Sugar Sector & Initiating Coverage Apr'20

SECTOR UPDATE
Sugar industry
Alternative energy enabling farm incomes to ensure
stability in sugar sector earnings
Initiating Coverage on Balrampur Chini Mills, Dwarikesh Sugar Industries,
Dhampur Sugar Mills and EID Parry
20 August 2020
Rajesh Majumdar Anupam Goswami

Director-Research Research Analyst
rajesh.majumdar@bksec.com anupam.goswami@bksec.com
+91-33-6651 3201/2 +91-33-6501 3201/2
Out of the bitter cycle
“What was the condition of ethanol in our country five years ago? Five years ago, there used to be only 40 crore litre
production of ethanol. It has risen to five times in the last five years. Today, we are producing 200 crore litres of ethanol
which is proving to be very helpful towards our environment…India is both aware as well as involved in finding solutions to
pollution. We are leaving no stone unturned” – PM’s Speech on 74th Independence Day
All the interests are finally aligned: Coming down from a highly volatile industry, the Indian sugar industry has witnessed
some stabilisation in the last two years due to increased Government regulations and initiatives. There is now a common
interest which lies between the government, the industry and the farmers in keeping adequate profitability of the industry so
that the farmers can be paid on time and cane arrears do not mount. Policy initiatives include the introduction of MSP,
export subsidies and a properly thought through Ethanol Blending programme.
Ethanol blending targets are far more achievable in the new construct: The present Government seems to be very serious
in achieving the ethanol blending target of 10% by 2022. A series of measures have been taken to make ethanol production
more remunerative. As a result more than 500 mn litres of distillery capacities have been set up. Furthermore, encouraging
ethanol from B-Heavy molasses and cane juice would further lead to liquidation of surplus sugar inventory in the future.
This means higher cash flows and less volatility: Such measures have led to better earnings, lower leverage in the industry
all intended for benefit and timely payment to the cane farmers. Blending higher quantity of ethanol would also mean lower
import bill of crude oil, saving in foreign exchange and maintaining a healthier Balance of Payment. We believe the ethanol
story has just begun and the next set of impetus will come from diversion of more sugar towards B-Heavy ethanol and cane
juice.
As market digests this, the sector will rerate: The sector has always traded at very low earnings multiples due to the volatile
nature of policy and cash flows. Improvement in profitability, stable cash flows and lower leverage make a good case for a
possible re-rating in the sugar stocks.
We would Overweight the sector from a three-year perspective: We like Uttar Pradesh mills more due to uniform weather
conditions, better ground water availability and higher recovery rate of sugar. We initiate coverage on Balrampur Chini Mills
and Dwarikesh Sugar Industries with a “BUY” recommendation and Dhampur Sugar Mills and EID Parry with a “Hold”
recommendation. With requirement of higher ethanol every year, we expect these companies and other big players in
industry to go for further expansion of distilleries since most of the other sugar mills have poor financials and unlikely to get
credit facilities for any expansion projects.
2
Index Page No.
Sugar Industry of Strategic importance 4
Domestic Sugar Industry and its concerns 5
Government Initiatives 13
Global Sugar Industry 25
Fuel Blending programme in Brazil 27
Key Risks 30
Company Section
Balrampur Chini Mills 32
Dwarikesh Sugar Industries 41
Dhampur Sugar Mills 49
EID Parry 57
Sugar industry of strategic importance
Sugar is a sector of significant importance to the national Historical cyclicality of industry

economy. At present, the sugar industry is regulated across
the value chain.
High Sugar
Production
Historically, the sector has struggled to generate a return Higher Sugar
Decline in
on invested capital in excess of its cost of capital in most cane
Sugar prices
harvesting
years, primarily due to a high mandated fixed cane price
and a volatile sugar price.
Lower
The sugar industry caters to an estimated 12% of rural Decrease in
earnings for
Cane arrears
population through direct and indirect employment. Sugar mills
India has now become the world’s largest sugar producer

beating Brazil and is also the largest sugar consumer.
Higher
Excess Sugar production in the last couple of years has earnings for
Increase in
Cane arears
resulted in surplus sugar inventories. Sugar mills
Indian Sugar production has historically been cyclical in

nature with three-four years of bumper crop usually Less
Increase in
Sugarcane
followed by two years of shortfall. Sugar prices
harvesting
Lower Sugar
The shortage years helped restore Mills’ health by production
liquidating excess stocks and lifting market prices for Sugar

thereby benefiting farmers.
Source: Industry, B&K Research
4
Domestic sugar industry – likely surplus to continue
However, this cyclical pattern has been broken lately, with Consumption proportion
Sugar production outpacing consumption since the year
2010-11 except the year 2016-17 when sugar production Household
39%
dipped to the level of just 20.3 mmt mainly due to drought
conditions. In fact, now we are facing a glut of high sugar
inventory due to excess production.
Of the total sugar sold in the free market, an estimated 61%

is accounted for by the industrial and small business Small
business &
segment, also referred to as indirect consumption of sugar. Industrial
61%
The household segment, which consumes sugar directly,
accounts for an estimated 39% of the total sugar domestic
Source: ISMA, B&K Research
consumption.
According to ISMA, the production in the sugar season 2019- Sugar production and consumption trend
20 is expected to be 26.5 MT. The season started in October, 35
2019 with 14.5 MT of opening stock. 30
25
The domestic consumption in 2019-20 is estimated to be
20
25.5 MT and exports nearly 5 MT. Therefore, the closing stock 14.5
15 10.7 11.0 10.5
on 30 September 2020, is expected to be nearly 11 mmt. 9.3
7.5
9.1
7.8
10 5.8 6.0 6.6
3.9
5
0
SY10 SY11 SY12 SY13 SY14 SY15 SY16 SY17 SY18 SY19 SY20E SY21E
Production Consumption* Closing Inventory
Source: ISMA, B&K Research. SY: Sugar Year: October-September,

consumption includes Domestic + Exports
5
Slight reduction in inventory in this sugar year
Further, as on June 2020 data released by ISMA, sugarcane sowing has grown by 1.1%. With Maharashtra and Karnataka
production getting back to normalcy after severe drought in SY19-20, we expect the sugar production after diversion of
towards B-Heavy ethanol for SY20-21 to be around 31.5 MT, consumption to be at 26.5 MT and exports at 5.5 MT. Hence, we
expect the closing stock as on 30th September 2021 to stand at 10.5 MT.
~1 million tonnes of sugar production is estimated to have been sacrificed in favour of ethanol production through the B-
Heavy molasses and juice routes.
Reduction in inventory is after considering a reduction in sugar output due to increasing production of ethanol by way of
diversion of B-Heavy molasses and sugarcane juice. Similarly, we expect 1.2 MT and 1.5 MT and of sugar will be sacrificed in
SY19-20 and SY20-21, respectively.
Domestic Sugar Balance Sheet

Particulars SY16-17 SY17-18 SY18-19 SY19-20E SY20-21E
Opening balance 7.8 3.9 10.7 14.5 11.0
Sugar production 20.7 32.6 33.3 27.0 31.5
Sugar availability 28.5 36.5 44.0 41.5 42.5
Domestic consumption 24.5 25.4 26.0 25.5 26.5
Exports 0.0 0.5 3.5 5.0 5.5
Total offtake 24.6 25.9 29.5 30.5 32.0
Closing stock 3.9 10.7 14.5 11.0 10.5
Closing stock % of offtake 16 41 49 36 33
6
CAD – a big concern for Government
India’s oil demand is met by 80% imports. High crude prices and the depreciating rupee has created a double-whammy for
the economy in FY18 and FY19, resulting in high import bills and inflation.
Current Account Deficit (CAD) widened to a high of US$ 57.2 bn (2.1% of GDP) in FY19 versus US$ 48.7 bn (1.9% of GDP) in 2019. To
curb the high dependence on import of oil and reduction in CAD, the government has mandated to blend up to 10% ethanol
in petrol from 4-5%.
For 10% blending, the demand for ethanol is 5 bn litres. At present, the sugar companies are able to produce up to 3.5 bn
litres, which has restricted the blending to below 6%. Higher ethanol blending will help in the reduction in petrol prices and
in turn will help in curbing import bills.
CAD has peaked in FY18-19 High oil import bill led by high crude prices
0 160
144.3
(10) 140
120 112.7 111.9

(20) (14.0) 102.2
100 87.8
US$ bn
(30) (24.6)
US$ bn
80 70.2
63.9
(40)
60
(50)
(48.7) 40
(60) 20
(57.2)
(70) 0
FY17 FY18 FY19 FY20 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Source: RBI, B&K Research Source: PPAC, B&K Research
7
Cane prices expected to rise ahead of state elections
Fair and Remunerative Price (FRP) is the minimum price FRP and UP SAP historical trend
that sugarcane farmers are legally guaranteed to receive 450
UP state election UP state election
from the sugar mills. In the SY19-20, the FRP was pegged at 400
2017 2021
350 305 315 315 315
Rs 275 per quintal, same as that in SY18-19, with the 280 280 280 280
300 240
objective of empowering the farmers. 250 205
165 275 275
200 255
The CCEA also approved to provide a premium of Rs 2.75 220 230 230
150 210
170 Indian General
per quintal for every 0.1% increase above 10% in the recovery 100
130 139 145 Indian General election 2019
50 election 2014
rate.
2011-12
2015-16
2018-19
2009-10
2010-11
2012-13
2013-14
2014-15
2017-18
2019-20
2016-17
While consumption remained steady excess production is
caused by excess sugarcane harvesting and the sugar FRP/Qtl UP SAP/Qtl
millers are mandated to lift all the harvest at Government

Source: ISMA, Industry, B&K Research
mandated FRP and State advised price (SAP).
Meanwhile, FRP and SAP has steadily risen over the years
making sugarcane farming more remunerative than other
crops.
We expect a upward revision in FRP and SAP given the

Uttar Pradesh elections in 2021.
8
Sugarcane: Among the most remunerative crop
for farmers
There are also several other following factors which makes sugarcane farming more remunerative for farmers:
• Sturdy Crop: Can withstand weather fluctuations better than others.
• Assured buyer: Each farmer is attached to a sugar mill. The mill can’t close till it crushes all sugarcane grown in its area.
• Assured price: Farmer gets full cane price fixed by Central or State Government even if late, which is not the case for
other crops.
• No middlemen: Cane bought directly and payment made directly into bank accounts of farmers.
As a result farmers became more reluctant to switch to other crops and area under sugarcane cultivation has remained at
a higher level.
Sugarcane price significantly higher than Estimated profitability per acre by crop
competitive crops (average land holding by farmer is ~1 acre)
3,000 30,000
25,464
2,500
19,285
25,000
17,880
17,633
16,260
14,692
2,000
Price/tonne
20,000
11,517
1,500
9,988
Rs
15,000
7,336
6,698
1,000
5,258
5,341
10,000
500
1,345
5,000
0
0
2011-12
2015-16
2009-10
2013-14
2018-19
2010-11
2012-13
2014-15
2017-18
2016-17
Maize
Sugarcane
Wheat
Moong
Jowar
Rice
Bajra
Gram
Lentil
Tur
Urad
Barley
Ragi
Paddy Wheat Sugarcane
Source: ISMA, B&K Research Source: CACP, Ministry of Agriculture, B&K Research
9
North India has high yielding cane variety
Another factor for high production of sugarcane is the gradual increase in recovery rate across the country, especially in
North Indian states like Uttar Pradesh, Bihar and Punjab, due to improved irrigation facilities and introduction of Co-0238
variety. Historically, sugar recovery in Uttar Pradesh used to be in the range of 9.1-9.5%. After the introduction of Co-0238
variety, cane yield as well as sugar recovery improved drastically.
As more mills in Uttar Pradesh adopted this high yield variety, the recovery rate improved drastically from 9.5% in FY15 to 11.9%
in FY20 surpassing the recovery rate in Maharashtra for the first time. By end of FY20, 90% of mills in Uttar Pradesh have
adopted this variety. In Uttar Pradesh, cane yield also improved from ~62 tonnes per hectare in SY15 to ~81 tonnes per
hectare in FY19.
Co-0238 variety adoption has resulted in increase in recovery % in Uttar Pradesh

