09 Power 43.3 5 217
Molasses @ 4.5% 0.045 Ethanol 10.6 44 461
Press Mud @ 3.5% 0.035 250 9

Total Revenue 4251
Total By-product Revenue 686
Source: ISMA, Company data, Edelweiss Professional Investor Research
Ethanol selling generates 6x more distillery revenue for an integrated

sugar complex.
Power generation unit produces almost double revenue as compared to

bagasse selling.
Overall by product revenue from 1 tn of cane crushing reaches to INR 686

in an integrated plant as compared INR 188 in a conventional plant.
More than 60% of this incremental by-product revenue flows to the

bottom-line of the integrated sugar unit.

At current sugar price of INR 31 / kg, B-grade molasses route will be more attractive
Sugar companies adopting B-grade molasses route of ethanol production needs to sacrifice certain
amount of sugar production. In case of direct cane juice route, no sugar production happens.
Hence prices of sugar and ethanol in three different routes has to support the trade-off. Our
analysis suggests that sugar mills are able to get additional revenue of ~INR 160 / tn of cane
crushed at current domestic sugar prices of INR 31 / kg and ethanol realisation from B‐grade
molasses at INR 52.5 / kg. Therefore most of the large sugar companies started declaring capacity
to produce ethanol under B-grade molasses route.
B-grade molasses route generates more revenue than other methods

Conventional B Heavy Cane Juice
Cane Crushed (Tn) 1 1 1
Sugar Production (KG) (A) 115 100 0
Ethanol Produced (Liter) (C) 11 21 60
Power Sold Outside (Units) (E) 43 43 43
Sugar Price (INR / KG) (B) 31 31 31

Ethanol Price (INR / Liter) (D) 43 53 59
Power Price (INR / Unit) (F) 5 5 5
Sugar Revenue (INR) (AxB) 3565 3100 0

Ethanol Revenue (INR) (CxD) 478 1103 3546
Power Revenue (INR) (ExF) 217 217 217
Total Revenue (INR) 4260 4419 3763

Source: ISMA, Company data, Edelweiss Professional Investor Research
B Heavy Molasses route

generates INR 168 of
incremental revenue from 1 tn
of cane crushing
Ethanol production to generate employment and provide additional income to farmers

One 100 KLPD 2G bio refinery can generate 1,200 jobs in areas like plant operations, village level
entrepreneurs and supply chain management. By adopting 2G technologies, agricultural
residues/waste, which otherwise are burnt by the farmers, can be converted to ethanol and can
fetch a price.

III. Ethanol Blending to pick up pace; Aggressive capacity expansion planned
Ethanol blending rate to reach 6.5% in SY19E
With 10% blending target in mind, OMCs have floated tenders to acquire 4,200 mn ltrs (including
900 mn ltrs in March 2019 ) of ethanol so far in SY19E. This will be equal to 10% of the total gasoline
consumption in India.
Out of the total 4,200 mn ltrs, sugar manufacturers are committed to supply 2,700 mn ltrs to OMCs
in SY19E. With 2,700 mn ltrs of ethanol supply, India is expected to reach 6.5% of blending rate in
SY19E. Around 2 mn tn of sugar is expected to get diverted for this ethanol supply.
Out of 2,700 mn ltrs, 1,900 mn ltrs is expected to be provided through conventional route, 500 mn
ltrs through B – grade and 200 mn ltrs from other agricultural products.
Ethanol Demand would be higher than Supply 2 mn tn of sugar is expected to get diverted
MN Litres SY19E Mn Litres SY19E
Ethanol Tender Issued by OMCs 4200 C Heavy Conversion 1900
Ethanol Committed by industry 2700 B Heavy Conversion 600
Deficit 1500 Others 200
Total 2700
Due to capacity
constraints, India will
achieve 6.5% blending this
year against intended 10%
India needs 4,200 mn ltrs of ethanol capacity for 10% blending rate target
India had around 330 distilleries, which produced over 4,600 mn ltrs of rectified spirits (alcohol)
per year by the end of SY18. Of this, about 166 distilleries have the capacity to distil over 2,600 mn
ltrs of ethanol.
India needs 4,200 mn ltrs of ethanol capacity against the current production of 2,600 mn ltrs to
reach 10% ethanol blending rate target and to fulfil the current demand. India will need 13,700 mn
ltrs of ethanol capacity by 2030 to reach 20% blending rate target.
Ethanol Capacity required to meet the target of blending

