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

A NEW SAVIOUR FORTHE SUGAR INDUSTRY?

08 October 2018

SECTOR UPDATE INDIA SUGAR

TABLE OF CONTENTS

JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital IQ and FactSet

Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification.

You can also access our portal www.jmflresearch.com

INDIA SUGAR

03

05

MAIN THEMES

08

14

18

20

SS19 - Another bumper production year

Sugar prices and government measures

Ethanol – a new saviour for the sugar industry?

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

Can Ethanol change sector dynamics?

Balrampur Chini – HOLD

EID Parry - BUY

Sugar companies - Profiles (Not Rated)

COMPANIES

OTHER REPORTS

JM Financial Institutional Securities Limited

Introduction

Key charts

26

29

INDIA CEMENTRURAL SAFARI VII INDIA REAL ESTATE

Achal Lohade [email protected] Tel: (91 22) 66303081

Manish Agrawal [email protected] Tel: (91 22) 66303068

Shrenik Bachhawat [email protected] Tel: (91 22) 663030674

08 October 2018


INDIA CONSUMER DURABLES

24

33

ANNEXURE

http://www.jmflresearch.com/JMnew/JMCRM/analystreports/pdf/IndiaConsumerDurables_MorePowerToEveryone_25April2018.pdf

http://jmflresearch.com/JMnew/JMCRM/analystreports/pdf/India_Strategy_Rural_Safari_April18.pdf

http://jmflresearch.com/JMnew/JMCRM/analystreports/pdf/Real_Estate_Sector_%20Outlook%2017_April2018.pdf

http://jmflresearch.com/JMnew/JMCRM/analystreports/pdf/Sector%20Update%20-%20India%20Cement%20-%20April%202018.pdf

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.

Structural excess supply scenario make demand-supply scenario worrisome:

After posting record sugar production of 32.2mnt in SS18 (+60% YoY; last peak of 28.3mnt in SS15), India is expected to produce another similar quantum (32-33mnt) in SS19, led by a) higher acreage and yield in UP (growing adoption of new ‘early variety’ sugarcane) and b) higher acreage in MH and Karnataka (good monsoon in 2017), offset by lower yields due to pest attacks/drought in key pockets of production. Even after assuming 5mnt of exports, India is likely to end with closing stock of c.12mnt in Sep’19, almost 6-7 months’ consumption). Moreover, considering the nature of the crop (long duration and sturdy, assured cash flows, adoption of the early variety of sugarcane) and robust profitability, we believe India should mostly have an excess supply scenario, except in case of severe drought or pest attacks.

Ethanol - A great step but cyclicality remains


Industry back to the old age - ‘Full Regulation’:

While India moved from full control to partial control in 2014, recent measures such as reverse stock limits (i.e. monthly release) – coupled with the MSP of sugar – have taken the sugar industry back to medieval times.

We believe strict control over supplies would continue until inventory levels fall to manageable levels.

Exports are the only solution:

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. India faces constraints in large-scale exports as a) there is limited demand for its quality of white sugar, b) global sugar prices are at almost 10-year lows leaving a significant gap between domestic prices and net export realisations, and c) a delayed announcement of export incentives has led to negligible production of raw sugar (easy to export). The industry is pushing for a high MSP for sugar (INR 34-36/kg) while mandating 4-6mnt exports, without any explicit subsidy 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).

Higher ethanol blending ratio can reduce sugar production by 2-3mnt at best:

In order to reduce cane arrears and achieve bio-fuel targets, the government has stepped up on ethanol procurement through a) higher ethanol pricing (INR 43.7/litre vs INR 40.8/litre earlier) and b) authorising the use of B Heavy molasses as well as sugarcane for ethanol production and accorded priority in procurement. While the B Heavy molasses and direct sugarcane juice route are viable at current sugar/ethanol prices, we believe the impact on sugar production can be at best 1mnt in 2018-19 and probably 2-3mnt over the medium term considering capacity constraints, geographical spread and industry dynamics (fragmented industry, competing demand from industrial/potable alcohol, historical unsteady EBP implementation, etc.).

08 October 2018


Maintain HOLD on Balrampur Chini:

While we consider Balrampur Chini (BCML) as one of the best names in the sugar industry, we continue to remain slightly cautious on the stock given:

a) supply overhang in near term,b) modest possibility of a SAP increase, andc) excessive dependence on government measures forprofitability (MSP on sugar, cane price assistance, export/buffer stock incentives, ethanol prices, etc.).

We value BCML at 0.5x EV/replacement to arrive at a Sep’19 TP of INR 90 and maintain HOLD. We await a better price point for entry.


What can make us more positive on the sector?

a) Lower-than-expected sugar production and higher MSP forsugar,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, ande) a hike in the blending ratio (from 5% currently) andtherefore a diversion of sugar for ethanol production.

