08 October 2018

SECTOR UPDATE
INDIA SUGAR

A NEW SAVIOUR FOR

THE SUGAR INDUSTRY?

Sugar companies to report

profit thanks to govt measures

Supply overhang to continue

Ethanol - Positive but unlikely

to change sugar cyclicality
08 October 2018

SECTOR UPDATE
INDIA SUGAR

T A BL E O F C O N T EN T S

INDIA SUGAR
Achal Lohade
03 Introduction [email protected]
Tel: (91 22) 66303081
05 Key charts
Manish Agrawal
MAIN THEMES [email protected]
Tel: (91 22) 66303068
08 SS19 - Another bumper production year
Shrenik Bachhawat
14 Sugar prices and government measures [email protected]
Tel: (91 22) 663030674
18 Ethanol – a new saviour for the sugar industry?

20 Constraints faced in the Ethanol Blending Program (EBP) in the past

24 Can Ethanol change sector dynamics?

COMPANIES
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26 Balrampur Chini – HOLD
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EID Parry - BUY
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33 Sugar companies - Profiles (Not Rated)
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end of this report for Important
ANNEXURE Disclosures and Disclaimers and
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O THER
REPO RT S

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DURABLES

JM Financial Institutional Securities Limited Page 2

08 October 2018

SECTOR UPDATE
INDIA SUGAR

Ethanol - A great step but cyclicality remains

India is at the cusp of another bumper sugar production phase recording, 32-33mnt (vs. consumption of 25-26mnt) in
the coming season (Oct’18-Sep’19); this would be led by Uttar Pradesh (UP; higher acreage and yields), but partially
offset by Maharashtra (lower yield). Despite record cane arrears, we believe farmers should continue to plant sugarcane
crops given robust profitability (vs. alternatives) and assured offtake/cash flows.

The government continues to provide support to the industry through various measures including regulating the
minimum selling price (MSP) of sugar, soft loans, export subsidies, cane price assistance, higher ethanol pricing and
blending mandates. However, we believe ethanol is unlikely to break the cyclicality of the sugar sector given its limited
impact on sugar production. We maintain our cautious stance on the sector given the supply overhang and maintain
HOLD on Balrampur Chini and BUY on EID Parry (on acccount of the value of its stake in Coromandel). Key risks to our
call - a) a significantly high MSP for sugar and b) another year of drought in Maharashtra/Karnataka.

Higher ethanol blending ratio can reduce sugar Structural excess supply scenario make demand-
production by 2-3mnt at best: supply scenario worrisome:

In order to reduce cane arrears and achieve bio-fuel targets, After posting record sugar production of 32.2mnt in SS18
the government has stepped up on ethanol procurement (+60% YoY; last peak of 28.3mnt in SS15), India is
through a) higher ethanol pricing (INR 43.7/litre vs INR 40.8/ expected to produce another similar quantum (32-33mnt)
litre earlier) and b) authorising the use of B Heavy molasses as in SS19, led by a) higher acreage and yield in UP (growing
well as sugarcane for ethanol production and accorded priority adoption of new ‘early variety’ sugarcane) and b) higher
in procurement. While the B Heavy molasses and direct acreage in MH and Karnataka (good monsoon in 2017),
sugarcane juice route are viable at current sugar/ethanol offset by lower yields due to pest attacks/drought in key
prices, we believe the impact on sugar production can be at pockets of production. Even after assuming 5mnt of
best 1mnt in 2018-19 and probably 2-3mnt over the medium exports, India is likely to end with closing stock of c.12mnt
term considering capacity constraints, geographical spread and in Sep’19, almost 6-7 months’ consumption). Moreover,
industry dynamics (fragmented industry, competing demand considering the nature of the crop (long duration and
from industrial/potable alcohol, historical unsteady EBP sturdy, assured cash flows, adoption of the early variety of
implementation, etc.). sugarcane) and robust profitability, we believe India should
mostly have an excess supply scenario, except in case of
Exports are the only solution: severe drought or pest attacks.

While the government appreciates this situation, inadequate

planning/low global sugar prices have resulted in minuscule
exports in the past, significantly lower than initial expectations. Industry back to the old age - ‘Full Regulation’:
India faces constraints in large-scale exports as a) there is
limited demand for its quality of white sugar, b) global sugar While India moved from full control to partial control in
prices are at almost 10-year lows leaving a significant gap 2014, recent measures such as reverse stock limits (i.e.
between domestic prices and net export realisations, and c) a monthly release) – coupled with the MSP of sugar – have
delayed announcement of export incentives has led to taken the sugar industry back to medieval times.
negligible production of raw sugar (easy to export). The
industry is pushing for a high MSP for sugar (INR 34-36/kg) We believe strict control over supplies would continue
while mandating 4-6mnt exports, without any explicit subsidy until inventory levels fall to manageable levels.
from the government. We do not rule out such a scenario
playing out, given the significant amount of inventory (which
can result in massive cane arrears/protests).

JM Financial Institutional Securities Limited Page 3

08 October 2018

SECTOR UPDATE
INDIA SUGAR

Ethanol - A great step but cyclicality remains

Rationality emerging on cane pricing; a positive, but Where do we go from here?

may change:
We believe sector fundamentals continue to remain weak on a
Compared with the earlier regulatory regime, we find that significant supply overhang (which may take at least 2 years to
states appear to be more rational in cane pricing (e.g. the overcome) and hence sugar prices are fundamentally expected
Tamil Nadu – TN – government is also showing a willingness to remain weak, if a free market scenario considered.
for cane price linkages; Maharashtra and Karnataka have
linkage mechanisms). However, the true linkage is still not However, given that the government is expected to regulate
working effectively as mills are supposed to pay a Fair and supplies and the MSP for sugar/sugarcane prices, we expect
Remunerative Price (FRP) as the minimum price, even sugar prices to remain firm and argue that the profitability of
though the price payable based on the linkage formula sugar mills is now entirely in the hands of the government.
would be substantially lesser.

Maintain HOLD on Balrampur Chini: Maintain BUY on EID Parry as it is a diversified play:

While we consider Balrampur Chini (BCML) as one of the We like EID Parry (EID) on its geographical advantage (located
best names in the sugar industry, we continue to remain in TN, Karnataka and Andhra Pradesh – AP), resulting in lower
slightly cautious on the stock given: cane costs and the ability to exploit export/import
opportunities.
a) supply overhang in near term,
b) modest possibility of a SAP increase, and We value EID on an SOTP basis: a) sugar and allied business at
c) excessive dependence on government measures for EV/replacement multiple of 0.5x, b) stake in Coromandel
profitability (MSP on sugar, cane price assistance, export/ International at a 40% discount to arrive at our base TP and c)
buffer stock incentives, ethanol prices, etc.). other subsidiaries at a 0-20% discount to the book value.. We
maintain BUY with a Sep’19 TP of INR 230. We estimate EID
We value BCML at 0.5x EV/replacement to arrive at a Sep’19 share price currently EID assigns 73% discount to value of its
TP of INR 90 and maintain HOLD. We await a better price holding in Coromandel International (CRIN), highest discount
point for entry. in past 5 years.

What can make us more positive on the sector?

a) Lower-than-expected sugar production and higher MSP for

sugar,
b) higher-than-expected exports from India (INR depreciation/
better global sugar prices),
c) cane price incentives by the Centre and state governments,
d) formal linkage of sugarcane price to revenue, and
e) a hike in the blending ratio (from 5% currently) and
therefore a diversion of sugar for ethanol production.

JM Financial Institutional Securities Limited Page 4

Sugar Sector 8 October 2018

Key charts
Exhibit 1. Alcohol Consumption mix and Ethanol Blending (%)
mn ltr other Use Fuel Ethanol Potable Use
Industrial Use Total alcohol Production EBP (%) RHS
3,000 2,850 5.0%
2,700 2,700 2,700
2,500 4.0%
2,500 2,300 2,300
2,175

1,000
3.0%

1180
1004
710
2,000

1300
500
1,680 2.0%
1,580

1000
793
1,500 1.0%
613

1,000
576

1,000

1,000
0.0%

1000
1000
1,000
718

700
800
-1.0%
554
521

500
750

-2.0%
700

700

600

600
587

588
454
427

400
- -3.0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: JM Financial, Industry

Exhibit 2. B Molasses and Direct route are viable at current sugar/ethanol prices
Conventional
Unit B Molasses Direct route
C Molasses

cane crushed tonnes 100 100 100

Sugar recovery rate % 10.37 8.82 -

Molasses recovery rate % 4.50 6.58 75 litres per

Ethanol recovery (per tonne of molasses) Litres 240 295 tonne of cane

Volume

Sugar Tonnes 10.37 8.82 -

Ethanol Litrs 1,080 1,941 7,500

Realisation

Sugar INR/Kg 29.0 29.0 -

Ethanol INR/ltr 43.2 52.0 59.0

Profit INR -12,013 2,701 81,344

Incremental profit over C molasses route INR 14,714 93,357

Source: JM Financial

Exhibit 3. Significant capacity additions required for EBP to pick up

Units C' Molasses B' Molasses Route Direct Route
100% 100% 50% 30% 100% 50% 30%
Sugarcane crushed mnt 325 325 325 325 325 325 325
Sugar Production mnt 33.7 28.7 31.2 32.2 - 16.9 23.6
Impact on sugar production mnt -5.0 -2.5 -1.5 -33.7 -16.9 -10.1
Total Alcohol Produced mn ltres 2,700 6,309 4,800 4,196 24,375 13,833 9,616
Industrial purpose mn ltr 600 600 600 600 600 600 600
Potable purpose mn ltr 700 700 700 700 700 700 700
Surplus for ethanol mn ltr 1,400 5,009 3,500 2,896 23,075 12,533 8,316
Ethanol requirement at 5% mn ltres 3,240 3,240 3,240 3,240 3,240 3,240 3,240
Ethanol requirement at 10% mn ltres 6,480 6,480 6,480 6,480 6,480 6,480 6,480
Surplus/(Deficit)
For 5% blending mn ltres -1,840 1,769 260 -344 19,835 9,293 5,076
For 10% blending mn ltres -5,080 -1,471 -2,980 -3,584 16,595 6,053 1,836
Capacity required for Production KLPD 9,000 19,117 14,544 12,715 73,864 41,918 29,139
Incremental capacity required KLPD 10,117 5,544 3,715 64,864 32,918 20,139
New Capex Required INR bn 121 67 45 778 395 242
Source: Industry, JM Financial

JM Financial Institutional Securities Limited Page 5

Sugar Sector 8 October 2018

Exhibit 4. India to have another surplus year Exhibit 5. UP establishes itself as largest producing state
mnt Mah UP TN Kar Others mnt
mnt mnt
Consumption Production Surplus/(Deficit) 35.0
35.0 8.5 10.0
6.8 6.4
4.5 3.7 30.0 5.2 5.5
3.2 5.0
2.4 2.3 0.3
30.0 0.2 4.6
25.0 5.6 3.7 3.5
-2.4 0.0 4.9 4.1
3.9 4.3 4.4 0.6 0.9
-4.2 2.7 4.6 4.9
-8.4
25.0 20.0 2.9 3.9
-5.0 2.5 3.7 3.5 4.0
2.1 2.8 4.2 1.2 4.0
2.4 1.9
1.8 1.4 2.1
-10.015.0 2.6 1.4 7.1 1.1
12.1 13.1
20.0 8.5 7.3 2.6 1.3
5.9 7.0 7.5 6.8
1.7 6.5
-15.010.0 1.6 5.2
8.8
15.0 4.1
-20.0 5.0 9.1 9.1 9.1 10.5 10.7 9.4
9.0 8.0 8.4
28.4

26.4

14.5

18.9

24.4

26.3

25.1

24.4

28.3

25.1

20.3

32.3

32.4
7.1 7.7
22.8

24.2
19.9

21.9

22.9

21.3

22.0

22.6

25.1

24.9

24.5

25.5

26.0
4.6 4.2
10.0 SS14 -25.0 0.0
SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS15

SS16

SS17

SS18

SS19E

SS19E
SS08

SS10

SS12

SS13

SS14

SS15

SS16

SS17
SS07

SS09

SS11

SS18
Source: ISMA, JM Financial Source: ISMA, JM Financial

Exhibit 6. Domestic sugar prices- Long-term Exhibit 7. Domestic sugar prices- Short-term
INR/kg Mumbai M-30 White sugar FOB INR/kg Mumbai M-30 White sugar FOB
42 42
40 40
38 38
36 36
34 34
32 32
30 30
28 28
26 26
24 24
22 22
20 20
Aug-14
Aug-09