Year All India Uttar Pradesh Maharashtra Karnataka
2009-10 10.2 9.1 11.5 10.7
2010-11 10.2 9.1 11.3 10.9
2011-12 10.3 9.1 11.7 11.1
2012-13 10 9.2 11.4 10.4
2013-14 10.2 9.3 11.4 11
2014-15 10.4 9.5 11.3 11.1
2015-16 10.6 10.6 11.3 10.7
2016-17 10.4 10.6 11.3 10.2
2017-18 10.7 10.8 11.2 10.6
2018-19 10.9 11.5 11.3 10.6
10
Leading to higher recoveries and lower COP
The credit for this goes to the wonder cane variety, Co-0238, developed by Bakshi Ram, director of the Indian Council of
Agricultural Research’s Sugarcane Breeding Institute (SBI) at Coimbatore. For Farmers this meant that 22 tonnes of extra
cane produced per hectare leading to incremental revenue of Rs 69,300 per annum. While, for sugar mills every 100 bps
improvement in recovery rate should lead to 9.5% lower cost of production of sugar.
Early adoption of Co-0238 cane variety in Uttar Pradesh has led to higher cane yield
Year Cane area (lakh hectare) Adaptation of Co-0238 (%) Cane yield (tonnes/hectare)
2009-10 19.77 0 52.3
2010-11 21.25 0 57.2
2011-12 22.51 0 59.35
2012-13 24.24 Negligible 61.63
2013-14 23.60 3 62.74
2014-15 21.32 8 65.15
2015-16 20.52 20 66.47
2016-17 20.54 35 72.38
2017-18 22.99 53 79.2
2018-19 24.11 69 80.81
2019-20 23.60 69 80.81
Source: ICAR, B&K Research
11
High cane arrears remain a concern
In period of high sugar production and high closing inventory, historically, seen that cane arrears also starts mounting. Cane
arrears have piled up to almost ~Rs 160 bn by end of FY20.
Selling price of sugar was based on market factors until Government introduced MSP at Rs 29 per kg in June 2018 and later
revised upwards to Rs 31 per kg. However, payment for sugarcane based on FRP was not linked to selling price of sugar. As a
result, cane cost as a % of sugar price has increased from 44% to 86% over the last decade.
Cane cost as a % of sugar realisation has

Cane arrears have piled up in the recent years increased
250 4,000 3,620
3,300
3,148 3,121 3,141 3,250
2,951 2,951 2,917
200 2,727
3,000 2,492
2,900 3,100 3,100
150
2,000 2,550 2,613 2,613
Rs bn
2,300 2,300
2,100 2,200
100
1,700
1,000 1,391 1,450
1,298
50
0
0 SY10 SY11 SY12 SY13 SY14 SY15 SY16 SY17 SY18 SY19 SY20
2011-12
2015-16
2018-19
2012-13
2013-14
2017-18
2019-20
2014-15
2016-17
Cane Price (per tonne) Sugar Realisation (per Qtl)

MSP (per Qtl)
12
Government initiatives – 1) Minimum Sugar Price
To address these concerns the Government has taken Sugar price effect after the introduction of MSP
series of initiatives in the last two years 45
MSP at MSP at 40.2
1. MSP (minimum selling price) for Sugar 40 29/kg 31/kg
 As a result of surplus production, sugar realisation 35 36.88 32.2
under the market forces fell to a level where 30
production of sugar meant loss for the millers. 25

26.5
 To mitigate this problem the Government 20
Oct-15
Jan-16
Apr-16
Oct-16
Jan-17
Oct-17
Jan-18
Oct-18
Jan-19
Oct-19
May-20
Apr-17
Apr-18
Apr-19
Jan-20
Jul-16
Jul-17
Jul-18
Jul-19
announced a Sugar MSP for the first time in June
2018 at Rs 29 per kg. Later on it was revised to Rs 31
Retail Ex-mill
per kg in February 2019.
 This has created a floor to the sugar realisation Source: ISMA, Industry, B&K Research
even in the periods of surplus production. It also

increased the profitability in the industry to some
extent.
 The Government is further recommending Rs 2

hike in the MSP on back of rising cost of processing
for sugar and a room to increase Sugarcane
FRP/SAP.
 However, we have not taken this in our estimates

until the Government formally announces.
13
2) Bio Fuel Policy – a game changer
2. Bio Fuel Policy
 Ethanol Blended Petrol (EBP) programme was initially launched in January, 2003 for blending 5% ethanol in petrol and
later on increased to 10%.
 The programme sought to promote the use of alternative and environment friendly fuels and to reduce import
dependency for energy requirements.
 The procurement was only from conventional C-Heavy molasses and the price was set at 43.7 per litre. However, due
to low sugar recovery and lower distillery capacity the blending target of 10% was never achieved.
 In September 2018, Government for the first time allowed incentivized sugar mills to produce ethanol from B-Heavy
molasses and directly from sugar cane juice.
 For the 2018-19, supply year (December-November), the Government introduced procurement prices of ethanol from
C-Heavy, B-Heavy as well as from Cane juice.
 Later on for the new 2019-20 supply year, the prices have been raised marginally to currently Rs 43.75/litre (C-Heavy),
Rs 54.27/litre (B Heavy) and Rs 59.48/litre (sugarcane juice).
 The oil marketing companies will also pay the GST and transportation tax associated with the ethanol supply – a
provision that existed in the previous plan as well.
 The new Biofuel Policy 2018 has fixed a target of achieving 20% ethanol blending with petrol by 2030. The
government is targeting to achieve the first milestone of 10 per cent of ethanol blending with petrol by 2022.
14
Ethanol buying is independent of oil prices
This initiative from the Government turned out to be a Supply of Ethanol and Blending (%) achieved
game changer for the whole Sugar industry. If mills are able
Tendered Quantity
to divert more sugar towards B-Heavy and cane juice for Ethanol Allocated Blending %
quantity supplied
ethanol, it would mean producing less sugar, higher Supply year (cr litres) achieved
(cr litres) (cr Litres)
profitability and increasing liquidity for sugar mills for timely
2012-13 103.0 32.0 15.4 0.7
payment of cane arrears.
2013-14 115.0 70.4 38.0 1.5
Since the country is producing too much sugar and is
2014-15 128.0 86.5 67.4 2.3
importing oil, the ethanol-blending programme is
beneficial both for mills and for the country’s balance of 2015-16 266.0 130.5 111.4 3.5
payments. 2016-17 280.0 80.7 66.5 2.1
2017-18 313.0 161.0 150.5 4.2

Furthermore, the procurement prices of ethanol (C-
Heavy, B-Heavy and Cane juice) is linked to MSP and not 2018-19 329.0 268.7 158.8 6.1
linked to crude oil prices. Hence, there is an upside risk Source: Industry, B&K Research
that if MSP of sugar hiked the procurement prices of

ethanol will hiked proportionately, leading to further
improvement in earnings.
At the current low levels of crude oil prices, OMC’s have continued their offtake of ethanol from sugar mills. Also new
tender for procurement of ethanol has been floated by the OMCs’. for a long term supply contract of five years. This
indicated the Government’s intention is solely on improving the liquidity of sugar mills and clearing cane arrears.
15
B-Heavy provides the best option for mills
Dynamics of ethanol produced from C-Heavy, B-Heavy and Cane juice

Particulars C-Heavy B-Heavy Cane Juice
Cane crushed (kg) 1,000 1,000 1,000
Sugar recovered 120 105 0
Recovery rate (%) 12.0 10.5 0.0
Sugar realisation (per kg) 33.0 33.0 33.0
Sugar Sales (A) 3,960 3,465 0
Ethanol (litres) 10.8 21.9 64.5
Ethanol Realisation (per litres) 43.8 54.3 59.5
Ethanol Sales (B) 473 1,189 3,836
Bagasse produced (kg) 225 225 225
Power produced (cr units) 92 92 92
Power sold (cr units) 55 55 55
Power realisation (per unit) 2.88 2.88 2.88
Power Sales (C) 159 159 159
Total Sales (A+B+C) 4,592 4,813 3,996
Revenue 100.0 100.0 100.0
Raw material cost 70 66 80
Stock adjustments 2.5 2.5 2.5
COGS 72 69 83
Gross profit 27.8 31.0 17.4
Gross profit (%) 28% 31% 17%
Employee expense 1.2 1.2 1.2
Other expense 7.5 7.5 7.5
EBITDA 19.1 22.3 8.7
EBITDA (%) 19 22 9
16
Sugar operations
Sugarcane farming Sold to market
Press Mud/Organic
Manure
Sugarcane
Cane crushing
Bagasse
Sugar Cane Juice
Power-
C-Heavy Molasses B-Heavy Molasses
Captive/Export
Distillery operation Distillery operation Distillery operation
C-Grade Ethanol B- Grade Ethanol A-Grade Ethanol
17
3) Soft Loan schemes have been announced for distillery
The Centre had announced the loan package in two tranches – first in June 2018 amounting to Rs 44.4 bn and the other in
March 2019 of Rs 105.4 bn. The objective was to incentivize millers to expand distillery capacities and divert sugar toward
ethanol as well as clearing cane arrears. This move was again beneficial for the millers as distillery capacity to the tune of
more than 50 cr litres have been set up after the scheme has been announced.
During ethanol supply year 2018-19, OMC’s have tendered 329 cr litres and out of that only 159 cr litres have been supplied. In
the current supply year 2019-20 the OMC’s have tendered for 511 cr litres but only 92 cr litres have been supplied till June 2020.
Specifically for FY21 such low offtake by OMC’s were caused by the lockdown imposed in 1QFY21.
As per industry sources, currently India’s petroleum demand for automobiles stands at ~5,000 cr litres and growing at a
CAGR of 4.5%. To achieve a blending rate of 10% across the country by 2022, 550-600 cr litres of ethanol would be required to
be supplied per annum. Currently, we have operational distillery capacity to the tune of 400 cr litres. Hence, to supply such
quantity of ethanol more distillery capacity as well as more diversion towards B-Heavy ethanol is required.
18
4) Export subsidies have also been announced to
support price
The Cabinet Committee on Economic Affairs (CCEA) on Export of Sugar
September 2019 approved the ongoing sugar export policy for the
Sugar year Export quantity (MT)
export of surplus stock up to 6 MT under Maximum Admissible
2009-10 0.2
Export Quantity (MAEQ) allocated to sugar mills for the sugar
season 2019-20. 2010-11 2.6
The Government has given its approval for providing a lump sum 2011-12 3.0
export subsidy at Rs 10,448 per metric tonne (MT) to sugar mills for 2012-13 0.3
the sugar season 2019-20. The subsidy is mainly intended to
2013-14 2.1
bridge the gap between global sugar prices and domestic price.
2014-15 1.1
The lump-sum export subsidy is being provided for expenses on
marketing costs including handling and costs of international and 2015-16 1.7
internal transport and freight charges on export. These subsidies 2016-17 0.0
is being directly paid to the famers for their cane dues on behalf
2017-18 0.5
of the sugar mills.
2018-19 3.8
In SY18-19, the Government had allowed 5 MT of export but the
millers could export only 3.8 MT. Source: Industry, B&K Research
For the current SY19-20, the Government has allowed a total 6MT
of export out of which 4.9 MT has been exported till June 2020.
We expect by the end SY19-20, total export of sugar could reach