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

We like EID Parry (EID) on its geographical advantage (located in TN, Karnataka and Andhra Pradesh – AP), resulting in lower cane costs and the ability to exploit export/import opportunities.

We value EID on an SOTP basis: a) sugar and allied business at EV/replacement multiple of 0.5x, b) stake in Coromandel International at a 40% discount to arrive at our base TP and c) 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 share price currently EID assigns 73% discount to value of its holding in Coromandel International (CRIN), highest discount in past 5 years.

Where do we go from here?

We believe sector fundamentals continue to remain weak on a significant supply overhang (which may take at least 2 years to overcome) and hence sugar prices are fundamentally expected to remain weak, if a free market scenario considered.

However, given that the government is expected to regulate supplies and the MSP for sugar/sugarcane prices, we expect sugar prices to remain firm and argue that the profitability of sugar mills is now entirely in the hands of the government.

08 October 2018


Rationality emerging on cane pricing; a positive, but may change:

Compared with the earlier regulatory regime, we find that states appear to be more rational in cane pricing (e.g. the Tamil Nadu – TN – government is also showing a willingness for cane price linkages; Maharashtra and Karnataka have linkage mechanisms). However, the true linkage is still not working effectively as mills are supposed to pay a Fair and Remunerative Price (FRP) as the minimum price, even though the price payable based on the linkage formula would be substantially lesser.

Ethanol - A great step but cyclicality remains

Sugar Sector 8 October 2018


Key charts

Alcohol Consumption mix and Ethanol Blending (%) Exhibit 1.

Source: JM Financial, Industry

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

Unit Conventional

C Molasses B Molasses Direct route

cane crushed tonnes 100 100 100

Sugar recovery rate % 10.37 8.82 -

Molasses recovery rate % 4.50 6.58 75 litres per

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

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

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

42

7

45

4 70

0

75

0

58

7

70

0

58

8

60

0

40

0

60

0

52

1

55

4

1,0

00

1,0

00

71

8

1,0

00

10

00

10

00

80

0

70

0

57

6

61

3

71

0 1

,00

0

79

3

50

0

10

04

11

80

10

00

13

00

1,580 1,680

2,500

2,850

2,175 2,300

2,700 2,700

2,300

2,700

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-

500

1,000

1,500

2,000

2,500

3,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

other Use Fuel Ethanol Potable Use

Industrial Use Total alcohol Production EBP (%) RHS

mn ltr



India to have another surplus year Exhibit 4.

Source: ISMA, JM Financial

UP establishes itself as largest producing state Exhibit 5.


Domestic sugar prices- Long-term Exhibit 6.

Source: Bloomberg, JM Financial

Domestic sugar prices- Short-term Exhibit 7.

Source: Bloomberg,, JM Financial

Global sugar prices- Long-term Exhibit 8.

Source:Bloomberg, JM Financial

Global sugar prices-Short term Exhibit 9.