May-13

May-18
Dec-12

Dec-17
Nov-10

Nov-15

Dec-14

Jun-15

Dec-15

Jun-16

Dec-16

Jun-17

Dec-17

Jun-18
Jan-10
Jun-10

Jul-12

Oct-13
Mar-14

Jan-15

Oct-18
Jun-15

Jul-17

Oct-15

Aug-16
Aug-14
Oct-14

Oct-16

Apr-17

Oct-18
Apr-11

Feb-12

Feb-15

Aug-15
Sep-11

Apr-15

Feb-16
Apr-16

Feb-17

Aug-17
Oct-17

Feb-18

Aug-18
Apr-16

Feb-17
Sep-16

Apr-18
Source: Bloomberg, JM Financial Source: Bloomberg,, JM Financial

Exhibit 8. Global sugar prices- Long-term Exhibit 9. Global sugar prices-Short term
USD/t Raw Sugar White Sugar USD/t Raw Sugar White Sugar
900 900

800 800

700 700

600 600

500 500

400 400

300 300

200 200

100 100
Feb-10

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18
Aug-09

Aug-10

Aug-11

Aug-13

Aug-14

Aug-15

Aug-16

Aug-18

Feb-15
May-15

Feb-16

May-16

Feb-17
May-17

Feb-18
Aug-12

Aug-17

Aug-14

Aug-15

Nov-15

Aug-16

Aug-17

Nov-17

May-18

Aug-18

Nov-18
Nov-14

Nov-16

Source:Bloomberg, JM Financial Source: Bloomberg, JM Financial

JM Financial Institutional Securities Limited Page 6

 x
x

0.7
0.9
1.1
1.3
1.5

0.5
1.7
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Oct-12 Oct-12
Jan-13 Jan-13
Apr-13
Sugar Sector

Apr-13
Jul-13 Jul-13
Oct-13 Oct-13
Jan-14 Jan-14
Apr-14

Source: Bloomberg, JM Financial

Source: Bloomberg, JM Financial
Apr-14
Jul-14 Jul-14
Oct-14 Oct-14
Jan-15 Jan-15
Apr-15 Apr-15
Jul-15 Jul-15
Oct-15 Oct-15
Jan-16

JM Financial Institutional Securities Limited

Jan-16

EV/Replacement
EV/Replacement

Apr-16 Apr-16
Jul-16 Jul-16
Oct-16 Oct-16
Jan-17 Jan-17
Apr-17 Exhibit 12. 1-year forward EV/replacement band - EID Apr-17
Jul-17 Jul-17
Exhibit 10. 1-year forward EV/replacement band - BRCM

Oct-17 Oct-17
Jan-18 Jan-18
Apr-18 Apr-18
Jul-18 Jul-18
Oct-18 Oct-18
x
x

0.0
0.5
1.0
1.5
2.0
2.5
0.5
1.1
1.3
1.5
1.7
1.9
2.5

0.7
0.9
2.1
2.3

Oct-12 Oct-12
Jan-13 Jan-13
Apr-13 Apr-13
Jul-13 Jul-13
Oct-13 Oct-13
Jan-14 Jan-14
Source: Bloomberg, JM Financial Apr-14
Source: Bloomberg, JM Financial

Apr-14
Jul-14 Jul-14
Oct-14 Oct-14
Jan-15 Jan-15
Apr-15 Apr-15
Jul-15 Jul-15
Oct-15 Oct-15

Jan-16 Jan-16
Exhibit 13. 1-year forward P/BV band - EID

Apr-16 Apr-16

Jul-16 Jul-16
1 Year forward Price to Book
Exhibit 11. 1-year forward P/BV band - BRCM

1-Yr forward Price to book chart

Oct-16 Oct-16

Jan-17 Jan-17

Apr-17 Apr-17

Jul-17 Jul-17

Oct-17 Oct-17

Jan-18 Jan-18

Apr-18 Apr-18

Jul-18 Jul-18

Oct-18 Oct-18
8 October 2018

Page 7
Sugar Sector 8 October 2018

SS19 - Another bumper production year

 Highest ever sugar production of 32.3mnt in SS18: India is estimated to have produced
c.32.2mnt of sugar, up 60% YoY, led by Maharashtra (+153% YoY to 10.7mnt), Uttar
Pradesh – UP (+37% to 12.05mnt) and Karnataka (+70% to 3.65mnt). The sharp increase
was driven by:

 Higher area under sugarcane (+15% YoY to 5.02mn hectares), led by UP (+8%
to 2.21mn ha) while Maharashtra witnessed a 45% increase (robust monsoon in
2016/2017).

 Robust monsoons, coupled with excellent climatic conditions, which resulted in

highest ever yields in Maharashtra (+35% YoY to 108t/ha), Karnataka (+40% to
93t/ha) and UP (+19% YoY - partly on account of a varietal mix). The all-India
yield jumped 19% YoY to 83t/ha, the highest ever recorded in the country.

 As a result, sugarcane production is estimated at 420mnt, up 36% YoY. Sugar

production – consequently – is estimated at 32.2mnt, up 60% YoY.

Exhibit 14. India to have another surplus year Exhibit 15. UP establishes itself as largest producing state
mnt Mah UP TN Kar Others mnt
mnt mnt
Consumption Production Surplus/(Deficit) 35.0
35.0 8.5 10.0
6.8 6.4
4.5 3.7 30.0 5.2 5.5
3.2 5.0
2.4 2.3 0.3
30.0 0.2 4.6
25.0 5.6 3.7 3.5
-2.4 0.0 4.9 4.1
3.9 4.3 4.4 0.6 0.9
-4.2 2.7 4.6 4.9
-8.4
25.0 20.0 2.9 3.9
-5.0 2.5 3.7 3.5 4.0
2.1 2.8 4.2 1.2 4.0
2.4 1.9
1.8 1.4 2.1
-10.015.0 2.6 1.4 7.1 1.1
12.1 13.1
20.0 8.5 7.3 2.6 1.3
5.9 7.0 7.5 6.8
1.7 6.5
-15.010.0 1.6 5.2
8.8
15.0 4.1
-20.0 5.0 9.1 9.1 9.1 10.5 10.7 9.4
9.0 8.0 8.4
28.4

26.4

14.5

18.9

24.4

26.3

25.1

24.4

28.3

25.1

20.3

32.3

32.4

7.1 7.7
22.8

24.2
19.9

21.9

22.9

21.3

22.0

22.6

25.1

24.9

24.5

25.5

26.0

4.6 4.2
10.0 -25.0 0.0
SS14
SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS15

SS16

SS17

SS18

SS19E

SS19E
SS08

SS10

SS12

SS13

SS14

SS15

SS16

SS17
SS07

SS09

SS11

SS18
Source: ISMA, JM Financial Source: ISMA, JM Financial

Exhibit 16. Area Exhibit 17. Yield

mn ha Mah UP TN Kar Others Total (RHS) mn ha Tonnes/ha Mah UP TN Kar Others Average (RHS) Tonnes/ha

6.0 5.5 6.0 450.0 81.2 81.9 80.1 81.1 82.0 89.0
5.2 78.4 78.9 79.7 77.7
5.1 5.0 5.0 5.0 5.1 4.9 5.0 76.3 76.1
4.9 73.0 73.3
400.0 79.0
5.0 4.4 4.4 5.0 63.2
4.2 62.6 62.5 64.1 63.1 70.6
1.2 64.3 63.0 61.8
1.1 350.0 60.8 64.3 69.0
1.1 1.1 1.1 1.1 1.1 1.2 1.1 1.2 68.1 69.2
4.0
4.0 1.0 1.0 0.5 300.0 90.3 93.8 90.3 90.3 91.2 93.2 59.0
0.3 0.3 0.8 0.4 0.4 87.9 85.8 83.0 84.1
0.4 0.4 0.5 0.5 0.4 0.2 84.1
0.4 0.4 3.0 66.5 79.2
0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.2 250.0 49.0
0.3 0.4
3.0 0.3 0.3 0.2 58.5
200.0 111.5 106.8 101.2 83.2 39.0
2.0 105.2 107.5 106.2 101.5 108.4 97.7 103.7 61.4
2.2 2.2 2.4
2.0 2.1 2.2 2.2 2.2 2.1 2.2 2.3 150.0 79.8 29.0
2.1 2.0 2.2 1.0
57.2 59.3 56.7 59.6 60.5 62.1 67.0 67.0 75.8
100.0 59.6 52.3 59.9 19.0
1.0 0.0
50.0 108.0 9.0
1.0 1.1 1.0 1.0 0.9 0.9 1.0 1.0 0.9 1.1 74.9 80.9 79.0 84.9 84.9 84.9 74.6 82.1 82.2 74.7 80.0 81.0
0.8 0.8 0.6
0.0 -1.0 0.0 -1.0
SS19E
SS09

SS10

SS11
SS07

SS08

SS12

SS13

SS14

SS15

SS16

SS17

SS18

SS07

SS16
SS08

SS09

SS10

SS11

SS12

SS13

SS14

SS15

SS17

SS18

SS19E

Source: ISMA, JM Financial Source: ISMA, JM Financial

 Another bumper crop in SS19: The Indian Sugar Mills Association (ISMA) estimates total
acreage under sugarcane at 5.43mn ha in SS19 (+8% YoY; 5.04mn ha in SS18), largely
led by UP. While ISMA’s intial expectation of sugar production is at c.35.5mnt (+3.3
million tons YoY), we believe India may produce 32-33mnt in SS19 as yields in key sugar
producing regions in Maharashtra have suffered severe drought and pest attacks.
Nonetheless, this is significantly higher than domestic demand of 25.5-26.0mnt.

JM Financial Institutional Securities Limited Page 8

Sugar Sector 8 October 2018

 Historically, initial estimates have been reasonably way off the actual production: Given
that sugar production is function of area, yield, drawl rate and sugar recovery, of which 3
variables (yield, drawl and recovery rate) are known only through the crushing season and
tend to change significantly, initial estimates tend to be meaningfully different from
actual production occasionally. For example, actual production in SS18 was c.32.3mnt as
against expectations of 25.1mnt (28% variance), which was largely led by exceptionally
high yields across Maharashtra, Karnataka and UP (India yield was up 19% YoY).

Exhibit 18. Actual vs. Initial Estimates

mnt Initial Estimate Actual Production
33.0

35.0

32.3
28.4

28.3
30.0

27.0
26.4

26.3
26.0
25.5

25.1

25.1

25.1
25.0

25.0
24.4

24.1
24.0
23.0

25.0

21.3
20.3
18.9
18.5

20.0
16.0
14.5

15.0

10.0

5.0

0.0
SS07 SS08 SS09 SS10 SS11 SS12 SS13 SS14 SS15 SS16 SS17 SS18
Source: ISMA, JM Financial

 Analysis of historical cycle in sugar industry:

In SS05, Maharashtra’s production declined from 6.2mnt to 2.2mnt, driving sugar prices
up and hence increasing cane acreage. Consequently, Maharashtra’s production jumped
to 9.1mnt in SS07. During the same period, the global surplus moved from 10.5mnt
(SS03) to a deficit of 1mnt (SS05) before jumping back to a surplus of 15mnt (SS07),
largely led by India.

Given the rise in production and consequent fall in prices, farmers moved away from
sugarcane and hence production in Maharashtra declined from 9.1mnt (SS08) to 4.6mnt
in SS09. During the same period, the global surplus moved from 13mnt (SS08) to a deficit
of 10mnt (SS09), largely driven by India.

Production remained elevated during SS10-16 as sugarcane remained the most profitable
crop on account of a steep rise in cane prices, apart from the unique benefits (assured
offtake/price, sturdy crop, less attention, etc).

However, consecutive 3 years of drought/inadequate rainfall in Maharashtra and

Karnataka resulted in a steep fall in production in SS17. Nevertheless, a robust monsoon
in SS16/17 resulted in a massive jump in planting and thus India moved from a deficit of
4mnt to a surplus of 7mnt (SS18).

JM Financial Institutional Securities Limited Page 9

Sugar Sector 8 October 2018

Exhibit 19. Historical trend in sugarcane and sugar production Exhibit 20. Area under sugarcane
mnt
mn ha Sugar Poduction (RHS) Area mn ha India Maharashtra Uttar Pradesh

5.5 50.0 6.0 3.0

45.0 2.4
5.0 5.5 2.3 2.5
2.2 2.2 2.2 2.2 2.2
40.0 2.1 2.2 2.1 2.1 2.2 2.1 2.2
2.0 2.0 2.0
2.0
4.5 35.0 5.0 2.0
30.0
4.0 4.5 1.5
25.0 1.1 1.1
1.0 1.0 1.0 1.0
1.0 0.9 0.9 0.9
3.5 20.0 4.0 0.8 0.8 1.0
0.6 0.6 0.6
15.0 0.4 0.5
3.0 3.5 0.3 0.5
14.6
16.5
12.9
12.9
15.5
18.2
18.5
18.5
20.1
13.5
12.7
19.3
28.4
26.4
14.5
18.9
24.4
26.3
25.1
24.4
28.3
25.1
20.3
32.3
32.4
10.0
4.4 4.5 3.9 3.7 4.2 5.2 5.1 4.4 4.2 4.9 5.0 5.0 5.0 5.1 4.9 4.4 5.0 5.5
2.5 5.0 3.0 0.0
SS96

SS99

SS02

SS05

SS08

SS11

SS14

SS17
SS95

SS97
SS98

SS00
SS01

SS03
SS04

SS06
SS07

SS09
SS10

SS12
SS13

SS15
SS16

SS18
SS19E

SS19E
SS02

SS13
SS03

SS04

SS05

SS06

SS07

SS08

SS09

SS10

SS11

SS12

SS14

SS15

SS16

SS17

SS18
Source: ISMA, JM Financial Source: ISMA, JM Financial

 Why this cyclicality in sugar production? Has it changed recently?