MN Litres SY18 SY19E SY22E SY30E
Gasoline Consumption 39015 42000 50023 68459
Blending Target 5% 10% 10% 20%
Ethanol Fuel Required 1951 4200 5002 13692
India needs to increase

ethanol capacity by ~5x to
achieve the 20% blending
target by 2030

INR 6,000cr investments by Indian sugar companies for ethanol capacity expansion
With the growing demand for ethanol, Indian sugar companies have lined up investments worth
INR 6,000cr to increase distillery capacity. Maharashtra-based mills are expected to invest INR
2,300cr followed by UP-based mills (INR 1,500cr). UP-based large millers like BCML, Dhampur,
Dwarikesh and Triveni are collectively estimated to install fresh ethanol production capacity of
almost 500 KLPD. UP government is also investing INR 100cr to upgrade cooperative sugar mills to
produce ethanol along with sugar.
Total investments worth INR 15,000 – 16,000cr lined up

Apart from sugar milers, OMCs are also aggressively spending on expanding 2G ethanol capacity.
100 KLPD bio-refinery would cost INR. 800cr investment. Currently, OMCs are in process of setting
up 12 2G bio-refineries with a total investment of INR 10,000 cr. This should lead to capacity
addition of 1200 KLPD.
Aggressive capacity expansion declared by sugar players and OMCs

2000
1800
1600
1400
1200
1000
(KLPD)
800
600
400
200
0
Shree Renuka
Triveni
OMCs
Balrampur
DCM Shriram
Magadh
Dharani
Mawana
Rana
Dwarikesh
Dhampur
Dhampur
Current Capacity Proposed Capacity
Source: Media Reports, Company data, Edelweiss Professional Investors research

Company Section

Tactical Buy
Balrampur Chini Mills Ltd. Beneficiary of structural changes
Balrampur Chini (BCML) being one of the largest and most efficient sugar producers in the country
Debashish Mazumdar
with fully integrated distillery and power capacity is best placed to capitalise on the positive Research Analyst
structural changes witnessed by the sugar industry. In order to capture the growth opportunities debashish.mazumdar@edelweissfin.com
in the ethanol blending space, the company is also expanding distillery capacity from 130 mn ltr
p.a. to 180 m ltr p.a. Led by ethanol division, EBITDA margin of the company is expected to reach CMP INR: 138
19% in FY20E as compared to 10% in FY18 and RoCE is expected to improve to 21% in FY20E against Rating: Tactical BUY
13% currently. We believe that reduction in uncertainty and increase in predictability will lead to
structural rerating of the sugar sector. BCML, one of the largest player in the sector, is expected Target Price INR: 195
to benefit from the same. We initiate ‘Tactical BUY’ with a target price of INR 195 by assigning a Upside: 44%
target P/E of 9x (equal to the long term average 1 year forward P/E) for FY20E.
Sugar business: Beneficiary of higher MSP and export quota

Sugar prices in India are expected to remain elevated post rise in MSP. As a result, sugar companies
are estimated to make positive profit margin even in a year of huge surplus. BCML is currently selling
sugar at higher than its cost of production. The recent hike in MSP will partly benefit the company
in Q4FY19 and fully in FY20E. We believe that BCML’s sugar division will report revenue and EBIT of
INR 3,598cr and INR 150cr in FY19E respectively. The same is expected to jump to INR 3,817cr and
INR 269cr in FY20E respectively. Bloomberg: BRCM:IN
Ethanol business: to be ssweeter than sugar 52-week