19.9

21.9

22.9

21.3

22.0

22.6

22.8

24.2

25.1

24.9

24.5

25.5

26.0

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

8.5

4.5

-8.4

-2.4

2.43.7

2.3

0.2

3.20.3

-4.2

6.8 6.4

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

10.0

15.0

20.0

25.0

30.0

35.0SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS14

SS15

SS16

SS17

SS18

SS19E

Consumption Production Surplus/(Deficit)mnt mnt

9.1 9.1

4.67.1

9.1 9.0 8.0 7.710.5

8.4

4.2

10.7 9.4

8.5 7.3

4.1

5.2

5.9 7.0 7.5 6.5

7.1

6.8

8.8

12.1 13.1

2.52.1

1.6

1.3

1.82.4 1.9

1.4

1.2

1.4

1.1

0.6 0.92.7

2.9

1.7

2.6

3.73.9

3.54.2

4.9

4.0

2.1

3.7 3.55.64.9

2.6

2.8

3.94.1

4.34.6

4.6

4.4

4.0

5.2 5.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS14

SS15

SS16

SS17

SS18

SS19E

mnt Mah UP TN Kar Others mnt

20

22

24

26

28

30

32

34

36

38

40

42

Au

g-0

9

Jan

-10

Jun-1

0

No

v-1

0

Ap

r-11

Sep

-11

Feb

-12

Jul-1

2

Dec-

12

May-

13

Oct

-13

Mar-

14

Au

g-1

4

Jan

-15

Jun-1

5

No

v-1

5

Ap

r-16

Sep

-16

Feb

-17

Jul-1

7

Dec-

17

May-

18

Oct

-18

Mumbai M-30 White sugar FOBINR/kg

20

22

24

26

28

30

32

34

36

38

40

42

Au

g-1

4

Oct

-14

Dec-

14

Feb

-15

Ap

r-15

Jun-1

5

Au

g-1

5

Oct

-15

Dec-

15

Feb

-16

Ap

r-16

Jun-1

6

Aug-1

6

Oct

-16

Dec-

16

Feb

-17

Apr-

17

Jun-1

7

Au

g-1

7

Oct

-17

Dec-

17

Feb

-18

Ap

r-18

Jun-1

8

Au

g-1

8

Oct

-18


100

200

300

400

500

600

700

800

900

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Aug

-11

Feb

-12

Aug

-12

Feb

-13

Aug

-13

Feb

-14

Aug

-14

Feb

-15

Aug

-15

Feb

-16

Aug

-16

Feb

-17

Aug

-17

Feb

-18

Aug

-18

Raw Sugar White SugarUSD/t

100

200

300

400

500

600

700

800

900

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

Nov

-15

Feb

-16

May

-16

Aug

-16

Nov

-16

Feb

-17

May

-17

Aug

-17

Nov

-17

Feb

-18

May

-18

Aug

-18

Nov

-18




1-year forward EV/replacement band - BRCM Exhibit 10.


1-year forward P/BV band - BRCM Exhibit 11.


1-year forward EV/replacement band - EID Exhibit 12.


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


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Oct

-12

Jan-1

3

Ap

r-1

3

Jul-13

Oct

-13

Jan-1

4

Ap

r-1

4

Jul-14

Oct

-14

Jan-1

5

Ap

r-1

5

Jul-15

Oct

-15

Jan-1

6

Ap

r-1

6

Jul-16

Oct

-16

Jan-1

7

Ap

r-1

7

Jul-17

Oct

-17

Jan-1

8

Ap

r-1

8

Jul-18

Oct

-18

EV/Replacementx

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

Oct

-12

Jan-1

3

Ap

r-1

3

Jul-13

Oct

-13

Jan-1

4

Ap

r-14

Jul-14

Oct

-14

Jan-1

5

Ap

r-15

Jul-15

Oct

-15

Jan-1

6

Ap

r-16

Jul-16

Oct

-16

Jan-1

7

Ap

r-1

7

Jul-17

Oct

-17

Jan-1

8

Ap

r-18

Jul-18

Oct

-18

1 Year forward Price to Bookx

0.5

0.7

0.9

1.1

1.3

1.5

1.7

Oct

-12

Jan-1

3

Ap

r-13

Jul-13

Oct

-13

Jan-1

4

Ap

r-14

Jul-14

Oct

-14

Jan-1

5

Ap

r-15

Jul-15

Oct

-15

Jan-1

6

Ap

r-16

Jul-16

Oct

-16

Jan-1

7

Ap

r-17

Jul-17

Oct

-17

Jan-1

8

Ap

r-18

Jul-18

Oct

-18

EV/Replacementx

0.0

0.5

1.0

1.5

2.0

2.5

Oct

-12

Jan-1

3

Ap

r-13

Jul-13

Oct

-13

Jan-1

4

Ap

r-14

Jul-14

Oct

-14

Jan-1

5

Ap

r-15

Jul-15

Oct

-15

Jan-1

6

Ap

r-16

Jul-16

Oct

-16

Jan-1

7

Ap

r-17

Jul-17

Oct

-17

Jan-1

8

Ap

r-18

Jul-18

Oct

-18

1-Yr forward Price to book chartx



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.

India to have another surplus year Exhibit 14.


UP establishes itself as largest producing state Exhibit 15.


Area Exhibit 16.


Yield Exhibit 17.


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.