In the past, India witnessed a typical cycle of 4-5 years (2 years of high and 2 years of low
production) due to a) long crop gestation (10-18 months, depending on variety) and b)
sugarcane arrears/lower sugarcane prices. For example, lower sugarcane prices (due to
high sugar production and low sugar prices) in one year drove farmers to reduce the cane
area, which led to low sugar production and higher sugar prices the following year.

However, analysis of recent data suggests that the cyclical nature of the sector might
have changed. This is mainly on account of:

a) A continuous increase in SAP and FRP, leading to more incentives for production.
Sugarcane is the most profitable crop (compared with its typical alternatives).

b) High-yield variety of crops being used (particularly in UP, where yields are up 30-40%).

c) An improvement in water availability.

d) Sugarcane being the only crop with an assured offtake and price.

e) The sturdy nature of the crop (it can mostly withstand adverse climatic conditions).

f) A lower need for labour and attention.

This has made farmers to retain acreage, despite record cane arrears (INR 210bn in
Mar’18).

 Cane price/other crops’ profitability:

The key issue lies in the fact that sugar remains a highly profitable cash crop and with the
government ensuring guaranteed offtake, there is little or no incentive for farmers to
switch crops. Even in the year of surplus production (low sugar prices), the FRP hike is a
clear indication of the government’s stance on the industry.

An analysis of the profitability of crops in Maharashtra and UP as well as at the all-India

level indicates that given the higher FRP/MSP of sugarcane compared with other crops,
the crop is extremely profitable for the farmer (2-3x based on region).

JM Financial Institutional Securities Limited Page 10

Sugar Sector 8 October 2018

Exhibit 21. Profitability of crops (Maharashtra)

Culivation
Cultivation cost Revised
Yield NSP/MSP Net Earnings
Crop Cost (incl int, Profitabilty
rentals)

(Qtl./ha.) (INR/Qtl.) (INR/Qtl.) (INR/ha.) INR/Qtl. INR/ha.

Sugarcane 785 275 116 1,24,812 176 77,713

Wheat (Rabbi) 37 1,735 1,295 16,280 2,076 -12,617

Soybeans (Khariff) 8 3,390 2,419 7,768 3,521 -1,048

1 wheat + 1 soybean 3,714 24,048 5,597 -13,665

Source: CACP 2018-19, JM Financial

Exhibit 22. Profitability of crops (Uttar Pradesh)

Culivation
Cultivation cost Revised
Yield NSP/MSP Net Earnings
Crop Cost (incl int, Profitabilty
rentals)

(Qtl./hect.) (INR/Qtl.) (INR/Qtl.) (INR/hect.) INR/Qtl. INR/ha.

Sugarcane 637 315 120 1,24,196 243 45,857

Wheat (Rabbi) 27 1,735 659 29,052 1,255 12,960

Paddy/Rice (Khariff) 28 1,745 824 25,788 1,530 6,020

1 wheat + 1 paddy 1,483 54,840 2,785 18,980

Source: CACP 2018-19, JM Financial

 Additionally, UP’s SAP price has been considerably higher over the years, ensuring
consistently higher sugar production in UP. On the other hand, the monsoon in
Maharashtra, Karnataka and other states tends to influence production more
dramatically.

 In its report for the 2018-19 FRP, CACP has stated that net returns of sugarcane will be
245% higher than (paddy + wheat) and 252% higher than (cotton + wheat). Therefore,
even if part of the FRP is paid on time (the remaining can be taken as a bonus; effectively,
the total FRP payment is delayed), farmers get more than they do for other crops.

 Increase in farmer incomes due to higher productivity has also been accepted by CACP in
its 2018-19 report, but not included in the FRP calculation.

JM Financial Institutional Securities Limited Page 11

Sugar Sector 8 October 2018

Exhibit 23. State-wise production Exhibit 24. UP SAP vs. FRP

mnt Mah UP TN Kar Others INR/tonne INR/kg
Sugar Price (RHS) UP SAP FRP
40.0
MH drops from 10.5 3,500
MH drops from MH drops from 9.1 (SS08) 3,150
(SS16) to 4.2 (SS17) and
6.2 (SS03) to 2.2 to 4.6 (SS09) and jumps 3,050
35 staring at 9 (SS18) 35.0
(SS05) and jumps back to 9.1 (SS11) 2,800 2,800 2,800 2,800
3,000
to 9.1 (SS07)
30 5.2 5.5 30.0
2,400
2,500 2,750
5.6 4.6 3.7 3.5 2,550
25 4.1 2,050 25.0
4.9 4.3 0.6 0.9
3.9 4.6 4.4 2,300 2,300
2.7 4.9 2,000 2,200
20 2.9 3.9 1,650 2,100 20.0
2.5 3.7 3.5 1.2 4.0 4.0
4.8 4.2 2.1 2.8 2.4 4.2 1,400
1.8 1.9 1.4 12.1 13.1 1,500
15 2.6 1.4 2.1 1,250 1,250 1,700
1.9 1.9 7.1 1.1 1,070
1,150 15.0
8.5 7.3 2.6 1.3
1.6
3.8 2.1 5.9 7.0 7.5 6.8 1,391 1,450
3.3 1.7 6.5 1,000 1,298
10 1.1 1.6 5.2
5.7 0.9 1.0 8.8 10.0
1.1 5.8
4.1 890 900 910 857 857
5 4.6 5.0 9.1 9.1 10.5 10.7 9.4
9.1 9.0 8.0 7.7 8.4 500 5.0
6.2 7.1
5.2

17.7

18.7

15.4

15.7

23.3

31.5

28.7

31.8

33.6

31.7

27.3

34.1

37.9

32.3
3.2 4.6 4.2
2.2
0
- -
SS03

SS04

SS05

SS06

SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS14

SS15

SS16

SS17

SS18

SS19E
SS05 SS06 SS07 SS08 SS09 SS10A SS11 SS12 SS13 SS14 SS15 SS16 SS17 SS18 SS19

Source: ISMA, JM Financial

Source: ISMA, JM Financial

On the other hand, depreciation of the BRL (Brazilian Real) has further weakened the
competitive positioning of Indian sugar. The cost of cane in India is significantly higher
than it is in Brazil, Thailand and Australia. Hence, Indian sugar exports can never be viable
and have to be subsidised.

Exhibit 25. Highest cane prices globally Exhibit 26. Productivity per hectare has risen significantly
INR per tonne Tonnes/ha
150 FY16 FY17 FY18
3,500

2,890 130
3,000
108
110
2,500 95
90 78 80
77 76
2,000 1,842
1,732 1,739
70 62 60 60 64 61
1,500
53
50
1,000
30

500 10

- -10 Uttar Pradesh Maharashtra Karnataka All India

Thailand Brazil Australia India

Source: ISMA, JM Financial Source: ISMA, JM Financial

Exhibit 27. Cost of production higher than global prices Exhibit 28. Cost of production comparison
INR/Qtl $/ton
India Global Price (White Sugar)
4,000
3,750 800 Brazil India
3,580
3,500
3,277 3,300 700
3,100
3,000 600 574
2,707 2,732
515
2,405
2,500 500
2,080
2,002
2,000 400 345
334
1,500 300

1,000 200

500 100

- -
FY14 FY15 FY16 FY17 FY18 FY17 FY18

Source: ISMA, JM Financial Source: ISMA, JM Financial

JM Financial Institutional Securities Limited Page 12

Sugar Sector 8 October 2018

Exhibit 29. Historical trend in MSP/FRP of key alternative crops to sugarcane

Paddy (INR/Qtl) Sugarcane (INR/ton) Wheat (INR/Qtl)
3,000
2,750

2,550

2,500
2,300 2,300
2,200
2,100

2,000
1,700 1,735
1,625
1,525
1,450 1,450 1,750
1,500 1,391 1,400
1,350
1,298 1,285 1,550
1,470
1,100 1,120 1,410
1,360
1,310
1,250
1,000
1,080
1,000 1,000

500

-
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Source: ISMA, JM Financial

Exhibit 30. Water levels in reservoirs in India

% of Storage
Last Year Current 10 Year Average
100%
90%
90% 84% 83%
80% 74% 72%
67% 68%
70%

60% 56%
50%
50%

40%

30%

20%

10%

0%
Northern Southern Western
th
Source: As on 27 September 2018, Agriculture Cooperation, JM Financial

JM Financial Institutional Securities Limited Page 13

Sugar Sector 8 October 2018

Sugar prices and government measures

 Sugar prices:

 Domestic ex-mill realisations bottomed out decisively during Aug-Sep’15 (INR

27-28/kg in UP) and rose to levels of INR 37-38/kg (+c.36-38% YoY) and
remained firm over Feb-May’17 on account of the severe impact of the drought
on sugar production and – consequently – tightness in inventories for SS17.
However, prices declined and touched INR 27/kg levels in May’18 on account of
a) the early start of the crushing season in UP and Maharashtra, b) a significant
surplus in SS18 and c) fear of a significant increase in SS19.

 We expect prices to remain stable in the near term given the government’s MSP
measures (slated to continue until Sep’19) and focus on controlled inflation
(various actions such as stock limits, MIEQ, higher blending of ethanol, etc.).

 The global sugar market, which saw turnaround in SS17 (on expectations of a
global deficit – hit highs of USD 0.23-0.24/lbs in Nov’16), remained weak on
higher production across the globe in SS18 (led by Brazil, India, South America
and EU), hitting lows of USD 0.12-0.13/lbs in Jun’17 for a brief period). Prices
stabilised and remained rangebound at USD 0.14-0.15/lb. However, in recent
months, it has drifted downwards to USD 0.12-0.13/lbs on the anticipation of
another global surplus in SS19, led by India.

Exhibit 31. Long-term domestic sugar prices Exhibit 32. Short-term domestic sugar prices
INR/kg Mumbai M-30 White sugar FOB INR/kg Mumbai M-30 White sugar FOB
42 42
40 40
38 38
36 36
34 34
32 32
30 30
28 28
26 26
24 24
22 22
20 20
Dec-17
Dec-12

Nov-15
Nov-10

Feb-15

Feb-16

Feb-17

Feb-18
Dec-14

Dec-15

Dec-16

Dec-17
Apr-15

Apr-16

Apr-17

Apr-18
Aug-14
Oct-14

Oct-15

Oct-16

Oct-17

Oct-18
Jun-15
Aug-15

Jun-16
Aug-16

Jun-17
Aug-17

Jun-18
Aug-18
Jan-10

Oct-13
Mar-14

Jan-15

Oct-18
Jun-10
Aug-09

Jul-12

May-13

Jun-15

Jul-17

May-18
Apr-11

Feb-12

Aug-14
Sep-11

Apr-16

Feb-17
Sep-16

Source: Bloomberg, JM Financial Source: Bloomberg, JM Financial

Exhibit 33. Long-term global sugar prices Exhibit 34. Short-term global sugar prices
USD/t Raw Sugar White Sugar USD/t Raw Sugar White Sugar
900 900

800 800

700 700

600 600

500 500

400 400

300 300

200 200

100 100
Nov-14

Feb-15
May-15

Feb-16
May-16

Nov-16

Feb-17
May-17

Nov-17

Feb-18
May-18
Aug-14

Aug-15

Nov-15

Aug-16

Aug-17

Aug-18

Nov-18
Feb-10

Feb-11
May-11

Feb-12

Feb-13
May-13

Feb-14
May-14

Feb-15
May-15

Feb-16
May-16

Feb-17
May-17

Feb-18
May-18
Aug-09

May-10
Aug-10
Nov-10

Aug-11
Nov-11
May-12
Aug-12
Nov-12

Aug-13
Nov-13

Aug-14
Nov-14

Nov-15

Aug-16
Nov-16

Nov-17

Aug-18
Nov-18
Nov-09

Aug-15

Aug-17

Source:Bloomberg, JM Financial Source: Bloomberg, JM Financial

JM Financial Institutional Securities Limited Page 14

Sugar Sector 8 October 2018

Exhibit 35. India and Global demand-supply scenario

in Millions tonnes (mnt) SS08 SS09 SS10 SS11 SS12 SS13 SS14 SS15 SS16 SS17 SS18 SS19E