144.10 / 58.70
With shift in focus of the government towards higher ethanol blending and increase in procurement range (INR):
prices, ethanol business has proved to be a boon for the sugar producers in a period of ample supply.
Share in issue (cr): 22.8
BCML is increasing the capacity of distillery from 130 mn ltrs p.a to 180 mn ltrs p.a and the same is
expected to be commissioned in December 2019. With growth in both volume and realisation, M cap (INR cr): 3,077
performance of the distillery segment is expected to improve significantly in FY20E. BCML’s distillery
division is expected to report a revenue of INR 563cr (23% YoY growth) and EBIT of INR 394cr (33% Avg. Daily Vol.
1160
YoY growth) in FY20E. BSE/NSE :(‘000):
Promoter
Jump in profitability in FY19 & 20E led by ethanol Holding (%)
40.98
Net profit of the company is expected to grow 91% YoY to INR 434cr in FY19E aided by small margin
improvement in sugar business and higher EBIT from ethanol. Net profit margin is expected to get
a further boost in FY20E with continued improvement in realisation in both sugar and ethanol
division. As a result, we expect net profit to grow by another 14% in FY20E to INR 492 cr and net
profit margin to improve to 12% as compared to 5% reported in FY18.
Rerating on cards; Initiating 'Tactical BUY' with a target price of INR 195
Our analysis of past performance suggests that profitability and return ratios of BCML has got
impacted significantly in the years of surplus sugar production. BCML’s stock performance has
remained cyclical and moved up and down in tandem with EBITDA margin and RoCE. However, the
sector and the company is expected to see less volatility going ahead due to hike in MSP and ethanol
blending programme. At CMP of INR 138, BCML is trading at a P/E of 7x and 6x its FY19E and FY20E
earnings respectively. We believe that reduction in uncertainty and increase in predictability will
lead to structural rerating of the sugar sector. BCML, one of the largest player in the sector, is
expected to benefit from the same. We initiate ‘Tactical BUY’ with a target price of INR 195 by
assigning a target P/E of 9x for FY20E.
Year to March FY16 FY17 FY18 FY19E FY20E

Revenues (INR cr) 2,757 3,460 4,343 4,060 4,156
Rev growth (%) -7.7 25.5 25.5 -6.5 2.4
EBITDA (INR Cr) 238 869 452 663 777
PAT (INR Cr) 222 600 269 434 493
EPS (INR) 9.7 26.2 9.9 17.1 19.7
EPS Growth (%) NA 171.2 -62.1 72.5 14.9
P/E (x) 11.1 5.5 7.6 8.1 7.0
P/B (x) 2.1 2.2 1.1 1.6 1.3
RoACE (%) 6.0 25.0 13.0 21.0 22.0
Date: 03rd April 2019
RoAE (%) 20.0 44.0 14.0 25.0 20.0

Balrampur Chini Mills Ltd.
Investment Hypothesis
I. Sugar business: Beneficiary of higher MSP and export quota
Sugar prices are expected to remain elevated due to hike in MSP to INR 31 / kg recently. Hence,
sugar companies are estimated to make positive profit margin even in a year of huge surplus.
Further, export quota of five million tonnes in SY19 would aid in reducing surplus and thereby
ensure the price to remain higher than the cost of production.
BCML, one of the largest sugar producers in India, reported a positive EBIT margin in the sugar
business during 9MFY19. The company is currently selling sugar at INR 32 / kg which is higher than
the cost of production of INR 30 / Kg. The recent hike in MSP will partly benefit the company in
Q4FY19 and fully in FY20E. Moreover, no hike in FRP and SAP will also benefit the company to put
cost under check.
We believe that BCML will crush 11 mn tn (19% growth YoY) and 9.9 mn tn (10% de-growth YoY) of
cane in FY19E and FY20E respectively. With recovery rate of being more than 11% for both the years,
the company is expected to produce 1.24 mn tn and 1.14 mn tn of sugar in FY19E and FY20E
respectively. BCML’s landed sugarcane cost is INR 327 / quintal based on SAP of INR 315 / quintal.
The government is also providing INR 14 / quintal subsidy for the sugar cane exported which
translates to INR 8 - 8.5 /kg of the company’s sugar exports.
We believe that BCML’s sugar division will report revenue of INR 3,566 cr & INR 3,602 cr and EBIT
of INR 164 cr & INR 195 cr in FY19E and FY20E respectively.
Sugar division’s Profitability is expected to improve significantly in FY20E