to 5.5 MT levels. Also for the next SY10-21, considering the high
sugar production we expect the Government to continue with its
export policies and set a target at least above 6 MT.
19
5) Sugar sales governed by quotas
To support the sugar realisation Government has re- Monthly quota released
imposed mill wise sugar sales quota from June 2018. The
Month Quota (MT) Month Quota (MT)
intention is to control the sugar supply in the country so
June 2018 21.0 July 2019 20.5
that the realisation is kept well above MSP i.e. Rs 31 per kg.
July 2018 16.5 August 2019 19.0
The quota system was last used in SY12-13. This move also
proved to be beneficial for industry as it had kept the sugar August 2018 17.5 September 2019 19.5
prices from coming under pressure from oversupply of September 2018 20.0 October 2019 21.0
sugar in the market.
October 2018 22.0 November 2019 21.5
We expect this mechanism, to continue at least for the November 2018 22.0 December 2019 21.5
next sugar season i.e. SY20-21 due expectation of high
December 2018 19.5 January 2020 22.0
sugar production.
January 2019 18.5 February 2020 20.0
As an add-on, the Government is providing additional
quotas on both domestic and export sales for companies February 2019 21.0 March 2020 21.0
who are diverting more sugar for ethanol blending. March 2019 24.5 April 2020 21.0
April 2019 18.0 May 2020 17.0
May 2019 21.0 June 2020 18.5
June 2019 21.5 July 2020 21.0
20
6) Buffer stock maintenance free of cost
In the wake of high sugar production during sugar season 2017-18 (October-September) and sugar season 2018-19, and
given the over-leveraged position in the industry and liquidity crunch Government had imposed a policy to create a buffer
stock of 3 MT of sugar for one year from July 2018 to June 2019.
Later on it was revised upward to 40 MT of sugar for one year from August 2019 to July 2020 for which Government would be
reimbursing the carrying cost of about Rs 16.7 bn to participating sugar mills.
This would further restrict the oversupply of sugar in the and also improve the liquidity position of sugar mills. The
reimbursement available under the scheme would be directly credited into farmers’ account on behalf of sugar mills
against their cane price dues.
21
Earnings stability likely in the industry on such
initiatives
These initiatives taken by the Government has helped the sector to improve their profitability and stabilise the cyclicality
by making structural changes in the basic fundamentals of the sugar industry in India.
Over the last two years, more than 500 mn litres distillery capacities has been set up and more than 282 applications have
been filled for soft loan scheme for setting up/expansion of distilleries.
We believe the product fungibility from sugar to ethanol and vice-versa will help in reducing the cyclicality of earnings of
the sugar mills. This would automatically help to optimise the sugar production and inventory, thus improving the
profitability and liquidity position of the sugar mills.
Moreover, the Government is now pushing hard to achieve the blending target of 10% by 2022 and reduction in crude
imports, thus reducing the import bill. Hence, polices regarding ethanol to continue and remain remunerative for the sugar
millers.
STRUCTURALLY, THE SUGAR INDUSTRY IS ON A STRONG FOOTING AS POLICIES SEEM TO BE IN SHAPE AT LEAST TILL THE PRESENT
GOVERNMENT IS IN POWER TILL 2024.
22
Improvement of financials for our coverage universe
Higher revenue share from distillery segment would lead to higher EBIT share going forward
Revenue share EBIT share

100 4.3 100
3.6 4.2 4.3
7.1 17.1 24.8 23.1 21.5
12.4 14.0 16.0 33.5
80 11.2 80
50.4
60 60
31.9 46.0 49.2 51.1
%
%
40 76.4 79.2 78.2 78.4 79.4 40

35.8
20 20
34.6 29.2 27.7 27.4
13.8
0 0
FY19 FY20 FY21E FY22E FY23E FY19 FY20 FY21E FY22E FY23E
Sugar Distillery Co-Gen Sugar Distillery Co-Gen
Also improving the margins and return ratios makes a good case for re-rating in the sector.
EBITDA margins Return ratios

15 30
25.5
22.5 23.0
14 14.6 25 23.4
14.0 18.2
13 20 22.7
22.3
20.7 20.1
%
12 12.7 15
15.5
%
11 10
11.0
10 5
10.1
9 0
FY19 FY20 FY21E FY22E FY23E
8
FY19 FY20 FY21E FY22E FY23E ROE ROCE

23
Uttar Pradesh mills are in a sweet position
After the adoption Co-0238 variety of sugarcane, cane yield in Uttar Pradesh has become the highest in the country. The
state is responsible for 36% of the country’s total sugar production. Sugarcane is a high water crop which requires adequate
and evenly distributed rainfall.
However, India’s tropical sugar producing states such as Maharashtra, Karnataka and Tamil Nadu face extreme weather
conditions. In the last five years, sugarcane availability was heavily affected by several floods or droughts in these states. In
SY19-20, sugar production fell by 40% due to impact of drought/floods in these states.
Compared to these states, Uttar Pradesh faces adequate rainfall as well ground water levels for irrigation. This ensures
uniform sugarcane availability and sustainable sugar production for Uttar Pradesh sugar millers which leads to uniform
cash flow generation and better working capital cycle.
Any shortage in sugar production due to drought/flood like situation in the western and southern states of India will
increase the sugar prices in the country. Hence, we believe Uttar Pradesh based sugar mills with higher production will be
able to take better advantage from the higher sugar realisations.
24
Global sugar industry dependent on Brazil and India
Globally, India is a key sugar geography, since it is the Global Sugar production
largest consumer and the second largest producer. The
250
global landscape is also highly influenced by Brazil, given
195 192 195
that it is the least cost producer and the largest exporter of 200 178 176 178 180
172 174 174
162 165
153
sugar. 150
MT
Ethanol has had a significant influence on the global sugar
100
market. The world sugar production has been increasing
steadily at a CAGR of 1.5% to 174 MT is SY19-20 while 50
consumption has grown faster at a CAGR of 2.2% to 176 MT in

0
SY19-20.
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020E
2024E
2026E
Global sugar balance moved from a surplus of 3.98 Million
Source: FAO, B&K Research
Metric Tonne (MMT) in Sugar Year (SY) 2018-19 to expect
deficit of 3.35 MMT in SY19-20. Global prices were under a
Global Sugar consumption
great deal of pressure, ultimately bottoming out in
250
September 2019.
201
191
However, Indian production dropped due to floods whilst 200
166 166 168 169 171 173 173 176
154 156 160
Thailand lost more than 35% of its record crop of last year, 150
due to unprecedented drought.
MT
100
Brazil’s focus on ethanol for the second successive year
meant that their sugar production remained capped at 50
previous year levels.

0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020E
2024E
2026E
Source: FAO, B&K Research
25
FY21 deficit will narrow due to Covid-19 and higher
production
As per estimates made by Platts Kingsman, global deficit Global Sugar deficit/surplus
for SY20-21 is expected to narrow down to 1.7 MMT. An 25
explosive combination of falling oil prices and weakening 20
Brazilian Real has led to Brazilian mills maximising their 15
sugar production.
10
Brazil is estimated to produce 7-8 MMT of additional sugar 5
in 2020-21 when compared to 2019-20. 0
A normal monsoon predicted for India should mean a (5)
sugar production of more than 30 MMT. Thailand is the only (10)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020E
2024E
2026E
major producer which is expected to have lower
production due to dry weather.
Initial estimates indicate that the sugar consumption
growth could be flat in 2020-21 due to loss of demand due Global Sugar price movement
to Covid-19 pandemic related lockdowns, although it is to
be seen how long the pandemic plays out and the nature Deficit
of recovery of economic activities in 2020-21.

Surplus
Deficit
13.00 c/lb
Source: Trading Economics, B&K Research

26
Fuel blending programme started early in Brazil
Brazil embarked on an ambitious fuel program in the early 70s to exploit greater use of ethanol as a transport fuel. In 1973
the industry really progressed after an international oil crisis doubled Brazil’s expenditure on oil imports and the government
was forced to consider alternative sources of energy to decrease its dependency and spending on fossil fuels.
The government launched the National Alcohol Programme (Pro-Álcool) in 1975 to increase ethanol production as a
substitute for gasoline. The Brazilian government sought to reduce the country’s reliance on oil imports and boost a national
ethanol industry, resulting in substantial macro-economic savings.
● To encourage growth of ethanol-based fuel, the Brazilian government took following steps:
● Guaranteed purchases of ethanol by the state-owned oil company Petrobras.
● Low-interest loans to agro-industrial ethanol firms.
● Lower excise taxes on ethanol than on petrol.
● Fixing of hydrous ethanol prices at 59% of the government-set gasoline price at the pump.
● Soft loans to support the sugarcane industry to rapidly increase the production of sugarcane, expand distilleries and
establish new production plants.
● Introduced subsidies to lower prices and reduced taxes for ethanol producers.
27
Leading to a boom in the bio-fuel industry
It took just six years of the Proálcool Programme (from 1975 to 1981) for 90% of all new vehicles sold in Brazil to have ethanol
fuel capacity.
The success of the Bio-fuel industry boomed when Flex-fuel Vehicles (FFV) were launched. FFV cars can run either on 100%
hydrous ethanol or on different blends of ethanol and gasoline. Electronic sensors detect the fuel blending and
automatically adjust the engine combustion. In one year from when FFVs entered the Brazilian market in 2004, they
accounted for 25% of new car sales. 2 million FFVs were sold in the first five years, reaching 90% of all cars sold in 2009.
Growth of Ethanol production in Brazil

40
1975 Pro-Álcool 2003 FFV cars

35 was launched 1985-89 De-regularisation, introduced
reduction of subsidies
30
1979 Ethanol cars
25 (E-100) retailing
In billion litres
introduced
20
15
10
0
1973
1980
1981
1982
1983
1974
1984
1988
1989
2010
2011
1975
1976
1977
1978
1979
1985
1986
1987
2012
2013
2014
2015
2016
2017
2018
2019
1990
1991
1992
1993
2000
2001
2002
2003
2007
1994
2008
2009
1995
1996
1997
1998
2004
1999
2005
2006
Source: ABARES, UNICA, B&K Research
28
Leading to a high blending proportion
The Brazilian government set gradually increasing targets for the percentage of ethanol with gasoline – from 4.5% in 1977 to
15% in 1980 and 27.5% in 2018 – which gave producers and consumers time to adapt. As ethanol production was tied to the
sugar industry, producers could respond to fluctuating market prices by switching back and forth temporarily between the
sugar and ethanol.
Before the Proálcool programme was introduced in 1975, Brazil was dependent on imports for 80% of its oil supply. By 2009,
more than 60% of its motor fuel demand was met with ethanol. Since 2011, Brazil has become a net exporter to crude oil.
Currently, most automobiles in Brazil run either on hydrous alcohol (E100) or on gasohol (E27 blend), as the mixture of 27%
anhydrous ethanol with gasoline is mandatory in the entire country.
Historical evolution of ethanol blends used in

Sugar production an allocation of ethanol Brazil
700 Ethanol Ethanol Ethanol
Year Year Year
600 blend blend blend
500 1931 E5 1992 E13 2006 E20
Million tonnes
400 1976 E11 1993–98 E22 2007 E23-25