Opening stock 10.1 9.5 3.4 4.9 5.9 6.6 9.3 7.3 9.5 8.1 4.4 10.6

Production 26.4 14.5 18.9 24.4 26.3 25.1 24.4 28.3 25.1 20.3 32.3 32.4

YoY growth -7% -45% 30% 29% 8% -5% -3% 16% -11% -19% 59% 0%

Uttar Pradesh 7.3 4.1 5.2 6.0 7.0 7.5 6.5 7.1 6.8 8.8 12.1 13.1

Maharashtra 9.1 4.6 7.1 9.1 9.0 8.0 7.7 10.4 8.4 4.2 10.7 9.4

Karnataka 2.9 1.7 2.6 4.1 3.8 3.3 4.2 5.0 4.0 2.1 3.7 3.5

Tamil Nadu 2.1 1.6 1.3 1.9 2.3 2.0 1.4 1.1 1.4 1.1 0.6 0.9

others 12.2 6.7 8.0 9.3 11.2 11.9 11.1 11.7 11.3 12.8 17.3 18.6

Imports 0.0 2.4 4.1 0.0 0.0 0.7 0.1 0.0 0.0 0.5 0.0 0.0

Local consumption 21.9 22.9 21.3 20.8 22.6 22.8 24.2 25.1 24.9 24.5 25.5 26.0

YoY growth 10% 5% -7% -2% 9% 1% 6% 4% -1% -1% 4% 2%

India poulation YoY growth 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%

Exports 5.0 0.2 0.2 2.6 3.0 0.4 2.2 1.1 1.6 0.0 0.5 5.0

Closing stock 9.5 3.4 4.9 5.9 6.6 9.3 7.3 9.5 8.1 4.4 10.6 12.0

Surplus/Deficit 4.5 -8.4 -2.4 3.6 3.7 2.3 0.2 3.2 0.3 -4.2 6.8 6.4

# of months consumption 5.2 1.8 2.7 3.4 3.5 4.9 3.6 4.5 3.9 2.2 5.0 5.5

Global Production 163.5 143.9 153.2 162.2 172.3 177.8 175.9 177.5 164.7 174.0 191.8 188.3

YoY growth -1% -12% 6% 6% 6% 3% -1% 1% -7% 6% 10% -2%

Brazil 31.6 31.9 36.4 38.4 36.2 38.6 37.8 36.0 34.7 39.2 38.9 34.2

India 28.6 16.0 20.6 26.6 28.6 27.3 26.6 30.5 27.4 22.2 32.4 33.8

Thailand 7.8 7.2 6.9 9.7 10.2 10.0 11.3 10.8 9.7 10.0 13.7 14.1

Global Consumption 150.8 153.4 154.1 155.3 159.6 165.3 165.7 167.9 169.2 170.8 174.1 177.6

Global Surplus/(Deficit) 12.7 -9.5 -1.0 7.0 12.8 12.6 10.2 9.6 -4.5 3.2 17.7 10.7
Source: JM Financial, Industry

JM Financial Institutional Securities Limited Page 15

Sugar Sector 8 October 2018

 Government measures in the past : The government has been proactive in maintaining
stakeholder interests (farmers, mills and bankers) through timely policies related to
ethanol blending and export quotas. Most recently, the government raised the amount of
subsidised loans to sugar mills to expand their ethanol production to INR 61.4bn (+38%
from the INR 44.4bn announced earlier), with 114 sugar units being selected by the
Ministry of Consumer Affairs, Food and Public Distribution to avail subsidised loans. The
mills will get an interest subsidy of up to 6% or half of the actual interest payable for the
loan offered to expand ethanol capacity, whichever is lower. The interest subsidy will be
offered for a period of five years, within which the loans have to be repaid by mills. With
the hike, the total interest subsidy is expected to be INR 18.5bn (earlier estimate of
INR13.3bn).

Exhibit 36. Significant government measures in recent months

Date Government Measures

Government raises amount of subsidised loans to INR 61.4bn (+38% from the initial amount) to sugar mills to expand. 114 sugar units have been selected to
Oct’18
avail subsidised loans.

Announced an INR 55.0bn package for the sugar industry, including production aid to cane growers and transport subsidy to mills for exports. Financial
Sep'18
assistance of INR 13.88 per quintal on the cost of cane and susbsidy of INR 1000-3000 per tonne of sugar based on the distance from port

Aug'18 Government extended the deadline for exporting 2mnt of sugar by three months to December

Extended soft loans of INR 44.4bn to setup new distilleries and installation of incineration boilers with interest subvention up to INR 13.3bn; Provided
performance based production subsidy @ INR 4.50 per quintal of cane crushed for sugar season 2015-16 payable to farmers against their cane dues contingent
Jul'18
on mills undertaking export and supplying of ethanol; Provided Assistance to sugar mills @INR 5.50/quintal of cane crushed for sugar season 2017-18 to offset
the cost of cane amounting to about INR 15.4bn

Jul'18 Government allowed sugar mills to manufacture ethanol directly from sugarcane juice or intermediate product called B-molasses.

Fixed FRP of sugarcane for SS19 at INR 275 per quintal for a basic recovery rate of 10%; providing a premium of INR 2.75 per quintal for each 0.1 % increase in
Jul'18
recovery over and above 10%

a) Government hiked price of ethanol, used for doping in petrol, by INR 3 per litre to Rs 43.70.
Jun'18
b) Also fixed the price of ethanol produced from intermediary or B-molasses at INR 47.49 per litre
a) Fixed the ex-factory sugar price at INR 29/kg
b) Created a monthly stock holding limit and approved to build a buffer of 3MT
Jun'18
c) Put in place a mechanism to control retail prices
d) Approved interest subvention of INR 13.3bn for five years on loans of INR 44.0bn to increase distileery capacities

May'18 Provide financial assistance of INR 5.50 per quintal of cane crushed in sugar season 2017-18 to sugar mills to offset the cost of cane

Mar'18 Government allowed export of 2 million tonnes of sugar until the end of the 2017-18 marketing year

Dec'17 Government withdraws stock holding limit on traders

Approved the revision in the price of ethanol under Ethanol Blended Petrol (EBP)
Nov'17 Programme for supply to the Public Sector Oil Marketing Companies. The revised price of
ethanol would be fixed at INR 40.85/- per litre
Approved the revision in the price of ethanol under Ethanol Blended Petrol (EBP)
Oct'16 Programme for supply to the Public Sector Oil Marketing Companies. The revised price of
ethanol would be fixed at INR 39.00/- per litre
a) Announced FRP for ethanol supplied for blending with petrol and removed the tender based price discovery procedures for ethanol and fixed attractive prices
for ethanol supplied for petrol blending. Prices were fixed at INR 48.50 to 49.50 per litre depending on distance from the depot thereby effectively giving INR
Jun'15 42 per litre to the mill as against INR 32 per litre in previous year
b) Increased the import duty to 40 percent, and abolished the Duty Free Import Authorization Scheme
c) Reduced the export obligation period from 18 months to 6 months under the Advanced Authorization Scheme
Source: JM Financial

JM Financial Institutional Securities Limited Page 16

Sugar Sector 8 October 2018

 Exports - the only solution: The government is providing financial assistance of INR 13.88
per quintal cane crushed in the 2018-19 market year (INR 5.5 per quintal in 2017-18).
Total expenditure would be INR 41.6bn in order to provide assistance to mills by
compensating expenditure towards internal transport, freight, handling and other charges
to facilitate 5mnt exports during 2018-19 (October-September). Additionally, there would
be a transport subsidy of INR 1,000 per tonne (mills located within 100 kms of the port),
INR 2,500 per tonne (beyond 100 kms from the port in coastal states) and INR 3,000 per
tonne (located in other-than-coastal states or actual expenditure).

We estimate total direct and indirect subsidy amount to c. INR 10-11/kg, assuming a)
transport subsidy assistance (INR 2.5/kg) and b) cane price assistance (INR144/tonne of
sugarcane- i.e. INR 8/kg assuming 18% export obligation). This should bridge the gap
between net export realisation and current domestic price.

Early announcement of these incentives, should help mills plan production of raw/white
sugar more effectively and hence, the industry expects to meet targets. However, we still
believe that this is a one-off measure and cannot continue forever as it involves significant
subsidies which could mean that India would never be competitive at a global level.
Moreover, a large chunk of surplus sugar being exported might lead to firming up of
domestic prices. Hence, the quantum of subsidy – and thereafter actual exports – need to
be closely monitored.

Exhibit 37. Prima facie, exports unviable

Units Dec'18 Mar'19
White Sugar Exports
FOB value of white sugar USD/t 339 341
Less: Discount on quality USD/t 10 10
Premium for Asia region USD/t 10 10
Realisation for India white sugar USD/t 339 341
Realisation for India white sugar USD/t 339 341
Realisation for India white sugar INR/t 24,972 25,083
Transport subsidy from govt INR/t 2,500 2,500

Transportation cost (incl handling charges) INR/t 1,400 1,400

Net Exports Realisation INR/t 26,072 26,183

Current domestic realisation M-30 (ex mill) INR/t 30,599 30,599

Exports vs. domestic -14.8% -14.4%

Raw Sugar Exports

Current FOB Price US cents/lb 12.11 12.24
USD/t 267 270
Add: Asia Premium USD/t 10 10
FOB realisation USD/t 277 280
INR/t 20,382 20,593
Transport subsidy from govt INR/t 2,500 2,500
Less: Inland transport cost INR/t 1,200 1,200
Net Exports Realisation INR/t 21,682 21,893
Current domestic realisation M-30 (net of
INR/t 31,597 31,597
excise & sugar cess)
Exports vs. domestic -31.4% -30.7%
Source: Bloomberg, Industry, JM Financial

JM Financial Institutional Securities Limited Page 17

Sugar Sector 8 October 2018

Ethanol – new saviour for the sugar industry?

Summary:

- There has been a significant pick-up in ethanol blending since 2014 on account of the
robust availability of alcohol (on higher sugar production) and government measures.

- The recently-announced National Biofuel Poilcy and other measures augur well for the
sugar industry over longer-term visibility on ethanol pricing/supplies.

- While near-term ethanol supplies are expected to remain tight on capacity constraints,
we expect a significant increase in distillation capacity due to robust profitability.

- Even over the longer term, the B Molasses route can have a modest impact on overall
sugar production (2-3mnt of reduction in sugar production) assuming a) current ethanol
prices sustain, b) robust capacity expansion and c) favourable terms in tenders from an
operational perspective. A 1mnt of sugar reduction results in a c.600mn litre increase in
ethanol production.

 The Ethanol Blending Programme (EBP), initiated in 2002, has seen numerous ups and
downs on account of a) supply disruption (depends on the sugar production cycle), b)
demand from alternative usages (potable and industrial purposes) and consequent
litigations and c) the lack of visibility on consistent pricing/tendering clauses.

- While the ethanol blending policy was initially announced in 2002, it was not made
mandatory. 5% ethanol blending was made mandatory only in 2007 and a fixed pricing
policy was introduced.

- In 2009, a policy to achieve 20% blending by 2017 was introduced.

- During 2010-12 an expert committee was formed for formula creation and provisional
pricing.

- During 2012-14, an open market price was decided in tenders and OMCs followed the
benchmark price as ceiling price.

- The target for 5% blending was set flexibly to go up to 10% in areas with better
availibilty. OMCs, in turn, were allowed relaxtion to achieve mandatory blending
wherever sufficient ethanol is available. Hence, this 5% blending was not compulsory.

- The policy imposed several restictions including: a) ethanol procured by OMCs needs to
be made from domestic molasses, b) domestic ethanol had to be used for the programme
and c) no direct conversion of cane juice into ethanol was allowed.

However, it has gathered a strong momentum in the past few years, especially in the past
6 months, on the back of renewed focus on biofuels and helping sugar mills tide over the
difficult period (higher ethanol price to help clear sugarcane arrears). The government
formally announced the National Biofuel Policy in May’18 (NBF), which also allows
bioethanol to be procured from non-food feed stock such as celluloses and lignocelluloses
material, including petrochemicals.

Historically, the entire gamut of ethanol for EBP came from the C-molasses route (residual
by-product in the sugar-making process) and it has hence been exposed to the vagaries of
the sugar cycle. As a result of this, production of alcohol has been extremely volatile.

However, on the other hand, industrial and potable alcohol industries have seen a
consistent increase in the demand for alcohol. As a result, the EBP’s implementation has
been patchy. However, the EBP has seen substantial improvement in past 3 years on the
back of a) surplus sugar/alcohol production, b) remunerative pricing by the government
and c) the renewed inclination of OMCs in procurement.