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Sugar Cane Crushed (Mn Ton) 8.1 7.7 8.1 7.4 7.9 9.3 11.0 9.8
Sugar Recovery Rate (%) 9.5% 9.8% 9.0% 11.1% 10.7% 11.3% 11.3% 11.4%
Sugar Production (Mn Ton) 0.77 0.76 0.72 0.82 0.85 1.01 1.24 1.11
Sugar Sales(Mn Tn) 0.88 0.71 0.81 0.80 0.80 1.03 1.05 1.07
Sugar Prices (INR / KG) 31.22 30.25 29.40 27.07 35.90 35.56 31.00 31.00
Sugar Revenue (INR Cr) 3003 2360 2615 2478 3370 4164 3566 3602
Sugar EBIT (INR Cr) 127 -108 -279 54 558 139 164 195
EBIT Margin (%) 4% -5% -11% 2% 17% 3% 5% 5%
In the previous cycle, high In the current cycle, although the

production affected the sugar production and inventory levels
price and BCML was making are high; BCML is making profit
losses in FY14 & 15. due to stable pricing.
Over 9MFY19, BCML’s sugar division witnessed weak performance mainly due to higher cost and
lower realization. However, the situation is expected to improve significantly in Q4FY19 and FY20E
due to reasons mentioned earlier.
Higher cost and Lower realization impacted the 9MFY19 performance in the sugar business
9MFY18 9MFY19 YoY growth
Sugar Cane Crushed (Mn Tn) 3.32 5.09 53%
Sugar Recovery Rate (%) 10.4% 11.1% -
Sugar Production (Mn Tn) 0.35 0.57 63%
Sugar Sales (Mn Tn) 0.78 0.78 0%
Sugar Prices (INR / KG) 36.83 30.80 -16%
Sugar Revenue (INR Cr) 3126 2555 -18%
Sugar EBIT (INR Cr) 274 88 -68%
EBIT Margin (%) 9% 3% -

II. Ethanol Business - Sweeter than sugar now

BCML is fully integrated sugar player wherein the company produces ethanol from internally
generated molasses. The company is increasing annual capacity of the distillery from 130 mn ltrs to
180 mn ltrs and the new plant is expected to be commissioned in December 2019.
BCML is expected to sell 110 mn ltrs and 130 mn ltrs of ethanol in FY19E and FY20E respectively
(against 80 mn ltrs in FY18). The government has revised ethanol prices produced through
conventional route with effect from December 2019 to INR 43.46 / ltr compared to current INR
40.85 / ltr earlier. Benefits of rise in sales volumes and realisation will be partly seen in Q4FY19 and
fully during FY20E.
We expect BCML’s distillery division to report a revenue of INR 457cr (YoY growth of 38%) and EBIT
of INR 297cr (YoY growth of 175%) in FY19E. With growth in both volume and realisation,
performance of the distillery segment is expected to improve further in FY20E with revenue of INR
563cr (YoY growth of 23%) and EBIT of INR 394cr (YoY growth of 33%).
Distillery business to witness significant improvement in performance in FY20E

Particulars FY17 FY18 FY19E FY20E
Alcohol Sales (KL) 69180 80659 110000 129339
Realisations (INR/ KL) 47233 41120 41500 43500
Revenue (INR Cr) 327 332 457 563
EBIT (INR cr) 118 108 297 394
EBIT Margin (%) 36% 33% 65% 70%
Over 9MFY19, distillery business reported strong growth mainly due to higher volume and improved
profitability on the back of lower molasses prices. Contribution of distillery division to the overall
revenue and profitability increased significantly.
Distillery division reported strong performance in 9MFY19

Alcohol Sales (KL) 61447 85706 39%
Realisations (INR/ KL) 38.94 40.74 5%
Revenue (INR Cr) 254 354 40%
EBIT (INR cr) 79 229 189%
EBIT Margin (%) 31% 65% -
Contribution of distillery division to the overall revenue and profitability increased significantly
Overall Revenue (INR Cr) 3375 2958 -12%
Distillery Revenue (INR Cr) 254 355 40%
- % Contribution 8% 12%
Overall EBIT (INR Cr) 404 393 -3%

Distillery EBIT (INR Cr) 79 229 189%
- % Contribution 20% 58%

III. Co-gen division – expected to maintain the momentum

Availability of bagasse would be high over the next two years with high cane crushing, which will
lead to higher power production. As per the open access policy of UP government, we have
assumed that 70% of the power will be sold to the state at a tariff equal to bagasse based power.
Remaining power will be sold in open market at a market determined rate.
We expect power segment to report revenue of INR 625cr and INR 576cr in FY19E and FY20E
respectively assuming a blended realisation of INR 5 / unit for both years. EBIT margin of the power
division is expected to remain in the range of 28-30% going forward.
Power division is expected to maintain the momentum