19.9

21.9

22.9

21.3

22.0

22.6

22.8

24.2

25.1

24.9

24.5

25.5

26.0

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

8.5

4.5

-8.4

-2.4

2.43.7

2.3

0.2

3.20.3

-4.2

6.8 6.4

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

10.0

15.0

20.0

25.0

30.0

35.0

SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS14

SS15

SS16

SS17

SS18

SS19E

Consumption Production Surplus/(Deficit)mnt mnt

9.1 9.1

4.67.1

9.1 9.0 8.0 7.710.5

8.4

4.2

10.7 9.4

8.5 7.3

4.1

5.2

5.9 7.0 7.5 6.5

7.1

6.8

8.8

12.1 13.1

2.52.1

1.6

1.3

1.82.4 1.9

1.4

1.2

1.4

1.1

0.6 0.92.7

2.9

1.7

2.6

3.73.9

3.54.2

4.9

4.0

2.1

3.7 3.55.64.9

2.6

2.8

3.94.1

4.34.6

4.6

4.4

4.0

5.2 5.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS14

SS15

SS16

SS17

SS18

SS19E

mnt Mah UP TN Kar Others mnt

1.0 1.10.8 0.8 1.0 1.0 0.9 0.9 1.0 1.0

0.6 0.9 1.1

2.2 2.2

2.1 2.02.1 2.2 2.2 2.2 2.1 2.2

2.2

2.32.4

0.4 0.4

0.3 0.3

0.3 0.3 0.3 0.3 0.3 0.3

0.2

0.2 0.2

0.3 0.3

0.3 0.3

0.4 0.4 0.4 0.4 0.5 0.5

0.4

0.40.5

1.1 1.1

1.00.8

1.1 1.1 1.1 1.1 1.2 1.1

1.0

1.2

1.2

5.2 5.1

4.44.2

4.9 5.0 5.0 5.0 5.1 4.9

4.4

5.0

5.5

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS14

SS15

SS16

SS17

SS18

SS19E

mn ha Mah UP TN Kar Others Total (RHS) mn ha

74.9 80.9 79.0 84.9 84.9 84.9 74.6 82.1 82.2 74.7 80.0108.0

81.0

59.6 57.2 52.3 59.3 56.7 59.6 59.9 60.5 62.1 67.0 67.0

79.8

75.8

105.2 107.5 106.2 101.5 108.4 111.5 97.7

103.7 106.8 101.2 83.2

58.5

61.4

87.9 85.8 83.090.3 93.8 90.3

84.190.3 91.2

84.166.5

93.2

79.2

64.3 63.060.8

62.6 62.5 63.2

64.364.1 63.1

61.8

68.1

70.6

69.2

78.4 78.976.3

79.7 81.2 81.9

76.180.1 81.1

77.773.0

82.0

73.3

-1.0

9.0

19.0

29.0

39.0

49.0

59.0

69.0

79.0

89.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS14

SS15

SS16

SS17

SS18

SS19E

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



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).

Actual vs. Initial Estimates Exhibit 18.


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).

23.0

33.0

18.5

16.0

25.5

26.0

24.0 25.0

25.0 2

7.0

21.3

25.1

28.4

26.4

14.5

18.9

24.4 2

6.3

25.1

24.1

28.3

25.1

20.3

32.3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

SS07 SS08 SS09 SS10 SS11 SS12 SS13 SS14 SS15 SS16 SS17 SS18

Initial Estimate Actual Productionmnt



Historical trend in sugarcane and sugar production Exhibit 19.


Area under sugarcane Exhibit 20.


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).

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

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

SS95

SS96

SS97

SS98

SS99

SS00

SS01

SS02

SS03

SS04

SS05

SS06

SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS14

SS15

SS16

SS17

SS18

SS19E

Sugar Poduction (RHS) Areamnt

mn ha

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

0.6 0.60.4

0.30.5

1.0 1.1

0.8 0.8

1.0 1.00.9 0.9

1.0 1.0

0.6

0.91.1

2.02.1

2.02.0

2.22.2 2.2

2.12.0

2.1 2.2 2.2 2.22.1 2.2 2.2

2.32.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.0

3.5

4.0

4.5

5.0

5.5

6.0

SS

02

SS

03

SS

04

SS

05

SS

06

SS

07

SS

08

SS

09

SS

10

SS

11

SS

12

SS

13

SS

14

SS

15

SS

16

SS

17

SS

18

SS

19E

India Maharashtra Uttar Pradeshmn ha



Profitability of crops (Maharashtra) Exhibit 21.

Crop Yield NSP/MSP

Cultivation

Cost Net Earnings

Culivation

cost

(incl int,

rentals)

Revised

Profitabilty

(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

Profitability of crops (Uttar Pradesh) Exhibit 22.

Crop Yield NSP/MSP

Cultivation

Cost Net Earnings

Culivation

cost

(incl int,

rentals)

Revised

Profitabilty

(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.



State-wise production Exhibit 23.


UP SAP vs. FRP Exhibit 24.


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.

Highest cane prices globally Exhibit 25.


Productivity per hectare has risen significantly Exhibit 26.


Cost of production higher than global prices Exhibit 27.


Cost of production comparison Exhibit 28.