JM Financial Institutional Securities Limited Page 18

Sugar Sector 8 October 2018

Exhibit 38. Potable and fuel are the two main uses of ethanol

mn ltr other Use Fuel Ethanol Potable Use Industrial Use

3,000

2,500

1,000

1180
1004
710
2,000

1300
500
803

1000
793
1,500
653

617

613

1,000
1,000

1,000
576

1000
1000
1,000
726

718

700
800
591

558

554
521

500

750
700

700

600

600
594

588
587
483

456

454
427

400
-
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: Industry, JM Financial

Exhibit 39. Blending rate increasing substantially over the last 3 years
Ethanol required (@5%) Ethanol supplied EBP (%)
1,700 5.0%
4.3%
4.0%
1,500 4.0%
3.0%
1,300 2.4%
3.0%
1,100 1.9%
1.7% 2.0%
1.5%
900 0.8%
0.7%
1.0%
0.3%
700
0.0%
500
-1.0%
300
100

1,110

1,250
250

300

154

380

674

665
50

100 -2.0%

(100) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 -3.0%

Source: Industry, JM Financial

 Recent measures give us confidence: In order to boost EBP impementation, the

central government has been proactive in implementing various measures including
a) higher ethanol prices, b) excise duty exemption for the interim period, c)
introduction of the National Biofuel Policy (NBF) in May 2018 (which allowed
production of ethanol from B-Heavy molasses as well as directly from cane juice)
and d) incentives for distillery capacity expansion (interest subvention up to 6%).

JM Financial Institutional Securities Limited Page 19

Sugar Sector 8 October 2018

Constraints faced in EBP in past:

a. Inadequate capacity: Given the recent substantial increase in ethanol prices by the
central government, ethanol has become significantly attractive for sugar
mills/distilleries. However, current distillation capacity can meet only up to 6%
blending, even after assuming entire distillation capacity for ethanol only (i.e. zero
volumes for industrial/potable purpose). As a result, the industry has to create
additional capacities.

Exhibit 40. Ethanol Manufacturing Capacity (SS17)

Distilleries attached with sugar mills
Standalone Distilleries Total
States Private Sector Cooperative Sector
No KLPD KLPA No KLPD KLPA No KLPD KLPA No KLPD KLPA
Andhra Pradesh 8 290 78,300 - - - 2 185 59,850 10 475 1,38,150
Bihar 5 260 70,200 - - - 1 75 20,250 6 335 90,450
Gujarat - - - 8 220 59,400 2 120 32,400 10 340 91,800
Haryana - - - 1 45 12,150 - - - 1 45 12,150
Karnataka 14 1,100 2,58,600 2 60 16,200 1 65 19,500 17 1,225 2,94,300
Maharashtra 18 920 2,48,400 33 1,127 3,04,290 21 1,150 2,66,340 72 3,197 8,19,030
Punjab 1 60 16,200 - - - - - - 1 60 16,200
Sikkim - - - - - - 1 60 18,000 1 60 18,000
Tamil Nadu 6 260 70,200 2 60 16,200 - - - 8 320 86,400
Telengana 2 105 28,350 - - - - - - 2 105 28,350
Uttar Pradesh 25 2,078 5,44,860 4 90 24,300 8 392 1,05,510 37 2,560 6,74,670
Uttarakhand 1 30 8,100 - - - - - - 1 30 8,100
All India 80 5,103 13,23,210 50 1,602 4,32,540 36 2,047 5,21,850 166 8,752 22,77,600
Source: ISMA, JM Financial

Recognising the constraint, the government announced a scheme in which it will

bear an interest subvention of maximum INR 13.32bn over a period of five years
(including moratorium period of one year) on estimated bank loan amounting to
INR 44.40bn to be sanctioned to the sugar mills by the banks over a period of three
years. This is expected to be further enhanced to INR 62bn (interest subvention
burden of INR 19bn) Moreover, the government has enhanced the monthly
domestic sales quota for those sugar mills which produce ethanol from B-heavy
molasses or sugarcane juice. The government will bear interest subvention up to
5% towards loans sanctioned.

This – coupled with new ethanol pricing for C Molasses/B Molasses routes – we
estimate would lead to unprecedented profitability for sugar mills/distilleries.
According to the industry, 150-200 applications have been received by the
government for fiscal incentives. Of this, about 114 have been approved (c.INR
62bn in loan amount) as per a recent news report (link) The industry believes that
20-25% incremental capacity may come on stream over the next 2 years.

Assuming a molasses price of INR 3,000/3,500 per tonne for C/B Molasses, we
estimate 83%/137% RoE for distilleries (would be further higher for sugar mills
having captive molasses). This is reflected in the tremendous momentum in new
application/approval for new distillation capacity.

The maximum loan being availed is INR 61.4 bn with Maharashtra (40% of total)
and UP (30%) accounting for the bulk of investments. However, a lot of these
applications will not finally fructify as this is based on the availability of cane and
financial resources at the available juncture and location.

JM Financial Institutional Securities Limited Page 20

Sugar Sector 8 October 2018

Exhibit 41. Distillery applications

No of Applications Distillery Expansion Capex

Region Number Mix KLPD Mix INR mn Mix

UP 28 25% 1,980 36% 15,940 30%

Maharshtra 53 46% 1,895 34% 21,830 41%

Others 33 29% 1,660 30% 15,480 29%

Total 114 100% 5,535 100% 53,240 100%

Source:Industry,PIB, JM Financial

Exhibit 42. Robust profitability of the ethanol segment

Unit of Measurement C Molasses route B Molasses route

Distillery Capacity KLPD 100 100

no of days operations days 330 330

Production (sales) litres 3,30,00,000 3,30,00,000

Ethanol realisation INR/ltr 43.46 52.43

Revenue INR mn 1,434 1,730

Less: RM Cost INR mn 450 385

Molasses required Tonnes 1,50,000 1,10,000

Molasses price INR/tonne 3,000 3,500

Less: Process cost INR mn 297 297

Less: Depreciation INR mn 65 65

Total Cost (EBIT level) INR mn 812 747

EBIT INR mn 622 983

EBIT margin % 43.4% 56.8%

Interest INR mn 66 66

PBT INR mn 557 918

Tax rate % 30% 30%

PAT INR mn 390 642

ROE % 83% 137%

ROCE (post tax) % 28% 44%

Pay back period years 3.80 1.98

Investment per KLPD INR mn 1,30,00,000 1,30,00,000

Capex required INR mn 1,300 1,300

Working capital INR mn 260 260

Total capital employed INR mn 1,560 1,560

Debt % 70% 70%

Debt INR mn 1,092 1,092

Equity INR mn 468 468

Weighted avg cost of capital % 8.4% 8.4%

Source: Industry, JM Financial

JM Financial Institutional Securities Limited Page 21

Sugar Sector 8 October 2018

Exhibit 43. Sensitivity of Ethanol price to the B and C Molasses price

C' Molasses Price (INR/tonne) B' Molasses Price (INR/tonne)

83% 1,000 2,000 3,000 4,000 5,000 137% 1,500 2,500 3,500 4,500 5,500
Ethanol Price (INR/ltr)

Ethanol Price (INR/ltr)

39.5 108% 86% 64% 41% 19% 48.4 150% 134% 118% 101% 85%

41.5 118% 96% 73% 51% 29% 50.4 160% 144% 127% 111% 94%

43.5 128% 106% 83% 61% 38% 52.4 170% 154% 137% 121% 104%

45.5 138% 116% 93% 71% 48% 54.4 180% 164% 147% 131% 114%

47.5 148% 125% 103% 81% 58% 56.4 190% 173% 157% 141% 124%
Source: JM Financial
b. Imposition of state taxes: The shortfall in ethanol supply is being felt in all states
except Maharashtra and UP, the two regions that account for the bulk of sugarcane
production in the country. Against a requirement of 350,000 kilolitres, UP saw an
offering of 635,000 kilolitres. In Maharashtra, against a requirement of 436,000
kilolitres, 500,000 kilolitres were offered. The reason for the divergence in the
trends between UP and Maharashtra is believed to be an export tax levied (INR 2 per
litre) by the UP government on every litre of ethanol sold to other states. Only
Karnataka, Maharashtra, Gujarat and Goa have removed controls over inter-state
ethanol movement meant for EBP.

c. Tenders issued by OMC (cap of 650mn litres for B Molasses/direct route): OMCs
have recent asked industry to submit tenders for ethanol upto 3,230mn litres to be
supplied during Dec’18-Nov’19. The key conditions are a) an indigenous
manufacturer of anhydrous ethanol, b) administered price as INR 43.46/ INR 47.13
per litre for ethanol derived from C Heavy Molasses/B Heavy Molasses respectively,
c) bidders cannot offer quantity more than the requirement for a particular location
and d) additional benefits are given based on distance of transportation involved.
The OMC tender document indicates a requirement of 600mn litres of ethanol from
B Heavy Molasses, Sugar Cane Juice and Damaged Food Grains while demand for
ethanol (C molasses) stood at 2,630mn litres.

d. Inadequate time for preparation for ethanol through B molasses route: While the
pricing for B Heavy/sugarcane juice route is remunerative, we believe there is
inadequate time to make relevant changes in the ancillary infrastructure (separate
storage of B Heavy molasses and ethanol produced therefrom). Moreover, this has
to be typically produced during the crushing season (Oct-Mar) and hence scope for
significant success of the B Molasses route may be limited in the immediate
crushing season, although we believe it may see a substantial pick-up in the next
season (starting Oct’19) if the current terms prevail. Moreover, OMCs have put cap
of 650mn litres on supply of ethanol through 100 % sugarcane juice and heavy
molasses/partial sugarcane juice.

 Can B-heavy molasses help achieve 10% EBP?:

- Given the current capacity and alternate usage of alcohol (potable/industrial), we

believe India may achieve 3-4% blending.

- However, we estimate B Molasses and Direct routes are significantly viable at the
current ethanol prices (INR 52.43/ltr for B Heavy Route and INR 59/ltr for Direct cane ioce
route) and sugar prices. We note that if the MSP for sugar increased, mills may choose C
Molasses over B Molasses.

- Given the robust profitability, we have seen significant interest in new/browfield

capacities by participants (reflected in the approval of 114 applications by the
government). Nonetheless, we believe actual capacity addition may be lesser than the
approved as a) participants may have taken approval for multiple locations but may
actually go ahead only with a few of them and b) the financial strength of a company
would not match requirements (some of the companies have weak balance sheets).

- Nonethless, we expect ethanol blending to increase in the next 3-5 years significantly
on the back of new capacities.
JM Financial Institutional Securities Limited Page 22
Sugar Sector 8 October 2018

Exhibit 44. Comparison of the recovery process

Conventional
Unit B Molasses Direct route
C Molasses
Sugarcane available tonnes 100 100 100
Sugar production tonnes 10.37 8.82 Conversion ratio:
Conversion cost for sugar INR /kg 5.7 5.7 1tonne of cane =
75 litres of
Sugar realisations (ex-factory) INR / kg 29.0 29.0 ethanol
Sugar Revenue INR 300,730 255,635
Net Revenue from Sugar INR 241,621 205,390
INR/tonne of cane 2,416 2,054

Molasses production tonnes 4.50 6.58

Alcohol recovery Litres/tonne 240 295
Ethanol production litres 1,080 1,941 7,500
Cost of processing molasses into ethanol INR/litre 9.0 9.0 10.0
Ethanol realisation (Ex-factory) INR/litre 43.2 52.0 59.0
Revenue from ethanol INR 46,656 100,937 442,500
Net Revenue from Ethanol INR 36,936 83,467 367,500
INR/tonne of cane 369 835 3,675

Power Produced units 7,178 8,255 8,255

Realisation INR/unit 4.8 4.8 4.8
Conversion cost INR/unit 0.7 0.7 0.7
Revenue from Power INR 34,454 39,623 39,623
Net Revenue from Power INR 29,430 33,844 33,844
INR/tonne of cane 294 338 338
Net Revenue
Sugar INR 241,621 205,390 0
Ethanol INR 36,936 83,467 367,500
Power INR 29,430 33,844 33,844
Total INR 307,987 322,701 401,344
Total (per tonne of cane) INR/tonne of cane 3,080 3,227 4,013
Sugarcane cost INR/tonne 3,200 3,200 3,200
Total Cost INR 393,854 393,494 395,000
Sugarcane cost INR 320,000 320,000 320,000
Conversion cost-sugar INR 59,109 50,246
Conversion cost-ethanol INR 9,720 17,470 75,000
Conversion cost-power INR 5,025 5,778 5,778
Profit INR -12,013 2,701 81,344
Sugar INR -78,379 -114,611 -320,000
Ethanol INR 36,936 83,467 367,500
Power INR 29,430 33,844 33,844
Incremental profit over C molasses route INR 14,714 93,357
Source: Industry, JM Financial

JM Financial Institutional Securities Limited Page 23

Sugar Sector 8 October 2018

 Can ethanol change sugar industry dynamics?

-While B-Molasses is financially viable, we estimate insignificant ethanol supplies from
the B-Molasses route on account of a) inadequate time for preparation (creationg of
separate storage of molasses and ethanol), b) limited capacity and c) significant export
and cane price incentives on sugar.

-Assuming a 30-40% increase installed capacities over the next 2 years, we estimate
that the industry may see almost 30% of cane crushed under the B-Molasses route at
best. This results in a c.1.5mnt impact on sugar production.

- We note that the B-Molasses route entirely depends on a) ethanol prices and b) sugar
prices. If sugar prices are remunerative, mills may instead opt for the conventional C-
Molasses route.