FY17 FY18 FY19E FY20E
Power Units Produced (Mn kwh) 754 847 1100 976
Power Units Sold (Mn units) 510.5 568 770 683
Realisations (INR/ unit) 4.87 4.81 4.9 5.0
Revenue (INR Cr) 444 531 625 576
EBIT (INR cr) 158 172 175 173
EBIT Margin (%) 36% 32% 28% 30%
The power division reported significant improvement in power generation and revenue over the
9MFY19 mainly due to higher cane crushing and thereby higher bagasse availability.
Higher bagasse availability led to higher power revenues in 9MFY19

Power Units Produced (Mn kwh) 458 610 33%
Power Units Sold (Mn units) 310 401 29%
Realisations (INR/ unit) 5 5 3%
Revenue (INR Cr) 284 349 23%
EBIT (INR Cr) 80 60 -25%
EBIT Margin (%) 28% 17%

IV. Ethanol business to drive profit growth in FY19E and FY20E

We expect BCML to report muted revenue growth in FY19E and FY20E mainly due to lower
realisation in sugar business. However, overall profitability is expected to improve significantly
helped by boost from distillery division.
As a result of higher EBIT from Ethanol and partial margin improvement in sugar division, overall
PAT of the company is expected to grow at 91% YoY to INR 434 cr in FY19E. With further
improvement in realization in both sugar and ethanol division, margin is expected to get further
boost and hence net profit is expected to grow by another 14% in FY20E to reach INR 492 cr.
In the table below, we have compared financial performance of BCML in different sugar cycles.
Currently, it is a period of high sugar production. Hence FY19 and FY20 would be similar to FY14 &
FY15 wherein sugar prices came under significant pressure due to high production and higher
inventory. However, in FY19E and FY20E the company is expected to report healthy overall
profitability due to jump expected from ethanol business.
Financial performance to remain heathy in FY19 & 20E

(INR cr) FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Reported Net sales 3,275 2,665 2,987 2,757 3,460 4,343 4,060 4,156
Growth (%) 26% -19% 12% -8% 0% 26% -7% 2%
EBITDA 420 218 126 238 869 452 663 777
EBITDA Margin 13% 8% 4% 9% 25% 10% 16% 19%
PBIT 311 108 11 128 764 356 561 662
PBIT Margin 10% 4% 0% 5% 22% 8% 14% 16%
PAT 162 5 -59 237 616 227 434 492
PAT Margin 5% 0% -2% 9% 18% 5% 11% 12%
EPS (INR) 6.63 0.20 -2.40 9.67 26.22 9.93 17.71 19.83
Comparing two similar scenarios, we can

conclude that BCML is in a much better
situation in the current high production
cycle.
In 9MFY19, the company experienced improvement in profitability despite decline in overall

revenue with EBITDA margin improving by 93 bps YoY to 14.6%. With improved operating
performance, low interest payment and lower tax outgo; the company reported 181 bps YoY
improvement in net profit margin to 9.6%.
Profitability got an ethanol boost in 9MFY19

(INR cr) 9MFY18 9MFY19 YoY Growth
Reported Net sales 3,375 2,958 12%
EBITDA 460 431 -6%
EBITDA Margin 14% 15% -
EBIT 433 377 -13%
PBIT Margin 13% 13% -
PAT 264 285 8%
PAT Margin 8% 10%

V. Rerating on card; Initiating 'Tactical BUY' with a target price of INR 195
Historically BCML’s Margin and Return Ratios hugely dependent on Sugar Prices
Historically, BCML’s margin and return ratios have been highly dependent on sugar prices. Marginal
movement in output prices impacted profitability of sugar companies significantly on both positive
and negative side as procurement cost of raw material was fixed and price of finished goods was
market driven.
Our analysis of past performance since FY03 suggests that profitability and return ratios of BCML
got impacted significantly in the years of surplus sugar production.
BCML’s EBITDA Margin mirrored the Sugar price movement… …and RoCE moved in tandem with Sugar Realisation
40 30% 40 40%
35%
35 25% 35
30%
30 20% 30
25%
25 15% 25 20%
(INR / KG)
(INR / KG)
15%
20 10% 20
10%
15 5% 15
5%
10 0% 10 0%
FY19E
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY15
FY17
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY11
FY12
FY13
FY14
FY16
FY18
Ex Mill Sugar Prices EBITDA Margin Ex Mill Sugar Prices RoCE