300 2008
1977 E10 1999 E24 E25
200
1978 E18–20–23 2000 E20 2009 E25
100
1981 E20–12–20 2001 E22 2010 E20–25
0
1982 E15 2002 E24–25 2011 E18–25
2001-02
2005-06
2011-12
2015-16
2018-19
2002-03
2003-04
2008-09
2013-14
2000-01
2004-05
2007-08
2009-10
2010-11
2012-13
2014-15
2017-18
2006-07
2016-17
1984–86 E20 2003 E20–25 2015 E27
Ethanol Sugar
1987–88 E22 2004 E20 2018 E27
1989 E18–22–13 2005 E22
Source: ABARES, UNICA, B&K Research Source: UNICA, Industry, B&K Research
29
Key risks
● Ethanol Blending programme: The present Government had been pushing hard to achieve the blending target of 10%
by 2022 and has taken major initiatives to expand the country’s distillery capacity and incentivized ethanol production
from B-Heavy and Cane juice. OMC’s has significantly increased their lifting in the last two years. This was a win-win
move by the Government as this way the Government can also reduce the sugar glut in the country and improve the
liquidity and profitability of sugar mills for timely cane arrear payments. While sugar business is highly volatile and
marginally profitable, sale of ethanol has proved to be a major contribution to earnings. Hence, any adverse change in
Ethanol blending policies by the Government would severely affect the earnings of the sugar mills.
● MSP and Sales quota: While MSP in sugar has ensured a floor price to sugar realisation even in the period of surplus
production. Monthly sales quota released by the Government has ensured the sugar prices are maintained well above
the MSP. Abolition of these regulations will be negative for sugar prices in periods of surplus production which have
adverse effect on the earnings.
● Export: To cut excess sugar inventory, the Government has introduced export subsidies for export of sugar. While the
global sugar prices are far below Indian sugar cost of production, continuance of such subsidies is highly necessary in
order to facilitate exports and curb the excess inventory. Hence, discontinuance of such subsidy or any delay in
payment of export subsidies to sugar mills will discourage exports of sugar in the industry.
● Cane pricing: Given that a large proportion of rural farmers in the key cane growing states are dependent on the sugar
cane sector, the SAP/FRP is largely politicised and has become major political tool during pre-elections. Any
disproportional increase in cane pricing without increase in MSP will adversely affect the earnings of the sugar industry
as well timely payment to farmers.
30
Company section
Balrampur Chini Mills BUY
RE-INITIATING COVERAGE Balrampur Chini Mills Limited (BCML) is one of the largest integrated sugar
Share Data companies in India. The company presently has 10 sugar factories located in Uttar
Price (Rs) 149
BSE Sensex 38,220 Pradesh having an aggregate sugarcane crushing capacity of 76,500 TCD,
Reuters code BACH.NS
distillery and co-generation operations of 520 KLPD and 163.2 MW (saleable
Bloomberg code BRCM IN
Market cap. (US$ mn) 435.7 quantity), respectively.
6M avg. daily turnover (US$ mn) 3.1
Issued shares (mn) 210 The company has handsomely rewarded its shareholders through constant
Target price (Rs) 233
dividend and buyback in the past.
Performance (%) 1M 3M 12M
Absolute 9.7 66.0 72.0
Higher Ethanol capacity and more focus towards B-Heavy Ethanol will further
Relative 4.1 27.6 20.4
Valuation Ratios boost profitability
Year to 31 Mar FY19 FY20 FY21E
EPS (Rs) 27.2 24.3 29.8
The company has recently commissioned its 4th distillery unit of 160 KLPD at
+/- (%) 158.1 (10.7) 22.7 Gularia in January 2020.
PER (x) 5.5 6.2 5.0
PBV (x) 1.6 1.4 1.2
The company is focusing to produce more ethanol from B-Heavy molasses in the
Dividend/Yield (%) 1.7 1.7 2.0
EV/Sales (x) 0.8 0.8 0.7 coming years which will improve the profitability and curb excess inventory of
EV/EBITDA (x) 5.1 5.3 3.9
sugar leading to higher cash flow generation.
Shareholding Pattern (%)
Promoters 41 With no further major capex plans ahead we believe the company to further lower
FIIs 20
MFs 12 down its debt as well as interest burden in the next two years. This would entail
Public & Others 27
higher return ratios for the company going forward.
Relative Performance
On the back of strong financials and high return ratios we initiate coverage with
200
a two year target price of Rs 233 and recommending a Buy at current levels.
100
0
Aug/19
Dec/19
Apr/20
Sep/19
Mar/20
Jul/20
Aug/20
Nov/19
May/20
Jan/20
Balrampur Chini Mills Sensex
32
Distillery capacity to further boost profitability
The company has recently commissioned its 4th distillery unit of 160 KLPD at Gularia in January 2020. With this, BCML has
reached an installed distillery capacity of 180 mn litres which is capable of producing ethanol from C-Heavy, B-Heavy or
even Cane juice directly. The current crushing capacity is sufficient to fully service such distillery capacity. The management
also aims to produce 80% ethanol from B-Heavy molasses in the coming years.
The OMC’s have floated a new tender for long-term contract for supply of ethanol. This indicated the long-term visibility in
the sector and the Government’s commitment towards higher blending initiative.
For FY21E to FY23E, we expect the company to produce ~156, 176 and 178 mn litres of ethanol, respectively. With higher
proportion from B-Heavy ethanol, the average blended realisation to increase from Rs 44.7 per litres to Rs 52.8 per litres and
sacrifice a sugar quantity of 125-150 mn kg in the process.
We expect the revenues from Distillery segment to grow at a CAGR of 20% for the next three years. Higher earnings from
higher realisation from this segment would directly add to the bottomline.
Revenue from distillery segment set to Higher proportion of B-Heavy ethanol in

increase volume sold
10 200
9.2 9.3
9 180
8.1
160
8
140
7
120
mn litres
6 5.5
100
Rs bn
4.7
5 80
4 60
3.1 3.2
2.7 40
3
20
2
0
1 FY20 FY21E FY22E FY23E
0
C-Heavy B-Heavy
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Source: Company, B&K Research

33
Strong financials and cash flow generation
The company had been able to lower down its total debt to Rs 17,823 mn in FY17 to Rs 14,823 mn in FY20. As a result, net
Debt/Equity is down from 1.16x in FY17 to 0.62x in FY20. Currently, long-term debt of the company stood at Rs 4,500 mn at
subsidised interest rates while working capital debt stood at Rs 10,500 mn.
With no further major capex plans ahead we believe the company to further lower down its debt as well as interest burden
in the next two years. This would entail higher return ratios for the company going forward.
Further, cash flow from operation in FY20 stood at Rs 8,495 mn led by lower receivables and lower inventory.
Going forward, higher revenues and more production of B-Heavy ethanol, inventory pile up to remain under check
leading to improved cash flow generations.
Cash flow from operations to stabilise going RoE set to increase with increase in EBITDA
forward margins
14 50
12
40
10 8.9
8
30
6 5.1
%
Rs bn
4 20
2
10
0
(2) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
0
(4) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
(6)
ROE Margin
(8)
34
Higher sugar volumes to increase the topline
The company commands a market share of 3.8-4% in the country’s supply of sugar. In SY19-20, Maharashtra and Karnataka
had produced almost 40% less sugar due to drought and floods in the states. This had positively impacted the Uttar Pradesh
sugar mills as they are now enjoying higher sales quota under the Government regulated release mechanism.
However, we expect this would increase the volumes and revenue till 1HFY21E, as supply from Maharashtra and
Karnataka to return to normalcy from October 2020 onwards. Having said this, the company had already fulfilled its
export quota and going to divert more sugar towards B-Heavy ethanol which can lead to wining additional sales quota
keeping the overall volume sold at higher levels for both FY21E and FY22E.
We expect the sugar volumes to increase at a CAGR of 5% over the next two years led by the high growth in domestic as
well as in export.
Higher revenue from sugar segment Higher volume of sugar sold

50 1,600
46.3
42.2 44.6
45 1,400
39.3
40 36.6
34.1 1,200
35
28.7 1,000
30
Mn Kg
Rs bn
25 22.0 800
20 600
15
400
10
200
5
0 0
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
35
Impressive shareholder rewarding
The company has a reputation of highest dividend payout policy in the industry. The company had paid dividends seven out
of ten years in the past. This is supported by the efficient and high operating cash flow generation.
Along with dividend, the company enhanced shareholder value during the last decade through Rs 5.3 bn buybacks and
increased market capitalisation to Rs 3 bn.
In June 2020, the Board of Directors have approved the buyback of 10 mn shares at a price of Rs 180/- per equity through the
“Tender Offer”. The buyback has been completed in August 2020.
Total reward to the shareholders over the years

(Rs mn) 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
EPS (Rs) 7.8 0.3 7.7 0.2 (2.6) 4.6 26.9 10.1 25.9 23.1
DPS (Rs) 0.75 – 2 – – – 3.5 2.5 2.5 2.5
Dividend 190 – 591 – – – 1,032 707 688 663
Buyback – – – – – 1,750 990 – 1,477
Total 190 0 591 0 0 0 2,782 1,697 688 2,140
Cash accruals 3,325 1,174 2,703 1,131 579 2,103 6,812 3,563 5,624 5,592
36
Company background
Balrampur Chini Mills Limited (BCML) is one of the largest integrated sugar companies in India. The allied businesses of the
Company comprise distillery operations and cogeneration. The company has eight plants in Eastern Uttar Pradesh and two
in Central Uttar Pradesh, the major cane-growing areas of Uttar Pradesh. The plants are located in proximity to each other
resulting in seamless and cost effective logistical operations.
BCML is presently having an aggregate sugarcane crushing capacity of 76,500 TCD, distillery and co-generation
operations of 520 KLPD and 163.2 MW (Saleable quantity), respectively.
The company was among the first companies in India’s sugar sector to invest in ethanol manufacturing capacities. Over the
last two decades, the company carved out a ~4% share of the country’s ethanol production.
About 63% of the power generated in-house is exported to the state electricity grid.
Plant location and capacity

Co-Gen Power
Crushing Distillery
saleable
capacity (TCD) capacity (KLPD)
capacity (MW)
Balrampur 12,000 160 27
Babhnan 10,000 100 10
Tulsipur 7,000
Haidergarh 5,000 21
Akbarpur 7,500 11
Mankapur 8,000 100 30
Rauzagaon 8,000 23
Kumbhi 8,000 23
Gularia 8,000 160 20
Maizapur 3,000
Total 76,500 520 165.2
37
Valuation
As per industry sources the Government is considering a hike of Rs 2 per kg from the current sugar MSP of Rs 31 per kg in
order to clear cane dues of about Rs 220 bn to farmers. Any upward revision in MSP will keep the sugar prices at higher levels.
Also, we must note that Ethanol prices are linked to sugar MSP and hence, any revision in sugar MSP would also be followed
by a proportional revision in ethanol prices. Hence, there is no risk to ethanol prices and profitability in this segment.
We like BCML on account of strong Balance Sheet and strong cash flows. Also, the company has increased its distillery
capacities which are going to further boost profitability in the coming years. The company has also handsomely returned
shareholders value through constant dividends and buy-back.
At CMP, the company is trading at a multiple of 3.9x on FY23E EPS. Due to better than industry stability, strong balance
sheet and high return ratios we believe multiple of 6x on FY23E EPS of Rs 38.8 is now warranted to arrive at a two year
target price of Rs 233. The company will generate enough free cash flows even after high dividend payouts for another
buyback next year, in our opinion.
Trailing PE Relative performance – 3 years

12 160
140
10
120
8 100
6 80
60
4
40
2 20
0 0
Aug/17
Jun/18
Feb/19
Jul/19
Dec/19
Sep/18
Sep/19
Mar/20
Aug/20
Nov/17
Jan/18
May/20
Apr/18
Nov/18
Apr/19
Jun-17
Jun-18
Jun-19
Mar-20
Aug-20
Nov-17
Jan-18
Oct-18
Jan-19
Oct-19
May-20
Jan-20
Mar-17
Aug-17
Mar-18
Aug-18
Mar-19
Aug-19
Trailing Mean +1 std dev -1 std dev Balrampur Chini Mills Sensex
Source: B&K Research
38
Financials – Balrampur Chini Mills
Income Statement Balance Sheet
Period end (Rs mn) Mar 19 Mar 20 Mar 21E Mar 22E Period end (Rs mn) Mar 19 Mar 20 Mar 21E Mar 22E
Net sales 42,858 47,413 53,056 56,705 Share capital 228 220 210 210
Reserves & surplus 20,599 23,484 27,184 33,091