6.23.2 2.2

5.29.1 9.1

4.67.1

9.1 9.0 8.0 7.710.5

8.44.2

10.7 9.4

5.7

4.6 5.0

5.8

8.5 7.3

4.1

5.2

5.9 7.0 7.5 6.5

7.1

6.8

8.8

12.1 13.1

1.6

0.9 1.1

2.1

2.52.1

1.6

1.3

1.82.4 1.9

1.4

1.2

1.4

1.1

0.6 0.9

1.9

1.1 1.0

1.9

2.72.9

1.7

2.6

3.73.9

3.54.2

4.9

4.0

2.1

3.7 3.5

4.8

3.8 3.3

4.2

5.64.9

2.6

2.8

3.94.1

4.34.6

4.6

4.4

4.0

5.2 5.5

0

5

10

15

20

25

30

35

SS03

SS04

SS05

SS06

SS07

SS08

SS09

SS10

SS11

SS12

SS13

SS14

SS15

SS16

SS17

SS18

SS19E

mnt Mah UP TN Kar Others

MH drops from

6.2 (SS03) to 2.2

(SS05) and jumps to 9.1 (SS07)

MH drops from 9.1 (SS08)

to 4.6 (SS09) and jumps

back to 9.1 (SS11)

MH drops from 10.5

(SS16) to 4.2 (SS17) and

staring at 9 (SS18)

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

1,070 1,150

1,250 1,250 1,400

1,650

2,050

2,400

2,800 2,800 2,800 2,800

3,050 3,150

890 900 910 857 857

1,298 1,391 1,450

1,700

2,100 2,200

2,300 2,300

2,550

2,750

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

-

500

1,000

1,500

2,000

2,500

3,000

3,500

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

Sugar Price (RHS) UP SAP FRPINR/tonne INR/kg

1,842 1,732 1,739

2,890

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Thailand Brazil Australia India

INR per tonne

53

76 78

6462 60 60 61

77

108

95

80

-10

10

30

50

70

90

110

130

150

Uttar Pradesh Maharashtra Karnataka All India

FY16 FY17 FY18Tonnes/ha

3,277

3,100

3,300

3,750

3,580

2,405

2,002

2,707 2,732

2,080

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY14 FY15 FY16 FY17 FY18

India Global Price (White Sugar)INR/Qtl

334 345

574

515

-

100

200

300

400

500

600

700

800

FY17 FY18

Brazil India

$/ton



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


Water levels in reservoirs in India Exhibit 30.

Source: As on 27th September 2018, Agriculture Cooperation, JM Financial

1,000 1,000 1,080

1,250 1,310

1,360 1,410

1,470 1,550

1,750

1,298 1,391

1,450

1,700

2,100 2,200

2,300 2,300

2,550

2,750

1,100 1,120

1,285 1,350

1,400 1,450

1,525 1,625

1,735

-

500

1,000

1,500

2,000

2,500

3,000


Paddy (INR/Qtl) Sugarcane (INR/ton) Wheat (INR/Qtl)

84%

50%

72%

90%

74%

56%

83%

67% 68%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Northern Southern Western

Last Year Current 10 Year Average% of Storage



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.

Long-term domestic sugar prices Exhibit 31.


Short-term domestic sugar prices Exhibit 32.


Long-term global sugar prices Exhibit 33.

Source:Bloomberg, JM Financial

Short-term global sugar prices Exhibit 34.


20

22

24

26

28

30

32

34

36

38

40

42

Au

g-0

9

Jan

-10

Jun-1

0

No

v-1

0

Ap

r-11

Sep

-11

Feb

-12

Jul-1

2

Dec-

12

May-

13

Oct

-13

Mar-

14

Au

g-1

4

Jan

-15

Jun-1

5

No

v-1

5

Ap

r-16

Sep

-16

Feb

-17

Jul-1

7

Dec-

17

May-

18

Oct

-18


20

22

24

26

28

30

32

34

36

38

40

42A

ug-1

4

Oct

-14

Dec-

14

Feb

-15

Ap

r-15

Jun-1

5

Au

g-1

5

Oct

-15

Dec-

15

Feb

-16

Ap

r-16

Jun-1

6

Au

g-1

6

Oct

-16

Dec-

16

Feb

-17

Ap

r-17

Jun-1

7

Au

g-1

7

Oct

-17

Dec-

17

Feb

-18

Ap

r-18

Jun-1

8

Au

g-1

8

Oct

-18


100

200

300

400

500

600

700

800

900

Aug

-09

Nov

-09

Feb

-10

May

-10

Aug

-10

Nov

-10

Feb

-11

May

-11

Aug

-11

Nov

-11

Feb

-12

May

-12

Aug

-12

Nov

-12

Feb

-13

May

-13

Aug

-13

Nov

-13

Feb

-14

May

-14

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

Nov

-15

Feb

-16

May

-16

Aug

-16

Nov

-16

Feb

-17

May

-17

Aug

-17

Nov

-17

Feb

-18

May

-18

Aug

-18

Nov

-18


100

200

300

400

500

600

700

800

900

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

Nov

-15

Feb

-16

May

-16

Aug

-16

Nov

-16

Feb

-17

May

-17

Aug

-17

Nov

-17

Feb

-18

May

-18

Aug

-18

Nov

-18




India and Global demand-supply scenario Exhibit 35.

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




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).

Significant government measures in recent months Exhibit 36.