BCML’s stock price mirrored the Margin and RoCE performance historically
With the strong cyclical movement in margin performance and return ratios, BCML’s stock price
performance remained cyclical and moved in tandem with EBITDA margin and RoCE.
BCML’s stock price mirrored the EBITDA margin…. … and was directly linked to RoCE performance
4,000 30% 4,000 40%
3,500 3,500 35%

25%
3,000 3,000 30%
20%
2,500 2,500 25%
2,000 15% 2,000 20%
(INR Cr)
(INR Cr)
1,500 1,500 15%

10%
1,000 1,000 10%
5%
500 500 5%
0 0% 0 0%
FY03
FY05
FY07
FY09
FY12
FY14
FY16
FY18
FY19E
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
M Cap EBITDA Margin M Cap RoCE

Valuation Re-rating / De-rating happened based on Sugar price performance in the past
As the fundamental performance of the company is largely dependent on sugar price movement,
BCML’s forward P/E multiple is derived based on sugar price trend. The P/E multiple of the company
has been volatile and traded in the range of 15-20x when sugar prices were high and the company
earned high profit margins. On the contrary, P/E multiple was significantly low when the profitability
got impacted by lower sugar realisation. The average P/E multiple for the company has been 9x
while it is currently trading at 6x forward P/E.
Historically, P/E got rerated with up move in sugar prices in the past
70% 25
24
60%
50% 20 20
40%
15 15
(X)
30%
20%
10
10%
0% 5
-10% 3
1 1
-20% 0
FY19E
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
- Ex Mill Sugar Price growth 1 yr forward PE Avr. 1 year forward P/E
MSP hike and ethanol blending programme will partially reduce margin volatility going forward
Due to rise in MSP by the government, profitability of BCML’s sugar business is expected to be less
volatile going forward. Further, the ethanol blending programme will lead to more predictable
financial performance in a year of high sugar production.
We believe that overall EBITDA margin of the company will jump to 19% in FY20E as compared to
10% reported in FY18 due to marginal improvement in profitability of sugar business and strong
profit growth in ethanol business. RoCE of the company is expected to touch 21% in FY20E as
compared to 13% in FY18.
EBITDA margin will improve by 900 bps over FY18-20E RoCE will improve by 700 bps between FY18-20E
900 20% 26%
800
19% 24%
700 18% 21%
600 16% 22%
16%
500 20% 20%
(INR Cr)
400
14% 18%
300
200 12% 16%
10%
100
14%
0 10% 13%
FY18 FY19E FY20E 12%
10%
EBITDA EBITDA Margin
FY18 FY19E FY20E

Lesser volatility and more predictability will lead to valuation rerating

At CMP INR 138, BCML is trading at a P/E of 7x of FY19E earnings and 6x of FY20E earnings. We
believe that reduction in uncertainty and increase in predictability will lead to structural rerating for
the sugar sector and especially BCML, one of the largest player in the sector. We initiate ‘Tactical
BUY’ with a target price of INR 195 discounting FY20E EPS at 9x.
1 year forward EV / EBITDA currently lower than historical … so the P/E Ratio
average…
25 25
24
23
20 20 20 20
15 15 15
13
12
(X)
(X)
10 10 10
5 5
4 3
1 1
0 0
FY19E
FY06
FY13
FY03
FY04
FY05
FY07
FY08
FY09
FY11
FY12
FY14
FY15
FY16
FY17
FY18
FY20E
FY04
FY12
FY19E
FY03
FY05
FY06
FY07
FY08
FY09
FY11
FY13
FY14
FY15
FY16
FY17
FY18
1 yr Forward EV / EBITDA Avr. 1 year forward EV / EBITDA 1 yr forward PE Avr. 1 year forward P/E

Financials
Income statement (INR cr)