Growth (%) (1.3) 10.6 11.9 6.9
Shareholders' funds 20,827 23,704 27,394 33,301
Operating expenses (35,880) (40,593) (44,223) (46,434)
Non-current liabilities 3,922 3,860 2,819 1,770
Operating profit 6,978 6,820 8,833 10,270 Long-term borrowings 2,792 3,403 2,347 1,291
EBITDA 6,978 6,820 8,833 10,270 Other non-current liabilities 1,130 457 472 479
Current liabilities 21,846 19,926 20,419 18,130

Growth (%) 54.5 (2.3) 29.5 16.3
ST borrowings, Curr maturity 14,549 11,421 11,343 9,169
Depreciation (958) (1,014) (1,077) (1,094)
Other current liabilities 7,298 8,506 9,076 8,961
Other income 340 385 368 384 Total (Equity and Liabilities) 46,596 47,490 50,632 53,200
EBIT 6,359 6,191 8,124 9,560 Non-current assets 16,736 18,316 18,317 18,287
Fixed assets (Net block) 14,675 16,361 15,760 15,130

Finance cost (409) (642) (456) (386)
Non-current Investments 1,201 1,798 2,400 3,000
Profit before tax 5,950 5,549 7,668 9,173
Long-term loans and advances 860 157 157 157
Tax (current + deferred) (244) (456) (1,419) (1,697) Current assets 29,860 29,174 32,315 34,914
Profit / (Loss) for the period 5,706 5,093 6,249 7,476 Cash & current investment 79 114 149 310
Other current assets 29,781 29,060 32,166 34,603

Reported Profit / (Loss) 5,706 5,093 6,249 7,476
Total (Assets) 46,596 47,490 50,632 53,200
Adjusted net profit 5,706 5,093 6,249 7,476
Total debt 17,341 14,823 13,690 10,460
Growth (%) 158.1 (10.7) 22.7 19.6 Capital employed 39,298 38,984 41,557 44,239
39
Financials – Balrampur Chini Mills
Cash Flow Statement Key Ratios
Period end (Rs mn) Mar 19 Mar 20 Mar 21E Mar 22E Period end (%) Mar 19 Mar 20 Mar 21E Mar 22E
Profit before tax 5,950 5,549 7,668 9,173 Adjusted EPS (Rs) 27.2 24.3 29.8 35.6
Growth 158.1 (10.7) 22.7 19.6
Depreciation 958 1,014 1,077 1,094 CEPS (Rs) 31.7 29.1 34.9 40.8
Book NAV/share (Rs) 99.2 112.9 130.4 158.6
Change in working capital (11,140) 2,646 (2,520) (2,546)
Dividend/share (Rs) 2.7 2.6 3.0 6.2
Total tax paid (1,265) (1,027) (1,419) (1,697) Dividend payout ratio 12.1 13.0 12.2 21.0
EBITDA margin 16.3 14.4 16.6 18.1
Others 409 642 456 386
EBIT margin 14.8 13.1 15.3 16.9
Cash flow from operations (a) (5,088) 8,825 5,263 6,411 Tax rate 4.1 8.2 18.5 18.5
RoCE 19.0 15.8 20.2 22.3
Capital expenditure (1,050) (2,700) (477) (464)
Total debt/Equity (x) 0.8 0.6 0.5 0.3
Change in investments (369) (654) (602) (744) Net debt/Equity (x) 0.8 0.6 0.5 0.3
Du Pont Analysis – RoE
Cash flow from investing (b) (1,419) (3,354) (1,079) (1,207)
Net margin 13.3 10.7 11.8 13.2
Free cash flow (a+b) (6,506) 5,471 4,184 5,204 Asset turnover (x) 1.0 1.0 1.1 1.1
Leverage factor (x) 2.3 2.1 1.9 1.7
Equity raised/(repaid) 0 (8) (10) –
Return on equity 31.1 22.9 24.5 24.6
Debt raised/(repaid) 7,443 (2,518) (1,133) (3,231) Valuations
Period end (x) Mar 19 Mar 20 Mar 21E Mar 22E

Dividend (incl. tax) (688) (663) (759) (1,570)
PER 5.0 6.1 5.0 4.2
Others (255) (2,303) (2,246) (386)
PCE 4.3 5.1 4.3 3.6
Cash flow from financing (c) 6,499 (5,493) (4,149) (5,187) Price/Book 1.4 1.3 1.1 0.9
Yield (%) 1.98 1.8 2.0 4.2
Net change in cash (a+b+c) (8) (21) 35 17
EV/EBITDA 6.6 6.7 5.1 4.0
40
Dwarikesh Sugar Industries BUY
INITIATING COVERAGE Dwarikesh Sugar Industries has emerged as one of the most sustainable multi-
Share Data product sugar companies in India. The company has three manufacturing units
Price (Rs) 29
BSE Sensex 38,220 spread across two regions in Uttar Pradesh.
Reuters code DWAR.NS
Bloomberg code DSIL IN The company’s aggregate crushing capacity stands at 21,500 tonnes of cane per
Market cap. (US$ mn) 72.1
6M avg. daily turnover (US$ mn) 0.02 day. Besides, the company possess an installed capacity of 100 KLPD and co-
Issued shares (mn) 188 generation capacity of 91 MW (saleable 56 MW).
Performance (%) 1M 3M 12M From a small distillery unit of 30 KLPD, the company had expanded its distillery
Absolute 14.0 63.1 22.5
capacity to 130 KLPD. The company aims to produce more ethanol from B-Heavy
Relative 8.1 33.4 20.9
molasses which would increase the average realisation and thus improving the
Valuation Ratios
Year to 31 Mar FY19 FY20 FY21E profitability of the company by massive scale.
EPS (Rs) 5.1 3.9 7.9
+/- (%) (6.2) (22.8) 102.7 The company is enjoys one of the highest recovery rate in the country of around
PER (x) 5.7 7.4 3.7
PBV (x) 1.2 1.1 0.9 12.3%. This has kept the per kg raw material for the company at Rs 28 per kg, lower
Dividend/Yield (%) 0.0 7.0 0.0 than the industry peers.
EV/Sales (x) 0.6 0.7 0.4
EV/EBITDA (x) 5.4 6.8 3.1
We expect the margin to improve significantly over the next two years and
Promoters 42
generate higher cash flow. The company could also deleverage its balance sheet
MFs 3 or go for further expansion of distilleries.
Public & Others 55
Relative Performance Considering the improving return ratios and stronger balance sheet we value
200
the stock at 5x FY23E EPS. We initiate coverage on the stock with a “Buy” rating
150 with a two year target price of Rs 55.
100
50
Aug/19
Dec/19
Apr/20
Sep/19
Mar/20
Jul/20
Aug/20
Nov/19
May/20
Jan/20
Dwarikesh Sugar Industries Sensex
41
Highest recovery rate
The company is enjoys one of the highest recovery rate in the country. In FY20, the company had reported a recovery rate
as high as 12.28%. In SY19-20, the company’s Faridapur unit touched a recovery rate of 12.39%
This is because Dwarikesh was the first one to encourage high yielding sugarcane variety in its catchment area and
currently 100% of its sugarcane is Co-0238 variety.
This has kept the per kg raw material for the company at Rs 28 per kg, lower than the industry peers. A 10 bps increase in
sugar recovery rate means a fall by 0.7% in cost of production.
However, we believe the recovery rate is now saturated and less likely to improve from hereafter.
Recovery rate highest among peers

Company (%) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Dwarikesh Sugar 9.4 9.7 10.5 12.6 20.8 11.7 11.6 11.3 12.3 12.3
Balrampur Chini 9.4 9.5 9.5 9.8 9.8 11.1 10.7 10.8 11.6 12.1
Dhampur Sugar 9.3 9.2 9.4 9.3 9.5 10.5 10.9 11.3 11.5 11.9
Dalmia Bharat* 9.3 9.1 9.9 10.5 10.9 12.1 11.6 11.8 12.2 12.2
Triveni Engg 10 9.1 9.3 9.3 9.6 10.8 11.1 11.4 11.8 12.0
Mawana Sugar 9.1 8.6 9 9.1 9.5 10.7 11.2 11.3 11.5 11.9
Source: Industry, Company, B&K Research
42
4x increase in distillery capacity
From a small distillery unit of 30 KLPD, the company had expanded and recently commissioned, in December 2019, its new
100 KLPD unit at the Dwarikesh Nagar unit. Also, the existing 30 KLPD unit is undergoing some pending authorisation and
maintenance work and will be back in operation from November 2020. Thereafter, the total capacity would increase 4 times
to 130 KLPD or 42 mn litres. Dwarikesh has more than adequate cane crushing capacity for this.
Moreover, the company aims to produce more ethanol from B-Heavy molasses which would increase the average
realisation and thus improving the profitability of the company by massive scale.
We expect the volume of distillery segment to grow to 38 mn litres in FY21E and 42 mn litres in FY22E. The revenue from this
segment is also expected to grow 4x from Rs 560 mn litres in FY20 to Rs 2,026 mn in FY23E.
Revenue from distillery segment to jump in the next two years led by higher distillery volume sale
2.5 45
2.1 40
2.0
2.0 35
1.6
30
1.5
mn litres
25
Rs bn
20
1.0
0.6 0.6 15
0.5
0.5 0.4 0.4 10
5
0.0 0
43
Jump in return ratios
With massive improvement in earnings from the jump in distillery sales, the return ratios of the company are going to
improve significantly. Higher cash generation could be used to repay long-term debts or even further expand its distillery
capacities, since the molasses production is far higher than the requirement of distillery units.
RoE set to increase with increase in EBITDA Cash flow from operations to stabilise going
margins forward
100 4.0
80 3.0
2.0
60
%
1.0
Rs bn
40
0.0
20
(1.0)
0 (2.0)
(3.0)
ROE EBITDA margins
Net Debt-Equity to fall to minimum level Revenue share of non-sugar to remain same
2.6 2.5
84% 88% 91% 87% 86% 86% 85% 85%
0.8
0.6
0.3 0.3
0.2 0.1
Sugar Non Sugar
FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E
Source: Company, B&K Research 44

Company background
Founded in 1993, Dwarikesh Sugar has emerged as one of the most sustainable multi-product sugar companies in India. The
Company has three manufacturing units spread across two regions in Uttar Pradesh. The Dwarikesh Nagar and Dwarikesh
Puram plants are located 52 kilometers apart in Bijnor district, Uttar Pradesh
Dwarikesh Dham plant is located in Bareilly district. The company’s aggregate crushing capacity stands at 21,500 tonnes of
cane per day. Besides, the company possess an installed capacity of 100 kilolitres of ethanol per day and co-generated
capacity of 91 MW (saleable 56 MW). Dwarikesh is known for its highest sugar recovery in the country of above 12.2%.

Crushing capacity (TCD) Distillery capacity (KLPD) Co-Gen Power capacity (MW)
Dwarikesh Nagar – Bijnor 6,500 100 22
Dwarikesh Puram – Bijnor 7,500 33
Dwarikesh Dham – Bareilly 7,500 36
Total 21,500 100 91
45
Valuations
Dwarikesh Sugar Industries Ltd. is one of the most efficient sugar companies with lowest cost of production given more than
12.2% sugar recovery. Higher Distillery sales and higher proportion of B-Heavy ethanol is the game changer in this stock.
We expect the margin to improve significantly over the next two years and generate higher cash flow. The company could
also de-leverage its balance sheet or go for further expansion of distilleries. Considering the significant improving return
ratios and stronger balance sheet we value the stock at 5x FY23E EPS of Rs 11.1
We initiate coverage on the stock with a “Buy” rating with a two year target price of Rs 55.