Exhibit 45. Scenario analysis

C Molasses B Molasses Direct Route

100% 100% 50% 30% 100% 50% 30%

Sugarcane crushed mnt 325 325 325 325 325 325 325

Under C Molasses route mnt 325 - 163 228 - 163 228

Under B Molasses route mnt - 325 163 98 - - -

Under Direct route mnt - - - - 325 163 98

Sugar Recovery rate

Under C Molasses route % 10.4% 10.4% 10.4% 10.4%

Under B Molasses route % 0.0% 8.8% 8.8% 8.8%

Under Direct route % 0.0% 0.0% 0.0% 0.0%

Sugar Production mnt 33.7 28.7 31.2 32.2 - - -

Under C Molasses route mnt 33.7 - 16.9 23.6 - - -

Under B Molasses route mnt - 28.7 14.3 8.6 - - -

Under Direct route mnt - - - - - - -

Alcohol produced (per tonne of cane) Litres 10.1 19.4 19.4 19.4 75.0 75.0 75.0
Total Alcohol Produced mn ltres 2,700 6,309 4,800 4,196 24,375 13,833 9,616
% higher than C Molasses 134% 78% 55% 803% 412% 256%

Demand for Alcohol

Industrial purpose mn ltr 600 600 600 600 600 600 600
Potable purpose mn ltr 700 700 700 700 700 700 700
Surplus for ethanol mn ltr 1,400 5,009 3,500 2,896 23,075 12,533 8,316
Ethanol requirement at 5% 3,240 3,240 3,240 3,240 3,240 3,240 3,240
Ethanol requirement at 10% 6,480 6,480 6,480 6,480 6,480 6,480 6,480
Source: JM Financial, Industry

JM Financial Institutional Securities Limited Page 24

Sugar Sector 8 October 2018

National Biofuel Policy 2018 - Key features

To promote biofuels, a National Policy on Biofuels was enacted by the Ministry of New
and Renewable Energy in 2009. The biofuels programme in India has been largely
impacted due to non-availability of domestic feedstock for biofuel production. The
government – in May’18 – announced a new policy. The key features are as below:

Scope/Objective: Aims to increase availability of biofuels in the market by increasing its

blending rate of ethanol in petrol (from 2.0% currently to 20% by 2030) and biofuel in
biodiesel (from 0.1% currently to 5% by 2030). It plans to achieve this by a) reinforcing
ongoing ethanol/biodiesel supplies through increasing domestic production b) setting up
Second Generation (2G) bio refineries c) development of new feedstock for biofuels (d)
development of new technologies for conversion to biofuels and e) facilitate integration
of biofuel with the main fuels.

Salient Features:

 It categorises biofuels as Basic Biofuels - First Generation (1G) bioethanol & biodiesel
and Advanced Biofuels - Second Generation (2G) ethanol, Municipal Solid Waste,
drop-in fuels, Third Generation (3G) biofuels and bio-CNG to enable extension
of financial and fiscal incentives under each category.

 Expands the scope of raw material for ethanol production by allowing use of
Sugarcane Juice, Sugar containing materials (Sugar Beet, Sweet Sorghum), Starch
containing materials (Corn, Cassava) and Damaged food grains (wheat, broken rice,
Rotten Potatoes).

 Allows use of surplus food grains for production of ethanol for blending with petrol
with the approval of National Biofuel Coordination Committee.

 Focusing on Advanced Biofuels, the Policy indicates a viability gap funding scheme
for 2G ethanol Bio refineries of INR.50.0bn in 6 years in addition to additional tax
incentives, higher purchase price as compared to 1G biofuels.

 Encourages setting up of supply chain mechanisms for biodiesel production from

non-edible oilseeds, Used Cooking Oil and short gestation crops.

Financial incentives: The government plans to a) extend financial incentives (viability gap
funding, subsidies and grant for biofuels) b) create a National Biofuel Fund for providing
financial incentives c) incentivize the nascent “Advanced Biofuel” industry with fiscal
incentives (tax credits, advance depreciation on plant expenditure, differential pricing
compared to 1G Ethanol, Viability Gap Funding) to set up 2G Ethanol Bio refineries d)
Schemes to take the “Advanced Biofuel” programme forward e) generate carbon credits
for the savings on CO2 emissions on the account of biofuel feedstock generation and
use of biofuels, in pure or blended form f) NABARD and other Public Sector Banks to
provide funding, financial assistance through soft loans and other means

Expected Benefits: The benefits of the policy are expected to be a) reduction in import
dependency by susituiting ethanol b) reduction in carbon dioxide emissions by reducing
crop burning & conversion of agricultural residues/wastes to biofuels there will be further
reduction in Green House Gas emissions, c) better Municipal Solid Waste Management
d) Infrastructural Investment in Rural Areas on account of distilleries being setup and
consequently employment generation e) Additional Income to Farmers by adopting 2G
technologies and converting agricultural waste into ethanol.

JM Financial Institutional Securities Limited Page 25

8 October 2018 India | Sugar | Company Update

Balrampur Chini | HOLD

Best in class, but await a better price point

Balrampur Chini (BCML) is expected to report another bumper year in FY19 thanks to a) MSP Achal Lohade
[email protected] | Tel: (91 22) 66303081
of INR 29/kg for sugar (protected downside), b) government incentives on cane prices (INR
Shrenik Bachhawat
144/t), c) rise in ethanol prices and d) lower opening inventory valuation (valued at INR [email protected] | Tel: (91 22) 66303074
26/kg). The company plans to set up a new distillery at its sugar plant in Guleria (160 KLPD), Manish Agrawal
which augurs well from a medium- to long-term perspective, assuming ethanol prices sustain [email protected] | Tel: (91 22) 66303068
at the current level. Nonetheless, we are concerned about a) a structural surplus scenario for
India given the robust profitability of sugarcane crops for farmers and yield improvement in
Uttar Pradesh (UP - on the early variety), except during severe drought/adverse climatic
conditions and b) a tight and excessive regulatory scenario, although we are currently positive
about it. We maintain HOLD with a Sep’19 TP of INR 90 and await a better price point for Recommendation and Price Target
entry. Current Reco. HOLD
Previous Reco. HOLD
 Fundamentals weak but supported by the government: Management is optimistic about Current Price Target (12M) 90
its business outlook on account of a) government-led measures leading to stable sugar Upside/(Downside) 18.7%
prices (a decline is not expected) to tackle record production scenario and b) the rising Previous Price Target 150
Change -40.0%
mix of early-variety sugar further increasing crushing volumes and recovery rates for the
company. Moreover, its outlook on co-gen and distillery volumes remains optimistic on
Key Data – BRCM IN
increased cane crushing volumes and higher realisations. Current Market Price INR76
Market cap (bn) INR17.3/US$0.2
 BCML to benefit from government incentives on ethanol: BCML has announced plans to
Free Float 44%
set up 160 KLPD capacity at its Guleria plant by Mar’20, thus expanding its total distillery Shares in issue (mn) 244.9
capacity from 360 KLPD to 520 KLPD. The expansion is based on a) higher ethanol pricing Diluted share (mn) 228.4
and visibility and b) the government’s interest subvention scheme (50% of interest rate or 3-mon avg daily val (mn) INR936.2/US$12.7
52-week range 179/59
6%, whichever is lower). We estimate a c.2-year pay-back period for BCML assuming the
Sensex/Nifty 34,377/10,316
B Molasses route and current ethanol prices. INR/US$ 73.8

 Revise estimates: We revise our FY19/20 estimates by -10%/16% and introduce FY21
Price Performance
numbers to factor in a) cane price incentives by the Central and state governments, b) % 1M 6M 12M
higher ethanol prices, c) storage income from the central government towards buffer Absolute -2.3 -1.0 -52.5
stock and d) MSP on sugar. We note that BCML is expected to report another bumper Relative* 9.1 -3.2 -56.0
year thanks to a) MSP of INR 29/kg for sugar (protected downside), b) government * To the BSE Sensex

incentives on cane prices (INR 144/t), c) higher ethanol prices and d) lower opening
inventory valuation (valued at INR 26/kg; average FY19 realisation of INR 30/kg).

 Cut TP; maintain HOLD: While we continue to like BCML on account of its strong balance
sheet (LTD/equity <0.06), we remain concerned about a) a structural surplus scenario,
except during severe drought/adverse climatic conditions, and b) excessive regulations
(government dictate sugarcane price/volume/sugar price/ethanol/power realisation). We
value Balrampur Chini at 0.5x EV/replacement cost (to reflect weak fundamentals of the
industry) to arrive at a Sep’19 TP of INR 90. We maintain HOLD and await a better price
for entry/addition. Key risks to our call a) a significant increase in the MSP of sugar and
ethanol price, and b) severe drought/adverse climatic conditions.

Financial Summary (INR mn)

Y/E March FY17A FY18A FY19E FY20E FY21E
Net Sales 34,601 43,425 41,382 44,701 46,872
Sales Growth (%) 25.5 25.5 -4.7 8.0 4.9
EBITDA 9,198 4,517 6,965 6,518 6,548
EBITDA Margin (%) 26.6 10.4 16.8 14.6 14.0 JM Financial Research is also available on:
Adjusted Net Profit 6,387 2,211 4,228 3,729 3,705 Bloomberg - JMFR <GO>,
Diluted EPS (INR) 28.0 9.7 18.5 16.3 16.2 Thomson Publisher & Reuters
Diluted EPS Growth (%) 188.7 -65.4 91.2 -11.8 -0.6
S&P Capital IQ and FactSet
ROIC (%) 21.8 8.2 17.0 14.3 14.0
ROE (%) 46.1 14.1 24.2 18.4 16.2
P/E (x) 2.7 7.9 4.1 4.7 4.7 Please see Appendix I at the end of this
P/B (x) 1.1 1.1 0.9 0.8 0.7 report for Important Disclosures and
EV/EBITDA (x) 4.0 6.3 4.1 4.0 3.7 Disclaimers and Research Analyst
Dividend Yield (%) 4.9 3.4 5.3 5.3 5.3
Source: Company data, JM Financial. Note: Valuations as of 05/Oct/2018
Certification.

JM Financial Institutional Securities Limited

Balrampur Chini 8 October 2018

Key Charts
Exhibit 46. Valuation Table
Particulars Bear case Base case Bull case

Replacement value INR mn 51,348 51,348 51,348

EV/Replacement multiple x 0.30 0.50 1.00

Implied EV INR mn 15,404 25,674 51,348

Less: Net debt (incl working cap) INR mn 4,336 4,336 4,336

Equity value INR mn 11,068 21,338 47,012

Target Price (Mar'19) INR/sh 48 90 206

CMP INR/sh 78 78 78

Potential upside/(Downside) % -38% 15% 164%

Implied P/BV (FY20) x 0.5 0.9 2.2

Implied P/E (FY20) x 2.8 5.3 12.1

Source: Company, JM Financial

Exhibit 47. 1-year forward EV/Replacement band Exhibit 48. 1-year forward P/BV band
x EV/Replacement x 1 Year forward Price to Book
1.4 2.5

1.2
2.3
2.1
1.0
1.9
0.8 1.7
1.5
0.6
1.3
0.4
1.1

0.2 0.9
0.7
0.0
0.5
Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18
Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
Oct-12

Jul-13
Oct-13

Jul-14
Oct-14

Jul-15
Oct-15

Jul-16
Oct-16

Jul-17
Oct-17

Jul-18
Oct-18

Apr-13

Apr-17
Apr-14

Apr-15

Apr-16

Apr-18
Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
Oct-12

Jul-13
Oct-13

Jul-14
Oct-14

Jul-15
Oct-15

Jul-16
Oct-16

Jul-17
Oct-17

Jul-18
Oct-18
Source: Bloomberg, JM Financial
Source: Bloomberg, JM Financial

Exhibit 49. Key Assumptions

Particulars Units FY17A FY18A FY19E FY20E FY21E

Year Ending 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar

Cane crushed mnt 7.95 9.28 10.02 10.52 11.05

Recovery rate % 10.7% 10.8% 11.0% 11.0% 10.9%

Sugar Production 000 tonnes 847 1,006 1,102 1,161 1,209

Cane cost INR/tonne 3,224 3,293 3,200 3,200 3,200

Gross spread INR/kg 5.65 5.18 1.11 1.99 1.75

Sales Volume

Sugar (cane based) tonnes 7,97,400 10,29,500 10,91,270 11,34,921 11,80,318

Distillery (incl ethanol) mn litres 69 81 104 121 131

Co-gen (bagasse based) mn units 510 568 637 668 702

Realisation (Ex-mill)

Sugar INR/tonne 35,900 35,560 30,200 31,000 31,000

Distillery INR/litre 42.55 39.15 41.50 44.81 45.25

Co-gen (bagasse based) INR/unit 4.81 4.81 4.91 5.00 5.10

Source: Company, JM Financial

JM Financial Institutional Securities Limited

Page 27
Balrampur Chini 8 October 2018

Financial Tables (Standalone)