Income from operations 2,757 3,460 4,343 4,060 4,156
Total operating expenses 2,519 2,591 3,891 3,398 3,379
EBITDA 238 869 452 663 777
Depreciation and amortisation 110 105 95 102 115
EBIT 128 764 356 561 662
Interest expenses 67 55 52 50 50
Other income 47 26 41 45 45
Profit before tax 108 735 345 556 657
Provision for tax 23 158 71 122 164
Core profit 85 577 274 434 493
Extraordinary items 137 23 -5 0 0
Profit after tax 222 600 269 434 493
Minority Interest 0 0 0 0 0
Share from associates 0 0 0 0 0
Adjusted net profit 222 600 269 434 493
Equity shares outstanding (Crore) 24.5 23.5 22.8 22.8 22.8
EPS (INR) basic 9.7 26.2 9.9 17.1 19.7
Diluted shares (mn) 24.5 23.5 22.8 22.8 22.8
EPS (INR) fully diluted 9.7 26.2 9.9 17.1 19.7
Dividend per share 0.0 85.8 58.8 0.0 0.0
Dividend payout (%) 0.0 14.3 21.8 0.0 0.0
Common size metrics- as % of net revenues

Operating expenses 91.4 74.9 89.6 83.7 81.3
Depreciation 4.0 3.0 2.2 2.5 2.8
Interest expenditure 2.4 1.6 1.2 1.2 1.2
EBITDA margins 8.6 25.1 10.4 16.3 18.7
Net profit margins 8.0 17.4 6.2 10.7 11.9
Growth metrics (%)

Revenues (7.7) 25.5 25.5 (6.5) 2.4
EBITDA 88.1 265.4 (48.0) 46.7 17.2
PBT NA 583.3 (53.0) 61.1 18.1
Net profit after MI NA 170.8 (55.2) 61.1 13.6
EPS NA 171.2 (62.1) 72.5 14.9

Financials
Balance sheet (INR cr)

As on 31st March FY16 FY17 FY18 FY19E FY20E
Equity share capital 25 24 23 23 23
Reserves & surplus 1,205 1,537 1,594 1,986 2,435
Shareholders funds 1,229 1,561 1,617 2,008 2,458
Secured loans 156 124 11 11 11
Unsecured loans 1,511 1,658 979 979 979
Other Liabilities 15 6 5 5 5
Sources of funds 1,244 1,567 1,622 2,013 2,463
Gross block 1,451 1,621 1,750 1,950 2,000
Depreciation 111 209 302 404 519
Net block 1,340 1,412 1,447 1,546 1,481
Capital work in progress 86 6 11 11 11
Total fixed assets 1,427 1,418 1,458 1,557 1,492
Investments 91 86 177 177 177
Inventories 1,865 2,314 1,802 2,030 2,494
Sundry debtors 199 165 233 244 249
Cash and equivalents 9 4 9 69 110
Loans and advances 110 41 22 47 72
Total current assets 2,183 2,523 2,065 2,389 2,925
Sundry creditors and others 780 671 1,080 1,112 1,135
Provisions 7 4 5 4 4
Total CL & provisions 787 675 1,085 1,115 1,138
Net current assets 1,396 1,848 981 1,274 1,787
Uses of funds 1,244 1,567 1,622 2,013 2,463
Book value per share (INR) 50 66 71 88 108
Operating cash Flow

EBIT 128 764 356 561 662
Depreciation 110 105 95 102 115
Tax 23 158 71 122 164
Chg in WC 267 452 (868) 293 513
CFO (52) 259 1,248 247 99

Financials
Profit & Efficiency Ratios

ROAE (%) 20% 44% 14% 25% 20%
ROACE (%) 6% 25% 13% 21% 22%
Debtors (days) 23 18 16 21 22
Current ratio 2.8 3.7 1.9 2.1 2.6
Debt/Equity 1.4 1.1 0.6 0.5 0.4
Inventory (days) 285 308 196 209 248
Payable (days) 114 57 109 144 120
Cash conversion cycle (days) 194 269 103 87 150
Working Capital (days) 148 158 230 211 169
Debt/EBITDA 15 17 10 10 9
Adjusted debt/Equity 1.4 1.1 0.6 0.5 0.4
Valuation parameters
Diluted EPS (INR) 9.7 26.2 9.9 17.1 19.7
Y-o-Y growth (%) NA 171.2 (62.1) 72.5 14.9
CEPS (INR) 13.5 30.0 16.0 23.4 26.6
Diluted P/E (x) 11.1 5.5 7.6 8.1 7.0
Price/BV(x) 2.1 2.2 1.1 1.6 1.3
EV/Sales (x) 1.6 1.5 0.6 1.0 1.0
EV/EBITDA (x) 18.1 6.0 6.0 6.2 5.2
Diluted shares O/S 24.5 23.5 22.8 22.8 22.8
Basic EPS 9.7 26.2 9.9 17.1 19.7
Basic PE (x) 11.1 5.5 7.6 8.1 7.0

Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200
Vinay Khattar
VINAY
Digitally signed by VINAY KHATTAR
DN: c=IN, o=Personal, postalCode=400072,
st=Maharashtra,
2.5.4.20=87db74ffb17a70c89e8519a4d13e40e9
Head Research 3c4bcaba1a64d00f3c841d2fee3fa678,
KHATTAR
serialNumber=cd5737057831c416d2a5f7064cb
693183887e7ff342c50bd877e00c00e2e82a1,
vinay.khattar@edelweissfin.com cn=VINAY KHATTAR

Date: 2019.04.03 19:50:26 +05'30'
Rating Expected to
Buy appreciate more than 15% over a 12-month period
Hold appreciate between 5-15% over a 12-month period
Reduce Return below 5% over a 12-month period
450
400
350
300
(Indexed)
250
200
150
100
50
0
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Balrampur Sensex

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Edelweiss Professional Investor Research

Insightful. Independent. Decisive.

Indian Sugar Sector: Tactical Buy - Balrampur Chini Mills Ltd

Indian Sugar Sector ............................................................................................................................................... 1

Ethanol: Production and Blending to Take Off Pace .............................................................................................. 11

I. Ethanol blending in India: A flop show in the past ............................................................................................... 15

Balrampur Chini Mills Ltd. ..................................................................................................................................... 25

I. Sugar business: Beneficiary of higher MSP and export quota .............................................................................. 26

II. Ethanol Business - Sweeter than sugar now ........................................................................................................ 27

III. Co-gen division – expected to maintain the momentum ................................................................................... 28

Edelweiss Professional Investor Research

Ethanol: Production and blending to take off

Date: 03rd April 2019

Edelweiss Professional Investor Research 1

Edelweiss Professional Investor Research 2

35 Consecutive Drought and Record high production put 40

India Sugar production India Sugar Consumption Ex Mill Price

Source: ISMA, Industry Data, Edelweiss Professional Investor Research

Average sugar realisation dropped 12% in SY18 due to supply glut

Source: Company Data, Edelweiss Professional Investor Research

Edelweiss Professional Investor Research 3

Area under cultivation (MN Hectares) Sugarcane Yield (Ton/ Hectares)

Source: ISMA, Industry Data, Edelweiss Professional Investor Research

Sugarcane production (MN Tonne) Recovery Rate

Source: ISMA, Industry Data, Edelweiss Professional Investor Research

Edelweiss Professional Investor Research 4

Source: ISMA, Media reports, Edelweiss Professional Investor Research

Edelweiss Professional Investor Research 5

Sugar Production will be almost close to consumption in SY20E

India Sugar production India Sugar Consumption

Sugar Inventory levels Equivalent of days of Consumption

Edelweiss Professional Investor Research 6

Cane arrears and sugar production has an inverse relationship

Cane Arrear Sugar Production

Source: ISMA, Industry Data, Edelweiss Professional Investor Research

Sugar prices are expected to move up in SY20E in anticipation of low production

Source: Bloomberg, Company data, Edelweiss Professional Investor Research

Edelweiss Professional Investor Research 7

Indian Sugar Industry Cycle

High sugarcane Higher sugarcane

Improved Lower sugarcane

Source: Industry Data, Edelweiss Professional Investor Research

Introduction of MSP to cap price decline in a year of huge surplus

High inventory led to fall in sugar prices historically

Higher production in Higher production in MSP providing

Edelweiss Professional Investor Research 8

India pays highest cane price among large producers

Brazil Thailand Australia India

Source: ISMA, Industry Data, Edelweiss Professional Investor Research

Government is incentivising the export

Edelweiss Professional Investor Research 9

Sugar selling Quota Actual Sugar sales

Source: Industry Data, Bloomberg, Edelweiss Professional Investor Research

3 mn tn of buffer stock announced

Edelweiss Professional Investor Research 10

Edelweiss Professional Investor Research 11

Evolution of ethanol industry in Brazil

The Evolution of Ethanol Production in Brazil

Source: UNICA, Edelweiss Professional Investor research

Edelweiss Professional Investor Research 12

SM and BCML Revenue

2,000 1,534 Others 8% 11%

EBITDA EBITDA Margins PAT PAT Margins