14 160
12 140
120
10
100
8
80
6
60
4 40
2 20
0 0
Aug/17
Jun/18
Feb/19
Jul/19
Dec/19
Sep/18
Sep/19
Mar/20
Aug/20
Nov/17
Jan/18
May/20
Apr/18
Nov/18
Apr/19
Jun-17
Jun-18
Jun-19
Mar-20
Aug-20
Nov-17
Jan-18
Oct-18
Jan-19
Oct-19
May-20
Jan-20
Mar-17
Aug-17
Mar-18
Aug-18
Mar-19
Aug-19
Trailing Mean +1 std dev -1 std dev Dwarikesh Sugar Industries Sensex
46
Financials – Dwarikesh Sugar Industries

Growth (%) (24.2) 23.2 36.9 9.1
Operating expenses (9,551) (12,001) (15,971) (17,208) Non-current liabilities 1,652 2,184 1,420 1,028
Operating profit 1,291 1,361 2,324 2,753 Long-term borrowings 1,396 1,946 1,168 759
Other non-current liabilities 256 238 252 269

EBITDA 1,291 1,361 2,324 2,753
Growth (%) (9.4) 5.4 70.8 18.4
Depreciation (329) (369) (257) (260) Other current liabilities 2,203 2,574 3,260 3,498
Total (Equity and Liabilities) 13,653 16,095 16,886 17,345

Other income 361 54 91 100
Non-current assets 4,154 5,102 5,216 5,136
EBIT 1,322 1,046 2,159 2,592
Finance cost (213) (330) (333) (291) Non-current Investments 3 3 3 3

Profit before tax 1,110 715 1,826 2,301
Other non-current assets 401 620 620 620
Tax (current + deferred) (158) 19 (338) (426)
Current assets 9,499 10,993 11,670 12,209
Profit / (Loss) for the period 951 734 1,488 1,875 Cash & current investment 13 31 48 197

Reported Profit / (Loss) 951 734 1,488 1,875
Total (Assets) 13,653 16,095 16,886 17,345
Adjusted net profit 951 734 1,488 1,875
Total debt 6,556 8,444 7,047 6,511
Growth (%) (6.2) (22.8) 102.7 26.0 Capital employed 11,451 13,521 13,626 13,847
47
Financials – Dwarikesh Sugar Industries
Profit before tax 1,110 715 1,826 2,301 Adjusted EPS (Rs) 5.1 3.9 7.9 10.0
Growth (6.2) (22.8) 102.7 26.0
Depreciation 329 369 257 260 CEPS (Rs) 6.8 5.9 9.3 11.3
Book NAV/share (Rs) 24.6 25.7 33.6 37.5
Change in working capital (4,236) (866) 40 (135)
Dividend/share (Rs) – 2.0 – 5.0
Total tax paid (186) (186) (338) (426) Dividend payout ratio – 61.9 – 60.5
EBITDA margin 11.9 10.2 12.7 13.8
Others 213 330 333 291
EBIT margin 12.2 7.8 11.8 13.0
Cash flow from operations (a) (2,771) 362 2,118 2,292 Tax rate 14.3 (2.6) 18.5 18.5
RoCE 14.2 8.4 15.9 18.9
Capital expenditure (275) (1,304) (371) (180)
Change in investments (0) (0) – – Net debt/Equity (x) 1.4 1.7 1.1 0.9
Others – (31) – –
Net margin 8.8 5.5 8.1 9.4
Cash flow from investing (b) (275) (1,336) (371) (180) Asset turnover (x) 0.9 0.9 1.1 1.2
Free cash flow (a+b) (3,045) (974) 1,747 2,112 Return on equity 22.9 15.5 26.6 28.0
Debt raised/(repaid) 3,134 1,888 (1,397) (536) Valuations
Period end (x) Mar 19 Mar 20 Mar 21E Mar 22E

Dividend (incl. tax) – (454) – (1,135)
PER 6.1 7.4 3.6 2.9
Others (104) (441) (333) (291)
PCE 4.5 4.9 3.1 2.5
Cash flow from financing (c) 3,029 992 (1,730) (1,962) Price/Book 1.2 1.1 0.9 0.8
Yield (%) 0.0 7.0 0.0 17.4
Net change in cash (a+b+c) (16) 18 17 150 EV/EBITDA 9.6 10.2 5.3 4.3
48
Dhampur Sugar Mills Hold
INITIATING COVERAGE Dhampur Sugar Mills Limited (DSML) is one of India’s largest sugar manufacturing
Share Data companies with an aggregate crushing capacity of 45,500 TCD, distillery and co-
Price (Rs) 140
BSE Sensex 38,220 generation operations of 400 KLPD and 125 MW (saleable) respectively spread
Reuters code DAMS.NS
across five plants in the cane-growing districts of Uttar Pradesh.
Bloomberg code DSM IN
Market cap. (US$ mn) 123.6
The company has expanded its distillery capacities by 100 KLPD to 400 KLPD. With
Issued shares (mn) 66 this the company has now a capacity to produce 135 mn litres per annum.
Performance (%) 1M 3M 12M The management is aiming to divert around 60% cane towards production of
Absolute 2.9 46.0 (7.9)
ethanol from B-Heavy molasses. This would increase the average blended
Relative (2.4) 19.4 (9.2)
realisation of the total volumes sold and improve the profitability of the
Valuation Ratios
Year to 31 Mar FY19 FY20 FY21E company.
EPS (Rs) 38.4 31.8 35.2
+/- (%) 62.3 (17.1) 10.5 By diverting more sugar towards B–Heavy ethanol, the company would be able
PER (x) 3.7 4.4 4.0
PBV (x) 0.8 0.7 0.6 to cut down its excess inventory and thus improving cash from operations. This
Dividend/Yield (%) 2.5 6.4 3.6
could be used to repay its long-term debt which would reduce the interest burden
EV/Sales (x) 0.6 0.4 0.4
EV/EBITDA (x) 3.3 4.0 3.2 on the earnings and thus improving the return ratios of the company.
Promoters 49 Higher sale of sugar from higher allocation of sales quota would commensurate to
FIIs 2 higher revenues for the company. Further, reduction of debt by the company will
MFs 1
Public & Others 48 reduce the interest burden and improve cash flows.
With capex cycle just ended, we expect the company to announce a strong
200 dividend/ buyback policy in FY21. We initiate coverage on the stock with a “Hold”
100
rating with a two year target price of Rs 186 by assigning a multiple of 4x to FY23E
0
EPS of Rs 46.6.
Aug/19
Dec/19
Apr/20
Sep/19
Mar/20
Jul/20
Aug/20
Nov/19
May/20
Jan/20
Dhampur Sugar Mills Sensex
49
Higher Ethanol from B-Heavy to boost profitability
The company has expanded its distillery capacities by 100 KLPD to 400 KLPD. With this the company has now a capacity to
produce 135 mn litres per annum. The management is aiming to divert around 60% cane towards production of ethanol
from B-Heavy molasses. This would increase the average blended realisation of the total volumes sold and improve the
profitability of the company.
For Ethanol supply year 19-20 (December-November) the total requirement by the OMCs were 5.11 bn litres which
commensurate to 10% blending rate. Due to Covid-19 pandemic there was lower offtake of ethanol by OMCs’ in 1QFY21. We
expect the situation to get back to normalcy from 3QFY21 onwards. The OMC’s have floated a new tender for long-term
contract for supply of ethanol. This indicated the long-term visibility in the sector and the Government’s commitment
towards higher blending initiative.
For FY21E, FY22E and FY23E, we expect the company to produce ~97, 112 and 117 mn litres of ethanol, respectively. With higher
proportion from B-Heavy ethanol, the average blended realisation to increase from Rs 49.8 per litre to Rs 52.4 per litre and
sacrifice a sugar quantity of 60-70 mn kg in the process.
We expect the revenues from Distillery segment to grow at a CAGR of 8% for the next three years. Higher earnings from
higher realisation from this segment would directly add to the bottomline.
Revenue from distillery segment set to Higher proportion of B-heavy ethanol in

increase volume sold
8.0 140
7.6
7.0 6.3 120
5.8
6.0 5.5 100
mn litres
5.0 4.5 80
Rs bn
3.8 3.9 60
4.0 3.5
40
3.0
20
2.0
0
1.0
FY20 FY21E FY22E FY23E
0.0
B-Heavy C-Heavy

50
Higher sugar volumes to increase the topline
The company commands a market share of 2.6-2.7% in the country’s supply of sugar. In SY19-20, Maharashtra and Karnataka
had produced almost 40% less sugar due to drought and floods in the states. This had positively impacted the Uttar Pradesh
sugar mills as they are now enjoying higher sales quota under the Government regulated release mechanism.
However, we expect this would increase the volumes and revenue till 1HFY21E, as supply from Maharashtra and Karnataka to
return to normalcy from October 2020 onwards. Having said this, the company had already fulfilled its export quota and
going to divert more sugar towards B-Heavy ethanol which can lead to wining additional sales quota keeping the over
volume sold at higher levels for both FY21E ,FY22E and FY23E.
Dhampur also sells sugar under its own brand name “Dhampure” at a retail price of 42-45 per kg. The management aims to
increase the share of branded sale from current less 1% to at least 5% over the next few years to overcome the commodity
cycle of the sugar to some extent. With rising awareness to branded and hygienic products the company could able to
increase its sugar realisation by Rs 3-4 per kg over the next three-four years. However, we have not considered this in our
estimates as a part of our conservative approach.
Higher revenue from sugar segment Higher volume of sugar sold going forward
35 32.9 1,200
30.7 31.1
30 27.0 26.6 1,000
25
20.3 800
19.2
20
Rs bn
Mn kg
15.6 600
15
400
10
5 200
0 0

51
Strong financials
By diverting more sugar towards B–Heavy ethanol, the company would be able to cut down its excess inventory and thus
improving cash from operations. This could be used to repay its long-term debt which would reduce the interest burden on
the earnings and thus improving the return ratios of the company.
We expect the operating cash flow of the company to generate a total of Rs 7.2 bn over the next two years.
Simultaneously, we expect the net debt-equity to come down to 0.20x levels by FY22E and probably become a zero net
debt company by FY23E.
Cash flow from operations to stabilise going RoE set to increase with increase in EBITDA
forward margins
10.0 40
8.1
8.0
6.4 30
6.0
3.6 3.8 3.9
%
4.0 20
Rs bn
1.6
2.0
10
0.0
(0.5) 0
(2.0)
(1.8) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
(4.0)
ROE EBITDA margin
52
Company background
Dhampur Sugar Mills Limited (DSML) is one of India’s largest sugar manufacturing companies with an aggregate crushing
capacity of 45,500 TCD, distillery and co-generation operations of 400 KLPD and 125 MW (saleable), respectively, spread
across five plants in the cane-growing districts of Uttar Pradesh.
In 2001, the company launched “Dhampure” to sell packaged sugar under its own brand. Dhampur has a capacity to
produce 1,700 MT per day of refined sugar. Dhampur’s refined sugar is also sold in one and five kilogram consumer packs
under the brand ‘”Dhampure Sulphurless Sugar”.

Co-Gen
Crushing Sugar Distillery
Power
capacity refinery capacity
capacity
(TCD) (TPD) (KLPD)
(MW)
Dhampur 15,000 – 250 73
Asmoli 9,000 900 150 44
Rajpura 8,500 – – 48
Mansurpur 8,000 800 – 35
Meerganj 5,000 – – 20
Total 45,500 1,700 400 220
53
Valuation
We expect the distillery segment volume to remain flattish in FY21 due to lower offtake from the OMCs in the 1Q and 2Q of
FY21. However, the blended realisation to improve significantly due to higher proportion of ethanol sale from B-Heavy
molasses and improve the overall margins for FY21E.
We expect the offtake by the OMCs will get back to normalcy by end of 2QFY21 and the earnings delta to accrue from the
higher sale of B-Heavy ethanol. Higher sale of sugar would commensurate to higher revenues for the company.
Further, reduction of debt by the company will reduce the interest burden and improve cash flows. With capex cycle just
ended, we expect the company to announce a strong dividend/ buyback policy in FY21.
We do not like the fact that the company has also commenced selling of country liquor which generally involves high risk
and may led to uncertainty in earnings.
We initiate coverage on the stock with a “Hold” rating with a two years target price of Rs 186 by assigning a multiple of 4x
to FY23E EPS of Rs 46.6 as return ratios are poorer to Balrampur and Dwarikesh. Free cash flows are also lesser.