Income Statement (INR mn) Balance Sheet (INR mn)
Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E
Net Sales 34,601 43,425 41,382 44,701 46,872 Shareholders’ Fund 15,413 15,872 19,003 21,635 24,244
Sales Growth 25.5% 25.5% -4.7% 8.0% 4.9% Share Capital 235 228 228 228 228
Other Operating Income 0 0 0 0 0 Reserves & Surplus 15,178 15,643 18,774 21,407 24,015
Total Revenue 34,601 43,425 41,382 44,701 46,872 Preference Share Capital 0 0 0 0 0
Cost of Goods Sold/Op. Exp 21,573 34,746 28,240 32,995 34,575 Minority Interest 0 0 0 0 0
Personnel Cost 1,809 2,040 2,346 2,698 3,103 Total Loans 17,823 9,898 10,185 10,583 10,583
Other Expenses 2,021 2,123 3,831 2,490 2,646 Def. Tax Liab. / Assets (-) 1,434 1,835 1,947 2,049 2,151
EBITDA 9,198 4,517 6,965 6,518 6,548 Total - Equity & Liab. 34,669 27,604 31,135 34,268 36,978
EBITDA Margin 26.6% 10.4% 16.8% 14.6% 14.0% Net Fixed Assets 14,184 14,583 14,805 14,965 15,062
EBITDA Growth 123.8% -50.9% 54.2% -6.4% 0.5% Gross Fixed Assets 16,214 17,495 18,808 20,008 21,208
Depn. & Amort. 1,049 952 978 1,040 1,103 Intangible Assets 0 0 0 0 0
EBIT 8,149 3,564 5,987 5,478 5,445 Less: Depn. & Amort. 2,091 3,025 4,003 5,043 6,146
Other Income 219 278 150 150 150 Capital WIP 61 113 0 0 0
Finance Cost 554 520 500 520 520 Investments 450 832 832 832 832
PBT before Excep. & Forex 7,814 3,322 5,637 5,108 5,075 Current Assets 25,320 21,206 23,410 27,017 30,045
Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 23,138 18,022 19,914 20,688 21,565
PBT 7,814 3,322 5,637 5,108 5,075 Sundry Debtors 1,628 1,822 1,736 1,876 1,967
Taxes 1,419 1,111 1,409 1,379 1,370 Cash & Bank Balances 45 87 485 3,179 5,239
Extraordinary Inc./Loss(-) -473 0 0 0 0 Loans & Advances 510 1,275 1,275 1,275 1,275
Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 0 0 0 0 0
Reported Net Profit 5,923 2,211 4,228 3,729 3,705 Current Liab. & Prov. 5,285 9,016 7,911 8,545 8,961
Adjusted Net Profit 6,387 2,211 4,228 3,729 3,705 Current Liabilities 2,954 7,853 6,802 7,348 7,705
Net Margin 18.5% 5.1% 10.2% 8.3% 7.9% Provisions & Others 2,331 1,163 1,108 1,197 1,256
Diluted Share Cap. (mn) 228.4 228.4 228.4 228.4 228.4 Net Current Assets 20,035 12,190 15,499 18,472 21,085
Diluted EPS (INR) 28.0 9.7 18.5 16.3 16.2 Total – Assets 34,669 27,604 31,135 34,268 36,978
Diluted EPS Growth 188.7% -65.4% 91.2% -11.8% -0.6% Source: Company, JM Financial
Total Dividend + Tax 1,032 707 1,096 1,096 1,096
Dividend Per Share (INR) 3.8 2.6 4.0 4.0 4.0
Source: Company, JM Financial

Cash Flow Statement (INR mn)

Dupont Analysis
Y/E March FY17A FY18A FY19E FY20E FY21E
Y/E March FY17A FY18A FY19E FY20E FY21E
Profit before Tax 7,341 3,322 5,637 5,108 5,075
Net Margin 18.5% 5.1% 10.2% 8.3% 7.9%
Depn. & Amort. 1,049 952 978 1,040 1,103
Asset Turnover (x) 1.1 1.4 1.4 1.4 1.3
Net Interest Exp. / Inc. (-) 516 500 350 370 370
Leverage Factor (x) 2.4 2.0 1.7 1.6 1.6
Inc (-) / Dec in WCap. -4,552 8,234 -2,911 -279 -553
Others 522 -27 113 102 102 RoE 46.1% 14.1% 24.2% 18.4% 16.2%

Taxes Paid -1,414 -1,182 -1,409 -1,379 -1,370

Operating Cash Flow 3,463 11,798 2,757 4,962 4,726 Key Ratios
Capex -1,223 -1,321 -1,200 -1,200 -1,200 Y/E March FY17A FY18A FY19E FY20E FY21E
Free Cash Flow 2,241 10,477 1,557 3,762 3,526 BV/Share (INR) 67.5 69.5 83.2 94.7 106.1
Inc (-) / Dec in Investments -1 -6 0 0 0 ROIC 21.8% 8.2% 17.0% 14.3% 14.0%
Others 67 -285 150 150 150 ROE 46.1% 14.1% 24.2% 18.4% 16.2%
Investing Cash Flow -1,157 -1,613 -1,050 -1,050 -1,050 Net Debt/Equity (x) 1.2 0.6 0.5 0.3 0.2
Inc / Dec (-) in Capital -1,747 -989 0 0 0 P/E (x) 2.7 7.9 4.1 4.7 4.7
Dividend + Tax thereon -1,032 -707 -1,096 -1,096 -1,096 P/B (x) 1.1 1.1 0.9 0.8 0.7
Inc / Dec (-) in Loans 1,112 -7,925 287 398 0 EV/EBITDA (x) 4.0 6.3 4.1 4.0 3.7
Others -660 -580 -500 -520 -520 EV/Sales (x) 1.1 0.7 0.7 0.6 0.5
Financing Cash Flow -2,327 -10,201 -1,309 -1,218 -1,616 Debtor days 17 15 15 15 15
Inc / Dec (-) in Cash -21 -15 398 2,694 2,060 Inventory days 244 151 176 169 168
Opening Cash Balance 66 45 87 485 3,179 Creditor days 42 74 72 70 70
Closing Cash Balance 44 29 485 3,179 5,239 Source: Company, JM Financial
Source: Company, JM Financial

JM Financial Institutional Securities Limited

Page 28
8 October 2018 India | Sugar | Company Update

EID Parry | BUY

SoTP Play

The core business segments OF EID Parry (EID) have recently recorded weak performance on Achal Lohade
[email protected] | Tel: (91 22) 66303081
account of a) consecutive years of drought and high SAP prices for sugarcane in Tamil Nadu
Manish Agrawal
(TN - its home state) and b) lower sugar prices. While the divestment of its bio pesticides [email protected] | Tel: (91 22) 66303068
business has further reduced its leverage (long-term debt has reduced from INR 12bn to INR Shrenik Bachhawat
6bn in the past 3 years), recent TN government actions indicate that a favourable cane price [email protected] | Tel: (91 22) 66303074
scenario (indirect link to sugar prices) would augur well for the company’s fundamentals.
EID’s current share price reflects a 73% holding company discount to the value of its stake in
of Coromandel International (CRIN IN; EID owns 60.5% stake), one of the highest in the past
3 years. We maintain BUY and our TP is INR 230.
 Weak performance in core business in 1QFY19: EID reported 1% YoY growth in revenue, Recommendation and Price Target
led by an increase in sugar volumes (+20% YoY) and decline in realisations (-29% YoY). Current Reco. BUY
Previous Reco. BUY
While distillery revenue grew (+56% YoY), it was impacted by lower co-gen revenue (on Current Price Target (12M) 230
lower cane volumes due to drought conditions in South India). Further, the company posted Upside/(Downside) 23.7%
a loss at the EBITDA level (at INR 1.1bn) due to lower margins in the sugar segment. The net Previous Price Target 410
Change -43.9%
loss came in at INR 1.04bn in 1QFY19.

 Stable outlook on sugar segment: Management remained optimistic on the monsoon in TN Key Data – EID IN
and Karnataka (water levels in dams are adequate). For FY19, the company guided for an Current Market Price INR186
Market cap (bn) INR32.9/US$0.4
operationally better year as sugarcane crushing volume is expected to go up while cane
Free Float 45%
prices are moderating. Moreover, sugar prices are being directly regulated by the Shares in issue (mn) 175.8
government provides reasonable confidence. Diluted share (mn) 177.0
3-mon avg daily val (mn) INR81.7/US$1.1
 Debt reduction on track: The Company has been consciously reducing its long-term debt 52-week range 392/184
through the disposal of non-core assets (e.g. its bio pesticides business) and utilisation of Sensex/Nifty 34,377/10,316
operational cash flows (no material capex programme apart from routine capacity INR/US$ 73.8

augmentation).
Price Performance
 Maintain BUY with TP of INR 230 on a diversified play: We revise our FY19/20 estimates by % 1M 6M 12M
Absolute -10.3 -33.0 -48.6
18%/8% to reflect lower cane prices; we also incorporate FY21 in our estimates. We
Relative* 0.2 -34.5 -52.4
value EID on an SOTP basis with a) sugar and allied businesses valued at 0.50x Sep’20 * To the BSE Sensex
replacement costs, b) the CRIN stake valued at a 65% discount to the current market
price, c) Silkroad Refinery and other investments valued at 0.7x BV and d) the bio-
products business valued at 10xSep’20EBIT. We arrive at Sep’19TP of INR 230. We
maintain BUY as EID’s current share price reflects a 73% holding company discount to
the value of its stake in of Coromandel International (CRIN IN; EID owns 60.5% stake),
one of the highest in the past 3 years. Key risk to call is lower than expected sugar
realisation.

Financial Summary (INR mn)

Y/E March FY17A FY18A FY19E FY20E FY21E
Net Sales 22,300 18,962 19,017 20,208 21,183
Sales Growth (%) -12.9 -15.0 0.3 6.3 4.8
EBITDA 3,451 1,672 1,644 1,891 1,892
EBITDA Margin (%) 15.3 8.7 8.6 9.3 8.8 JM Financial Research is also available on:
Adjusted Net Profit 2,740 -57 986 1,387 1,516 Bloomberg - JMFR <GO>,
Diluted EPS (INR) 15.6 -0.3 5.6 7.8 8.6 Thomson Publisher & Reuters
Diluted EPS Growth (%) 0.0 0.0 0.0 40.6 9.4
S&P Capital IQ and FactSet
ROIC (%) 15.8 4.0 3.0 4.8 5.1
ROE (%) 19.9 -0.4 5.7 7.5 7.9
P/E (x) 11.9 -576.6 33.4 23.7 21.7 Please see Appendix I at the end of this
P/B (x) 2.2 2.0 1.8 1.8 1.7 report for Important Disclosures and
EV/EBITDA (x) 12.2 25.6 24.0 19.9 18.8 Disclaimers and Research Analyst
Dividend Yield (%) 2.2 2.2 2.2 2.2 2.2
Source: Company data, JM Financial. Note: Valuations as of 05/Oct/2018
Certification.

JM Financial Institutional Securities Limited

EID Parry 8 October 2018

Key Charts
Exhibit 50. Valuation Table
Base Case valuation

Particulars Unit Valuation

30,501
Replacement Value of Sugar and Related Capacities INR mn

0.50
EV/Replacement multiple x

15,250
Enterprise Value for Sugar Business A INR mn

100
India Bio Products EBIT INR mn

10
PE Multiple x

1,004
Value of India Bio Products Business B INR mn

Valuation of stake in Coromandel International

375
Per share value of CRIN C INR

177
No of shares held by EID D mn

66,433
Fair value of the investment E=CxD INR mn

43,182
Less: Holding company discount (60%) F INR mn

23,252
Value of investment in Coromandel G=E-F INR mn

3,491
Investment in Silkroad Refinery H INR mn

1,818
Other Investments into subsidiaries I INR mn

4,713
Less: Net Debt at standalone level J INR mn

40,102
Fair value for EID Equity K=A+B+G+H+I-J INR mn

176
No of shares L mn

230
Fair value per share M=K/L INR

186
CMP INR

24%
Upside potential %

Source: Company, JM Financial

Exhibit 51. Sensitivity to target price

Market pric e of Coromandel
### 316 356 395 435 474
EV/Replacement

0 .3 160 180 190 210 220

0 .4 180 200 210 220 240
0 .5 200 210 230 240 250
0 .6 220 230 240 260 270
0 .7 230 250 260 280 290
Source: JM Financial

JM Financial Institutional Securities Limited Page 30

EID Parry 8 October 2018

Exhibit 52. Implied discount to CRIN’s stake

Prem/(Disc) to CRIN stake value Avg +1 STD DEV -1 STD DEV
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
-100%
-120%
-140%
Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18
Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18
Source: Bloomberg, JM Financial

JM Financial Institutional Securities Limited Page 31

EID Parry 8 October 2018

Financial Tables (Standalone)