Date Government Measures

Oct’18 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

avail subsidised loans.

Sep'18 Announced an INR 55.0bn package for the sugar industry, including production aid to cane growers and transport subsidy to mills for exports. Financial

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

Jul'18

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

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.

Jul'18 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

recovery over and above 10%

Jun'18 a) Government hiked price of ethanol, used for doping in petrol, by INR 3 per litre to Rs 43.70.

b) Also fixed the price of ethanol produced from intermediary or B-molasses at INR 47.49 per litre

Jun'18

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

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

Nov'17

Approved the revision in the price of ethanol under Ethanol Blended Petrol (EBP)

Programme for supply to the Public Sector Oil Marketing Companies. The revised price of

ethanol would be fixed at INR 40.85/- per litre

Oct'16

Approved the revision in the price of ethanol under Ethanol Blended Petrol (EBP)

Programme for supply to the Public Sector Oil Marketing Companies. The revised price of

ethanol would be fixed at INR 39.00/- per litre

Jun'15

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

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




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.

Prima facie, exports unviable Exhibit 37.

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

excise & sugar cess) INR/t 31,597 31,597

Exports vs. domestic -31.4% -30.7%

Source: Bloomberg, Industry, JM Financial



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.



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


Blending rate increasing substantially over the last 3 years Exhibit 39.


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%).

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FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

other Use Fuel Ethanol Potable Use Industrial Usemn ltr

100

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300

154

380

674

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1.5%1.7%

0.8%

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Ethanol required (@5%) Ethanol supplied EBP (%)



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.

Ethanol Manufacturing Capacity (SS17) Exhibit 40.

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


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.

https://www.business-standard.com/article/economy-policy/sugar-mhttps:/www.business-standard.com/article/economy-policy/sugar-makers-rush-to-expand-ethanol-capacity-114-applications-approved-118100200353_1.html



Distillery applications Exhibit 41.

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

Robust profitability of the ethanol segment Exhibit 42.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%




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

Eth

an

ol Price

(IN

R/ltr

)

C' Molasses Price (INR/tonne)

Eth

an

ol Price

(IN

R/ltr

)

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

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%


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.



Comparison of the recovery process Exhibit 44.

Unit Conventional

C Molasses B Molasses Direct route

Sugarcane available tonnes 100 100 100

Sugar production tonnes 10.37 8.82 Conversion ratio:

1tonne of cane =

75 litres of

ethanol

Conversion cost for sugar INR /kg 5.7 5.7

Sugar realisations (ex-factory) INR / kg 29.0 29.0

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




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.

Scenario analysis Exhibit 45.

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




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.

8 October 2018 India | Sugar | Company Update

Balrampur Chini | HOLD

Best in class, but await a better price point


JM Financial Research is also available on: Bloomberg - JMFR <GO>,

Thomson Publisher & Reuters S&P Capital IQ and FactSet


Balrampur Chini (BCML) is expected to report another bumper year in FY19 thanks to a) MSP

of INR 29/kg for sugar (protected downside), b) government incentives on cane prices (INR

144/t), c) rise in ethanol prices and d) lower opening inventory valuation (valued at INR

26/kg). The company plans to set up a new distillery at its sugar plant in Guleria (160 KLPD),

which augurs well from a medium- to long-term perspective, assuming ethanol prices sustain

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

entry.

Fundamentals weak but supported by the government: Management is optimistic about

its business outlook on account of a) government-led measures leading to stable sugar

prices (a decline is not expected) to tackle record production scenario and b) the rising

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

increased cane crushing volumes and higher realisations.

BCML to benefit from government incentives on ethanol: BCML has announced plans to

set up 160 KLPD capacity at its Guleria plant by Mar’20, thus expanding its total distillery

capacity from 360 KLPD to 520 KLPD. The expansion is based on a) higher ethanol pricing

and visibility and b) the government’s interest subvention scheme (50% of interest rate or

6%, whichever is lower). We estimate a c.2-year pay-back period for BCML assuming the

B Molasses route and current ethanol prices.

Revise estimates: We revise our FY19/20 estimates by -10%/16% and introduce FY21

numbers to factor in a) cane price incentives by the Central and state governments, b)

higher ethanol prices, c) storage income from the central government towards buffer

stock and d) MSP on sugar. We note that BCML is expected to report another bumper

year thanks to a) MSP of INR 29/kg for sugar (protected downside), b) government

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.