12 160
140
10
120
8
100
6 80
60
4
40
2 20
0 0
Aug/17
Jun/18
Feb/19
Jul/19
Dec/19
Sep/18
Sep/19
Mar/20
Aug/20
Nov/17
Jan/18
May/20
Apr/18
Nov/18
Apr/19
Jun-17
Jun-18
Jun-19
Mar-20
Aug-20
May-20
Nov-17
Jan-18
Oct-18
Jan-19
Oct-19
Jan-20
Mar-17
Aug-17
Mar-18
Aug-18
Mar-19
Aug-19
Trailing Mean +1 std dev -1 std dev Dhampur Sugar Mills Sensex

54
Financials – Dhampur Sugar Mills

Growth (%) (16.0) 21.8 12.3 3.2
Non-current liabilities 6,198 4,786 3,750 2,712
Operating profit 4,802 3,663 4,135 4,471
Long-term borrowings 5,302 4,296 3,240 2,184
EBITDA 4,802 3,663 4,135 4,471 Other non-current liabilities 896 490 510 527
Growth (%) 32.0 (23.7) 12.9 8.1 Current liabilities 19,644 19,928 19,562 19,237
Depreciation (697) (754) (739) (733) ST borrowings, Curr maturity 12,876 13,227 11,898 11,127

Other income 171 293 287 237
Total (Equity and Liabilities) 38,275 38,430 38,965 39,620
EBIT 4,276 3,202 3,683 3,975
Non-current assets 16,929 17,028 16,541 16,068
Finance cost (905) (1,001) (817) (711)
Exceptional & extraordinary (160) (172) – – Non-current Investments 330 273 273 273
Profit before tax 3,210 2,030 2,867 3,264 Long-term loans and advances 332 514 514 514
Tax (current + deferred) (660) 84 (530) (604) Current assets 21,346 21,402 22,423 23,552
Cash & current investment 97 93 162 767

Profit / (Loss) for the period 2,550 2,114 2,336 2,660
Total (Assets) 38,275 38,430 38,965 39,620
Total debt 18,178 17,523 15,139 13,312
Growth (%) 62.3 (17.1) 10.5 13.9 Capital employed 31,506 31,729 31,301 31,511
55
Financials – Dhampur Sugar Mills
Growth 62.3 (17.1) 10.5 13.9
Depreciation 697 754 739 733 CEPS (Rs) 48.9 43.2 46.3 51.1
Book NAV/share (Rs) 187.3 206.6 235.8 266.2
Change in working capital (5,938) (132) 31 (61)
Dividend/share (Rs) 3.5 9.0 5.0 8.0
Total tax paid (510) (438) (530) (604) Dividend payout ratio 11.0 33.9 17.1 24.1
EBITDA margin 17.4 10.9 11.0 11.5
Others 905 1,001 817 711 EBIT margin 15.5 9.5 9.8 10.2
Tax rate 20.6 (4.1) 18.5 18.5
Cash flow from operations (a) (1,636) 3,215 3,922 4,043
RoCE 15.0 10.1 11.7 12.7
Capital expenditure (801) (728) (252) (260) Total debt/Equity (x) 1.5 1.3 1.0 0.8
Net debt/Equity (x) 1.5 1.3 1.0 0.7
Change in investments (258) 57 – – Du Pont Analysis – RoE
Net margin 9.3 6.3 6.2 6.8
Cash flow from investing (b) (1,059) (671) (252) (260)
Asset turnover (x) 0.8 0.9 1.0 1.0
Free cash flow (a+b) (2,695) 2,544 3,670 3,783 Leverage factor (x) 3.1 2.9 2.6 2.4
Return on equity 22.6 16.2 15.9 16.0
Debt raised/(repaid) 3,711 (656) (2,384) (1,827)
Valuations
Dividend (incl. tax) (280) (717) (400) (640) Period end (x) Mar 19 Mar 20 Mar 21E Mar 22E
PER 6.1 4.4 4.0 3.5

Others (743) (1,175) (817) (711)
PCE 4.8 3.2 3.0 2.7
Yield (%) 1.50 6.4 3.6 5.7
Net change in cash (a+b+c) (7) (4) 69 605
EV/EBITDA 7.0 7.3 5.9 4.9
56
EID Parry Hold
RE-INITIATING COVERAGE EID Parry is a Chennai-based Murrugappa Group Company which is engaged in
Share Data agricultural business since last 170 years. EID Parry is mainly involved in sugar, co-
Price (Rs) 283
BSE Sensex 38,220 generation, distillery, Bio-Pesticides & fertilisers and Nutraceutical. EID is also the
Reuters code EIDP.NS
holding company for Coromandel International Ltd. (CIL) which has strong
Bloomberg code EID IN
Market cap. (US$ mn) 669 presence in fertilisers.
Issued shares (mn) 177 The current valuation of EID Parry implies a heavy discount to the investment in
CIL and almost Nil value to standalone and other business. However, we value CIL
Performance (%) 1M 3M 12M
Absolute 0.3 77.9 85.9 at a Target Price of Rs. 885 in our separate research on CIL. Hence, together with
Relative (4.9) 45.5 83.4
upside potential in CIL and improvement in ex–CIL businesses, the company is
Valuation Ratios
Year to 31 Mar FY19 FY20 FY21E
poised to a significant value accretion.
EPS (Rs) 24.7 50.2 75.7
+/- (%) (15.5) 103.3 50.7 After recovering from the disruption due to drought in Karnataka and Tamil Nadu,
PER (x) 11.7 5.7 3.8 sugar business is also set to return to normalcy in FY21. Expansion in Distillery
PBV (x) 1.6 1.4 1.2
Dividend/Yield (%) 2.1 0.0 0.5 capacity to augur growth in revenues as well as improve the profitability.
EV/Sales (x) 0.6 0.5 0.4
EV/EBITDA (x) 6.1 4.6 3.5 The company is in the process of streamlining its operations and write-off loss
Shareholding Pattern (%) making units. Amount from stake sale in CIL and sale in Pondicherry plant would be
Promoters 45
FIIs 6 utilised in repaying the overall debt in the company which will reduce the interest
MFs 1 burden on the earnings and improve the financials going forward.
BFSI's 2
Public & Others 46
Furthermore, turnaround in Refinery and Nutraceutical businesses will add more
value to the company.
400
200
Considering the series of operational as well as financial developments in the
0 company, we initiate a coverage with a “Hold” rating. We value the company by
SOTP method with a two year target price of Rs 377.
Aug/19
Dec/19
Apr/20
Sep/19
Mar/20
Jul/20
Nov/19
May/20
Aug/20
Jan/20
EID Parry Sensex

57
Sugar volumes to return to normalcy
During FY19-20, the sugar production in the states of Karnataka and Tamil Nadu were severely affected by the widespread
drought. Due to lower crop yield, the sugar production in these two states were lower by almost 40%. For FY20, the recovery
rate of the company fell down to 9.99% as against 10.11% in FY19.
However, from August 2019 onwards, Karnataka and Tamil Nadu has received good amount of rainfall which again revived
the sugarcane plantation. Sugarcane availability is in these two states is expected to increase by 12-15% and return to
normalcy for crushing in SY20-21. We believe with improvement in cane availability the sugar production from the Southern
states is to return back to normalcy.
EID Parry also sells its sugar and Jaggery under its strong brand “Parry’s”. This made the company to reduce its dependence
from the risk of commodity business to some extent and to command a higher realisation of sugar. During FY20, the retail
sale contributed 18% as against 9% in FY19 of the total sugar sale. With better brand building we expect the revenue from
sugar division to grow at a CAGR of 9% over the next three years.
Higher volume of sugar sold Higher revenue from sugar segment

800 20
744
18
700
16
600
14
478 484
500 436 12
410
Rs bn
385 404
mn kg
373 10
400
8
300
6
200
4
100 2
0 0
58
Distillery expansion to stir up the earnings
EID Parry is expanding its distillery capacity to further capitalise the opportunity from higher ethanol blending mandate by
the Govt. The company is setting up a 60/90 KLPD greenfield molasses based distillery capacity with production volume of
60 KLPD ENA from C – Molasses, 90 KLPD Ethanol from B-Heavy molasses/sugar cane syrup at Bagalkot, Karnataka. The unit is
expected to commence operation from 4QFY21. Besides this, the Sankili unit has started the installation process of a modern
incineration boiler which will help to increase the number of operating days of the distillery by 70 days per year, besides
being environment friendly. The boiler is expected to be commissioned in the current financial year.
This initiative would hugely benefit the company in terms of higher volumes and higher realisation from B-Heavy ethanol.
We expect the volumes from distillery segment to grow to 94 mn litres by FY23 which would also improve the margins going
forward.
Revenue from distillery segment to jump in the next two years led by higher distillery volume sale
6.0 100
5.4 95
90 85
4.8
5.0
80
68 68 66 68
3.9 70 65
4.0 3.6 61
3.2 3.2 60
mn litres
3.1
Rs bn
2.9
3.0 50
40
2.0
30
20
1.0
10
0.0 0
59
Relocation of assets bodes well
Moreover, the Cane area in Tamil Nadu has seen considerable decline during the last few years caused by deficit rain and
farmers shifting to other competing crops. This has adversely affected the company’s Tamil Nadu operations, where most of
its plant capacity continued to remain idle. The company is in the process of shifting its Pudukkottai plant (4,500 TCD) in
Tamil Nadu to Bagalkot in Karnataka where the consistency of cane availability is far better than Tamil Nadu.
The transfer is expected to get completed in 2021 and commence operation from October 2021. Another idle plant in
Pondicherry (2,000 TCD), the company is in the process of selling it off including land to prospective buyer. This transaction
could fetch the company more than Rs 3 bn which could be used in reduction of debt.
60
Debt reduction to improve financials
EID recently sold 5.85 mn shares of its subsidiary Coromandel International Ltd. and raised Rs 3.68 bn, which has been utilised
to reduce long-term debt. It will also receive Rs 2.1 bn dividend from CIL (Rs 12 per share announced in May 2020), which will
also help EID in de-leveraging its balance sheet. Together with amount received from the sale of its Pondicherry plant, there
could be a Rs 6-7 bn significant reduction in debt in both standalone as well as in its refinery business.
During 1QFY21, the company has reduced its standalone debt by Rs 3 bn to Rs 7 bn. Reduction of overall debt and
improvement in cash flows will be a key monitorable for this company going forward.
We estimate the interest cost to reduce by Rs 300-350 mn in FY21 total D/E to fall from 1.0x to 0.5x in FY23.
Standalone and Refinery debt to reduce going forward leading to fall in consolidated D/E ratio
25 2.0
20
1.5
15
Rs bn
1.0
10
0.5
5
0 0.0
Standlaone Debt Refinery Debt Consol D/E Ratio
61
Turnaround in refinery business
Parry Sugars Refinery India Pvt. Ltd. (PSRIPL) is a wholly owned subsidiary of EID Parry India Ltd. engaged in the business of
exporting refined sugar. The company was earlier struggling on the inventory side and lack of gas availability. However, it
has now streamlined its operations and installed a 35 MW coal-based power plant.
During SY19-20, global sugar market turned from a surplus to deficit due to lower sugar production in key producing nations
such as Brazil, India and Thailand. Consequently, the white premiums and refining spreads improved significantly to US$ 50-
55 per tonne in SY19-20.
For SY20-21, due to steep fall in oil prices and depreciation of Brazilian Real, Brazilian mills are expected to maximise their
sugar production in 2020-21.This coupled with a surplus production for India, is expected to move the global sugar market to
a small surplus in 2020-21. However, continuing dry weather in Thailand is helping to keep refined sugar supply tight with
higher spreads for refining. The refinery business is expected to earn a spread of US$ 40-45 per tonne in FY21. Further, debt
reduction to reduce the burden of interest cost and improve the earnings as well cash flow. With well hedged spreads we
believe it is better positioned than earlier to grow its sales and break-even in FY21.
Revenue from refinery business to increase gradually with high volumes leading to stable margins
35 20
Revenue
30 15
25
10
%
20
Rs bn
5
15
0
10
5 (5)
FY17 FY18 FY19 FY20 FY21E FY22E FY23E
0
GP Margin (%) EBITDA margin (%)
FY18 FY19 FY20 FY21E FY22E FY23E
62
Company background
EID Parry is a Chennai-based Murrugappa Group company which is engaged in agricultural business since last 170 years. EID
Parry is mainly involved in sugar, co-generation, distillery, Bio-Pesticides & fertilisers and Nutraceutical. EID is also the holding
company for Coromandel International Ltd. which has strong presence in fertilisers. EID has total 8 sugar factories which are
spread across southern states of Tamil Nadu, Andhra Pradesh and Karnataka. Out of the total domestic sale of sugar, almost
60% is from Institutions such as pharmaceuticals, confectioners, dairy and beverages, etc.
The company also has a refining business operating through its wholly owned subsidiary Parry Sugars Refinery India Pvt. Ltd.
(PSRIPL) located in Kakinada SEZ, Andhra Pradesh in close proximity to the port.
EID Parry also sells its product in retail under the strong brand name of “Parry’s”. In 2019, Parrys Sugar, won the prestigious
Economic Times – ‘Best Brands’ Award – the only sugar manufacturer to receive this recognition in the industry.
Under the Nutraceutical business, the company had recently launched a series of products which is in the process of
accruing fruitful benefits.