Income Statement (INR mn) Balance Sheet (INR mn)
Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E
Net Sales 22,300 18,962 19,017 20,208 21,183 Shareholders’ Fund 14,775 16,381 18,228 18,765 19,431
Sales Growth -12.9% -15.0% 0.3% 6.3% 4.8% Share Capital 176 177 177 177 177
Other Operating Income 184 251 200 200 200 Reserves & Surplus 14,599 16,204 18,051 18,588 19,254
Total Revenue 22,484 19,213 19,217 20,408 21,383 Preference Share Capital 0 0 0 0 0
Cost of Goods Sold/Op. Exp 14,308 12,690 12,307 12,943 13,590 Minority Interest 0 0 0 0 0
Personnel Cost 1,253 1,351 1,486 1,605 1,733 Total Loans 9,435 10,180 7,680 5,680 3,680
Other Expenses 3,472 3,500 3,780 3,969 4,168 Def. Tax Liab. / Assets (-) -616 -683 -683 -683 -683
EBITDA 3,451 1,672 1,644 1,891 1,892 Total - Equity & Liab. 23,593 25,879 25,225 23,762 22,429
EBITDA Margin 15.3% 8.7% 8.6% 9.3% 8.8% Net Fixed Assets 14,882 13,958 13,618 13,065 12,401
EBITDA Growth 465.8% -51.6% -1.6% 15.0% 0.1% Gross Fixed Assets 31,420 31,653 32,453 33,053 33,553
Depn. & Amort. 1,110 1,130 1,141 1,152 1,164 Intangible Assets 0 0 0 0 0
EBIT 2,341 542 503 739 728 Less: Depn. & Amort. 16,618 17,747 18,888 20,041 21,204
Other Income 1,478 1,937 1,583 1,583 1,583 Capital WIP 80 53 53 53 53
Finance Cost 1,399 1,129 1,100 935 795 Investments 7,858 8,783 8,783 8,783 8,783
PBT before Excep. & Forex 2,420 1,350 986 1,387 1,516 Current Assets 11,040 16,998 16,688 16,636 16,670
Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 7,346 10,976 10,946 10,946 10,946
PBT 2,420 1,350 986 1,387 1,516 Sundry Debtors 2,105 1,345 1,345 1,428 1,496
Taxes -321 -337 0 0 0 Cash & Bank Balances 61 101 926 792 757
Extraordinary Inc./Loss(-) 0 -872 1,710 0 0 Loans & Advances 797 2,324 1,219 1,219 1,219
Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 732 2,252 2,252 2,252 2,252
Reported Net Profit 2,740 815 2,696 1,387 1,516 Current Liab. & Prov. 10,186 13,861 13,864 14,723 15,426
Adjusted Net Profit 2,740 -57 986 1,387 1,516 Current Liabilities 8,560 12,466 12,469 13,241 13,874
Net Margin 12.2% -0.3% 5.1% 6.8% 7.1% Provisions & Others 1,626 1,395 1,395 1,481 1,552
Diluted Share Cap. (mn) 175.9 177.0 177.0 177.0 177.0 Net Current Assets 854 3,137 2,824 1,913 1,244
Diluted EPS (INR) 15.6 -0.3 5.6 7.8 8.6 Total – Assets 23,593 25,879 25,225 23,762 22,429
Diluted EPS Growth 0.0% 0.0% 0.0% 40.6% 9.4% Source: Company, JM Financial
Total Dividend + Tax 844 850 850 850 850
Dividend Per Share (INR) 4.0 4.0 4.0 4.0 4.0
Source: Company, JM Financial

Cash Flow Statement (INR mn)

Dupont Analysis
Y/E March FY17A FY18A FY19E FY20E FY21E
Y/E March FY17A FY18A FY19E FY20E FY21E
Profit before Tax 2,420 1,350 986 1,387 1,516
Net Margin 12.2% -0.3% 5.1% 6.8% 7.1%
Depn. & Amort. 1,121 1,145 1,141 1,152 1,164
Asset Turnover (x) 0.9 0.8 0.8 0.8 0.9
Net Interest Exp. / Inc. (-) 690 -288 37 -128 -268
Leverage Factor (x) 1.8 1.6 1.5 1.3 1.2
Inc (-) / Dec in WCap. 1,466 -652 1,138 776 635
Others -659 -1,915 1,190 -520 -520 RoE 19.9% -0.4% 5.7% 7.5% 7.9%

Taxes Paid 321 337 0 0 0

Operating Cash Flow 5,358 -24 4,492 2,667 2,527 Key Ratios
Capex -602 -371 -800 -600 -500 Y/E March FY17A FY18A FY19E FY20E FY21E
Free Cash Flow 4,756 -394 3,692 2,067 2,027 BV/Share (INR) 84.0 92.5 103.0 106.0 109.8
Inc (-) / Dec in Investments 47 -27 0 0 0 ROIC 15.8% 4.0% 3.0% 4.8% 5.1%
Others 828 712 1,583 1,583 1,583 ROE 19.9% -0.4% 5.7% 7.5% 7.9%
Investing Cash Flow 273 315 783 983 1,083 Net Debt/Equity (x) 0.6 0.6 0.4 0.3 0.2
Inc / Dec (-) in Capital 5 7 0 0 0 P/E (x) 11.9 -576.6 33.4 23.7 21.7
Dividend + Tax thereon -704 0 -850 -850 -850 P/B (x) 2.2 2.0 1.8 1.8 1.7
Inc / Dec (-) in Loans -3,769 745 -2,500 -2,000 -2,000 EV/EBITDA (x) 12.2 25.6 24.0 19.9 18.8
Others -1,470 -1,015 -1,100 -935 -795 EV/Sales (x) 1.9 2.2 2.1 1.8 1.7
Financing Cash Flow -5,937 -263 -4,450 -3,785 -3,644 Debtor days 34 26 26 26 26
Inc / Dec (-) in Cash -306 28 825 -135 -34 Inventory days 119 209 208 196 187
Opening Cash Balance 1,063 61 101 926 792 Creditor days 164 259 259 261 260
Closing Cash Balance 757 89 926 792 757 Source: Company, JM Financial
Source: Company, JM Financial

JM Financial Institutional Securities Limited

Page 32
Sugar Sector 8 October 2018

Sugar companies - Profiles (Not Rated)

 Triveni Engineering & Industries (Triveni) operates in sugar and engineering segments and
is one of the largest integrated sugar players with 7 mills, 6 co-generation units and 1
distillery spread over 8 locations in UP.

The plants are strategically located in fertile and well-irrigated areas. The mills are spread
across the western, central and eastern part of the cane rich areas of UP (Khatauli,
Deoband and Sabitgarh units in western UP; Rani Nangal, Chandanpur and Milak
Narayanpur units in central UP and Ramkola in eastern UP). Over 50% of Triveni's
crushing capacity is located in western UP (fertile and well-irrigated land). And all sugar
units are under canal irrigation (both in western and central UP), leading to reduced
dependence on monsoons.

It set up sugar refinery at two sugar units for manufacturing refined sugar (higher
realisations and product quality). Currently, c.40% of the sugar produced by Triveni is
refined sugar. Triveni's distillery, located in Muzzffarnagar UP, is one of the largest single
stream molasses based distilleries in India and is strategically located in close proximity to
two of its largest sugar unitsand procures consistent supply of captive raw material. The
distillery has a flexible manufacturing process allowing it to produce Extra Neutral
Alcohol, Rectified Spirit, Special Denatured Spirit and Ethanol.

 Dhampur Sugar is an integrated sugarcane processing company with a wide-ranging

portfolio of products (sugar, renewable power, fuel ethanol, alcohol, extra neutral
alcohol, alcohol based chemicals and bio fertilisers).

It has a cane crushing capacity of 45.5K TCD of cane per day spread across 5 mills located
in Uttar Pradesh. Dhampur (15K), Asmoli (9K), Rajpura (8.5K), Mansurpur (8K) and
Meerganj (5K) are all mills based in UP. The total refining capacity stands at 1,700 TPD.
Currently, distillery capacity stands at 300,000 LPD with Dhampur (200,000) and Asmoli
(100,000) being the contributors. An additional capacity of 50,000 is coming up in both
the plants at an estimated capex of INR 400mn (expected completion by Oct’18). In-
house molasses constitutes 80% while rest is imported. The distillery runs for 350 days a
year on account of 2 incineratior boilers installed in FY18. It further helps to achieve zero
liquid discharge and generate 11.5MW power out of effluents, resulting in higher asset
utilisation.

 Dwarikesh Sugar is a UP-based diversified sugar company with a combined capacity of

21.5K TCD spread across 3 plants in Bijnor and Bareilly districts. Dwarikesh was one of
the early movers in its Bijnor command areas to plant the Co-0238 cane variety (high
yielding disease resistance variety). Additionally, its portfolio includes 30 KLPD distillery
capacity equipped with a modern effluent treatment plant. It has 86MW of cogeneration
capacity (37% utilised in-house and rest exported to the grid). It has a diversified revenue
source including sale of CER (Carbon Emission Reduction) and REC (Renewable Energy
Certificate).

Exhibit 53. Capacity and Replacement Costs

Company CMP Market Cap Net Debt Enterprise Value Replacement Cost EV/Replacement Location Capacity

INR INR mn INR mn INR mn INR mn (x) State Sugar (TCD ) Distillery (KLPD) Cogen (MW)

Balrampur 75 17,327 9,826 27,153 46,369 0.6 UP 77 360 163

Triveni 40 10,524 11,050 21,574 30,965 0.7 UP 61 160 56

Dhampur 125 8,364 13,159 21,524 30,581 0.7 UP 46 300 127

EID Parry 179 31,700 51,503 83,203 25,583 3.3 TN 39 248 100

DCM Shriram 347 56,456 5,140 61,596 19,461 3.2 UP 33 150 62

Dwarikesh Sugar 23 4,359 3,215 7,574 12,375 0.6 UP 22 30 54
Source: Bloomberg as on 08/10/2018, JM Financial

JM Financial Institutional Securities Limited Page 33

Sugar Sector 8 October 2018

Exhibit 54. New capacity being installed by top players

Proposed
in KLPD Existing New Capacity Increase

Balrampur 360 160 44%

Triveni 160 650 406%

Dhampur 300 300 100%

Eid Parry 248 145 58%

DCM Shriram 150 0 0%

Dwarikesh Sugar 30 70 233%

Source: Company, Press Release, JM Financial

Exhibit 55. State-wise applications for new distilleries

No of Applications Distillery Expansion Capex

Region Number Mix KLPD Mix INR mn Mix

UP 28 25% 1,980 36% 1,594 30%

Maharshtra 53 46% 1,895 34% 2,183 41%

Others 33 29% 1,660 30% 1,548 29%

Total 114 100% 5,535 100% 5,324 100%

Source: Press Release, JM Financial

JM Financial Institutional Securities Limited Page 34

Sugar Sector 8 October 2018

Annexure

Exhibit 56. Manufacturing Process

Source: JM Financial, https://www.feedipedia.org/node/561

Process and products

 Cane sugar is obtained by a) successive evaporation b) crystallisation and c)

centrifugation. The sugar extraction process and the sugar refining process yield specific
types of molasses.

 A molasses (80-85% DM) is an intermediate by-product produced from extraction of first

sugar crystal extraction (A sugar) obtained from the initial processing at the sugar factory.
 B molasses (80-85% DM) contains less sugar compared with A molasses and does not
crystallise spontaneously.

 C molasses (91% DM) is the end by-product of the processing in the sugar factory. It
does not crystallise and can be found in liquid/dried form and used as a commercial feed
ingredient.

 Syrup-off (90-92%DM) is the end product obtained from the centrifugation of the final
refined masecuite in a raw sugar refinery. It is usually sent to the raw sugar section of the
refinery and reprocessed to recover more sucrose.

 Refinery final molasses is the by-product of refined sugar extraction having similar
composition to that of C molasses produced in a raw sugar factory.

JM Financial Institutional Securities Limited Page 35

Sugar Sector 8 October 2018

APPENDIX I

JM Financial Institutional Securities Limited

(formerly known as JM Financial Securities Limited)
Corporate Identity Number: U67100MH2017PLC296081
Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.
SEBI Registration Nos.: Stock Broker - INZ000163434, Research Analyst – INH000000610
Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.
Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: [email protected] | www.jmfl.com
Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: [email protected]

Definition of ratings
Rating Meaning
Buy Total expected returns of more than 15%. Total expected return includes dividend yields.
Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.
Sell Price expected to move downwards by more than 10%

Research Analyst(s) Certification

The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:

All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and

No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research
report.

Important Disclosures

This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the
company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select
recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written
consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein.

JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst and a Stock Broker having trading
memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Ltd. (MSEI). No material disciplinary
action has been taken by SEBI against JM Financial Institutional Securities in the past two financial years which may impact the investment decision making of the
investor.

JM Financial Institutional Securities renders stock broking services primarily to institutional investors and provides the research services to its institutional
clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management,
brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing
offerings of securities, corporate finance, investment banking, mergers & acquisitions, broking, financing or any other advisory services to the company(ies)
covered herein. JM Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from
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JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell
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Sugar Sector 8 October 2018

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