Achal Lohade [email protected] | Tel: (91 22) 66303081

Shrenik Bachhawat [email protected] | Tel: (91 22) 66303074

Manish Agrawal [email protected] | Tel: (91 22) 66303068

Recommendation and Price Target

Current Reco. HOLD

Previous Reco. HOLD

Current Price Target (12M) 90

Upside/(Downside) 18.7%

Previous Price Target 150

Change -40.0%

Key Data – BRCM IN

Current Market Price INR76

Market cap (bn) INR17.3/US$0.2

Free Float 44%

Shares in issue (mn) 244.9

Diluted share (mn) 228.4

3-mon avg daily val (mn) INR936.2/US$12.7

52-week range 179/59

Sensex/Nifty 34,377/10,316

INR/US$ 73.8

Price Performance % 1M 6M 12M

Absolute -2.3 -1.0 -52.5

Relative* 9.1 -3.2 -56.0

* To the BSE Sensex

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

Adjusted Net Profit 6,387 2,211 4,228 3,729 3,705

Diluted EPS (INR) 28.0 9.7 18.5 16.3 16.2

Diluted EPS Growth (%) 188.7 -65.4 91.2 -11.8 -0.6

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

P/B (x) 1.1 1.1 0.9 0.8 0.7

EV/EBITDA (x) 4.0 6.3 4.1 4.0 3.7

Dividend Yield (%) 4.9 3.4 5.3 5.3 5.3

Source: Company data, JM Financial. Note: Valuations as of 05/Oct/2018

Balrampur Chini 8 October 2018


Key Charts

Valuation Table Exhibit 46.

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

1-year forward EV/Replacement band Exhibit 47.


1-year forward P/BV band Exhibit 48.


Key Assumptions Exhibit 49.

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


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Balrampur Chini 8 October 2018


Financial Tables (Standalone)

Income Statement (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%

Other Operating Income 0 0 0 0 0

Total Revenue 34,601 43,425 41,382 44,701 46,872

Cost of Goods Sold/Op. Exp 21,573 34,746 28,240 32,995 34,575

Personnel Cost 1,809 2,040 2,346 2,698 3,103

Other Expenses 2,021 2,123 3,831 2,490 2,646

EBITDA 9,198 4,517 6,965 6,518 6,548

EBITDA Margin 26.6% 10.4% 16.8% 14.6% 14.0%

EBITDA Growth 123.8% -50.9% 54.2% -6.4% 0.5%

Depn. & Amort. 1,049 952 978 1,040 1,103

EBIT 8,149 3,564 5,987 5,478 5,445

Other Income 219 278 150 150 150

Finance Cost 554 520 500 520 520

PBT before Excep. & Forex 7,814 3,322 5,637 5,108 5,075

Excep. & Forex Inc./Loss(-) 0 0 0 0 0

PBT 7,814 3,322 5,637 5,108 5,075

Taxes 1,419 1,111 1,409 1,379 1,370

Extraordinary Inc./Loss(-) -473 0 0 0 0

Assoc. Profit/Min. Int.(-) 0 0 0 0 0

Reported Net Profit 5,923 2,211 4,228 3,729 3,705

Adjusted Net Profit 6,387 2,211 4,228 3,729 3,705

Net Margin 18.5% 5.1% 10.2% 8.3% 7.9%

Diluted Share Cap. (mn) 228.4 228.4 228.4 228.4 228.4

Diluted EPS (INR) 28.0 9.7 18.5 16.3 16.2

Diluted EPS Growth 188.7% -65.4% 91.2% -11.8% -0.6%

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


Cash Flow Statement (INR mn)


Profit before Tax 7,341 3,322 5,637 5,108 5,075

Depn. & Amort. 1,049 952 978 1,040 1,103

Net Interest Exp. / Inc. (-) 516 500 350 370 370

Inc (-) / Dec in WCap. -4,552 8,234 -2,911 -279 -553

Others 522 -27 113 102 102

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

Capex -1,223 -1,321 -1,200 -1,200 -1,200

Free Cash Flow 2,241 10,477 1,557 3,762 3,526

Inc (-) / Dec in Investments -1 -6 0 0 0

Others 67 -285 150 150 150

Investing Cash Flow -1,157 -1,613 -1,050 -1,050 -1,050

Inc / Dec (-) in Capital -1,747 -989 0 0 0

Dividend + Tax thereon -1,032 -707 -1,096 -1,096 -1,096

Inc / Dec (-) in Loans 1,112 -7,925 287 398 0

Others -660 -580 -500 -520 -520

Financing Cash Flow -2,327 -10,201 -1,309 -1,218 -1,616

Inc / Dec (-) in Cash -21 -15 398 2,694 2,060

Opening Cash Balance 66 45 87 485 3,179

Closing Cash Balance 44 29 485 3,179 5,239


Balance Sheet (INR mn)