Crushing Distillery Co-Gen Power
capacity capacity saleable
(TCD) (KLPD) capacity (MW)
AP-Sankillo 5,000 45 16.0
KN-Haliyal 7,500 50 31.0
KN-Bagalkot 6,000 – 15.5
KN-Ramdurg 5,000 0 13.0
TN- Nellikuppam 7,500 75 24.5
TN-Pugalur 4,800 – 22.0
TN-Pudukottai 4,500 – 18.0
TN-Pettavaithalai 3,500 – 20.0
TN-Sivaganga – 64 –
Total 43,800 234 160.0
63
Valuation
Post the stake sale, the company currently holds 58.48% SOTP valuation
stake in Coromandel International Ltd. (CIL) valued at Rs 137 A. Standalone business
bn at the current market price of Rs 799. The current EV/EBITDA multiple (x) 3.0
valuation of EID Parry implies a heavy discount to the
FY23E EBITDA (Rs mn) 3,021
investment in CIL and almost Nil value to standalone and
Target EV (Rs mn) 9,063
other business. However, we value CIL at a target price of
Rs 885 in our separate research on CIL. Hence, together with B. 58.48% stake in Coromandel at TP Rs 885 (Rs mn) 151,618
upside potential in CIL and improvement in ex-CIL Holding Company Discount (%) 60
businesses, the company is poised to a significant value Final value (Rs mn)
60,647
accretion.
C. Parry Sugar Refinery Pvt. Ltd. (Rs mn)
Moreover, the EID Parry also has a Nutraceuticals business, 2,919
the market of which is growing at a CAGR of 7.3% due to (0.5x of investment value)
rising awareness about health and wellness and increasing D. US Nutraceuticals LLC (Rs mn)
409
purchasing power. This business is still at a nascent stage
(0.5x of investment value)
and the current share is only 1.2% in the consolidated
E. Other subsidiary
revenue of EID Parry. We believe the Nutraceutical business
is still in the process of streamlining its operations, growing Standalone debt (Rs mn) 6,443
distribution channels and to contribute a meaningful Target market cap (Rs mn) 6,6771
earning share in the next three-four years. No. of shares (mn) 177
We value EID Parry on a SOTP basis with 1) Standalone Target value per share (Rs)
377
business, 2) Refinery subsidiary, 3) CIL and 4) US
Nutraceutical subsidiary; at a two year target price of Rs
377 per share and with a “Hold” recommendation.
64
15
0
5
10
20
25
30
Mar-17
Jun-17
Aug-17
Trailing PE
Nov-17
Trailing

Jan-18
Valuation
Mar-18
Jun-18
Aug-18
Mean
Oct-18
Jan-19
Mar-19
Jun-19
+1 std dev
Aug-19
Oct-19
Jan-20
Mar-20
-1 std dev
May-20
Aug-20
80
0
100
160
20
40
60
120
140
Aug/17
Nov/17
Jan/18
Apr/18
Jun/18
Sep/18
EID Parry
Nov/18
Feb/19
Apr/19
Relative performance – 3 years
Jul/19
Sep/19
Sensex
Dec/19
Mar/20
May/20
Aug/20
65
Financials – EID Parry

Growth (%) 7.7 3.5 12.3 11.8
Minority interest and others 13,246 17,068 22,283 28,255
Operating profit 15,951 19,991 23,760 26,600 Non-current liabilities 6,247 12,077 7,503 5,956
EBITDA 15,951 19,991 23,760 26,600 Long-term borrowings 4,521 10,295 6,462 4,911
Other non-current liabilities 1,727 1,782 1,041 1,046

Growth (%) 16.5 25.3 18.9 12.0
Depreciation (2,723) (3,190) (3,239) (3,400)
Other income (377) 189 1,333 1,363
EBIT 12,851 16,991 21,854 24,563 Total (Equity and Liabilities) 159,896 150,240 162,586 175,804
Finance cost (4,245) (4,305) (3,993) (3,455) Non-current assets 39,865 45,762 44,005 45,686

Exceptional & extraordinary (239) – – –
Non-current Investments 3,932 3,954 2,791 3,291
Profit before tax 8,367 12,686 17,861 21,108
Tax (current + deferred) (3,993) (3,774) (4,464) (5,151) Other non-current assets 3,265 2,612 4,882 5,224
Profit / (Loss) for the period 4,374 8,912 13,397 15,957 Current assets 120,031 104,478 118,581 130,118
P/L of Associates, Min Int, Pref Div (2,844) (4,233) (5,215) (5,972) Cash & current investment 3,059 1,562 3,655 3,112

Total (Assets) 159,896 150,240 162,586 175,804
Total debt 48,846 42,143 36,389 34,868
Growth (%) (40.2) 205.8 74.9 22.0 Capital employed 95,098 96,188 102,245 111,963
66
Financials – EID Parry
Growth (40.2) 205.8 74.9 22.0
Depreciation 2,723 3,190 3,239 3,400 CEPS (Rs) 24.0 44.5 64.5 75.6
Book NAV/share (Rs) 176.7 198.8 240.3 270.0
Change in working capital (14,341) 3,390 (5,295) (8,576)
Dividend/share (Rs) 6.0 – 1.5 2.0
Total tax paid (3,888) (3,742) (5,551) (5,151) Dividend payout ratio 69.4 – 3.9 4.3
EBITDA margin 9.6 11.7 12.4 12.4
Others 4,245 4,305 3,993 3,455
EBIT margin 7.8 9.9 11.4 11.4
Cash flow from operations (a) (2,893) 19,828 14,248 14,236 Tax rate 47.7 29.7 25.0 24.4
RoCE 14.3 17.8 22.0 22.9
Capital expenditure (3,015) (9,758) (374) (4,240)
Change in investments 124 45 1,291 (500) Net debt/Equity (x) 1.0 0.8 0.5 0.4
Others (168) 707 (2,503) (341)
Net margin 0.9 2.7 4.3 4.6
Cash flow from investing (b) (3,059) (9,006) (1,586) (5,081) Asset turnover (x) 1.1 1.1 1.2 1.3
Free cash flow (a+b) (5,952) 10,822 12,662 9,155 Return on equity 5.0 14.1 21.1 22.1
Debt raised/(repaid) 8,603 (6,703) (5,754) (1,522) Valuations
Dividend (incl. tax) (1,062) – (321) (428) Period end (x) Mar 19 Mar 20 Mar 21E Mar 22E
PER 23.7 10.7 6.1 5.0

Others (5,412) (5,550) (4,366) (7,748)
PCE 8.5 6.4 4.4 3.7
Yield (%) 2.93 0.0 0.5 0.7
Net change in cash (a+b+c) (3,824) (1,431) 2,221 (543)
EV/EBITDA 5.1 4.5 3.5 3.1
67
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Sugar Sector & Initiating Coverage Apr'20

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Sugar Sector & Initiating Coverage Apr'20

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SECTOR UPDATE

Rajesh Majumdar Anupam Goswami

Sugar Industry of Strategic importance 4

Domestic Sugar Industry and its concerns 5

Global Sugar Industry 25

Fuel Blending programme in Brazil 27

Balrampur Chini Mills 32

Dwarikesh Sugar Industries 41

Dhampur Sugar Mills 49

Sugar is a sector of significant importance to the national Historical cyclicality of industry

India has now become the world’s largest sugar producer

Indian Sugar production has historically been cyclical in

liquidating excess stocks and lifting market prices for Sugar

Of the total sugar sold in the free market, an estimated 61%

2019 with 14.5 MT of opening stock. 30

Production Consumption* Closing Inventory

Source: ISMA, B&K Research. SY: Sugar Year: October-September,

Domestic Sugar Balance Sheet

Opening balance 7.8 3.9 10.7 14.5 11.0

Sugar production 20.7 32.6 33.3 27.0 31.5

Sugar availability 28.5 36.5 44.0 41.5 42.5

Domestic consumption 24.5 25.4 26.0 25.5 26.5

Exports 0.0 0.5 3.5 5.0 5.5

Total offtake 24.6 25.9 29.5 30.5 32.0

Closing stock 3.9 10.7 14.5 11.0 10.5

Closing stock % of offtake 16 41 49 36 33

120 112.7 111.9

Source: RBI, B&K Research Source: PPAC, B&K Research

millers are mandated to lift all the harvest at Government

We expect a upward revision in FRP and SAP given the

• Sturdy Crop: Can withstand weather fluctuations better than others.

Co-0238 variety adoption has resulted in increase in recovery % in Uttar Pradesh

2009-10 10.2 9.1 11.5 10.7

2010-11 10.2 9.1 11.3 10.9

2011-12 10.3 9.1 11.7 11.1

2012-13 10 9.2 11.4 10.4

2013-14 10.2 9.3 11.4 11

2014-15 10.4 9.5 11.3 11.1

2015-16 10.6 10.6 11.3 10.7

2016-17 10.4 10.6 11.3 10.2

2017-18 10.7 10.8 11.2 10.6

2018-19 10.9 11.5 11.3 10.6

Source: ISMA, B&K Research

Cane cost as a % of sugar realisation has

Cane Price (per tonne) Sugar Realisation (per Qtl)

Source: ISMA, B&K Research

 As a result of surplus production, sugar realisation 35 36.88 32.2

under the market forces fell to a level where 30

production of sugar meant loss for the millers. 25

even in the periods of surplus production. It also

 The Government is further recommending Rs 2

 However, we have not taken this in our estimates

2. Bio Fuel Policy

payments. 2016-17 280.0 80.7 66.5 2.1

2017-18 313.0 161.0 150.5 4.2

that if MSP of sugar hiked the procurement prices of

Dynamics of ethanol produced from C-Heavy, B-Heavy and Cane juice

Sugarcane farming Sold to market

Sugar Cane Juice

Distillery operation Distillery operation Distillery operation

C-Grade Ethanol B- Grade Ethanol A-Grade Ethanol

Source: Industry, B&K Research

We expect by the end SY19-20, total export of sugar could reach