Shareholders’ Fund 15,413 15,872 19,003 21,635 24,244

Share Capital 235 228 228 228 228

Reserves & Surplus 15,178 15,643 18,774 21,407 24,015

Preference Share Capital 0 0 0 0 0

Minority Interest 0 0 0 0 0

Total Loans 17,823 9,898 10,185 10,583 10,583

Def. Tax Liab. / Assets (-) 1,434 1,835 1,947 2,049 2,151

Total - Equity & Liab. 34,669 27,604 31,135 34,268 36,978

Net Fixed Assets 14,184 14,583 14,805 14,965 15,062

Gross Fixed Assets 16,214 17,495 18,808 20,008 21,208

Intangible Assets 0 0 0 0 0

Less: Depn. & Amort. 2,091 3,025 4,003 5,043 6,146

Capital WIP 61 113 0 0 0

Investments 450 832 832 832 832

Current Assets 25,320 21,206 23,410 27,017 30,045

Inventories 23,138 18,022 19,914 20,688 21,565

Sundry Debtors 1,628 1,822 1,736 1,876 1,967

Cash & Bank Balances 45 87 485 3,179 5,239

Loans & Advances 510 1,275 1,275 1,275 1,275

Other Current Assets 0 0 0 0 0

Current Liab. & Prov. 5,285 9,016 7,911 8,545 8,961

Current Liabilities 2,954 7,853 6,802 7,348 7,705

Provisions & Others 2,331 1,163 1,108 1,197 1,256

Net Current Assets 20,035 12,190 15,499 18,472 21,085

Total – Assets 34,669 27,604 31,135 34,268 36,978


Dupont Analysis


Net Margin 18.5% 5.1% 10.2% 8.3% 7.9%

Asset Turnover (x) 1.1 1.4 1.4 1.4 1.3

Leverage Factor (x) 2.4 2.0 1.7 1.6 1.6

RoE 46.1% 14.1% 24.2% 18.4% 16.2%

Key Ratios


BV/Share (INR) 67.5 69.5 83.2 94.7 106.1

ROIC 21.8% 8.2% 17.0% 14.3% 14.0%

ROE 46.1% 14.1% 24.2% 18.4% 16.2%

Net Debt/Equity (x) 1.2 0.6 0.5 0.3 0.2

P/E (x) 2.7 7.9 4.1 4.7 4.7

P/B (x) 1.1 1.1 0.9 0.8 0.7

EV/EBITDA (x) 4.0 6.3 4.1 4.0 3.7

EV/Sales (x) 1.1 0.7 0.7 0.6 0.5

Debtor days 17 15 15 15 15

Inventory days 244 151 176 169 168

Creditor days 42 74 72 70 70


8 October 2018 India | Sugar | Company Update

EID Parry | BUY

SoTP Play


JM Financial Research is also available on: Bloomberg - JMFR <GO>,

Thomson Publisher & Reuters S&P Capital IQ and FactSet


The core business segments OF EID Parry (EID) have recently recorded weak performance on

account of a) consecutive years of drought and high SAP prices for sugarcane in Tamil Nadu

(TN - its home state) and b) lower sugar prices. While the divestment of its bio pesticides

business has further reduced its leverage (long-term debt has reduced from INR 12bn to INR

6bn in the past 3 years), recent TN government actions indicate that a favourable cane price

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,

led by an increase in sugar volumes (+20% YoY) and decline in realisations (-29% YoY).

While distillery revenue grew (+56% YoY), it was impacted by lower co-gen revenue (on

lower cane volumes due to drought conditions in South India). Further, the company posted

a loss at the EBITDA level (at INR 1.1bn) due to lower margins in the sugar segment. The net

loss came in at INR 1.04bn in 1QFY19.

Stable outlook on sugar segment: Management remained optimistic on the monsoon in TN

and Karnataka (water levels in dams are adequate). For FY19, the company guided for an

operationally better year as sugarcane crushing volume is expected to go up while cane

prices are moderating. Moreover, sugar prices are being directly regulated by the

government provides reasonable confidence.

Debt reduction on track: The Company has been consciously reducing its long-term debt

through the disposal of non-core assets (e.g. its bio pesticides business) and utilisation of

operational cash flows (no material capex programme apart from routine capacity

augmentation).

Maintain BUY with TP of INR 230 on a diversified play: We revise our FY19/20 estimates by

18%/8% to reflect lower cane prices; we also incorporate FY21 in our estimates. We

value EID on an SOTP basis with a) sugar and allied businesses valued at 0.50x Sep’20

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.

Achal Lohade [email protected] | Tel: (91 22) 66303081

Manish Agrawal [email protected] | Tel: (91 22) 66303068

Shrenik Bachhawat [email protected] | Tel: (91 22) 66303074

Recommendation and Price Target

Current Reco. BUY

Previous Reco. BUY

Current Price Target (12M) 230

Upside/(Downside) 23.7%

Previous Price Target 410

Change -43.9%

Key Data – EID IN

Current Market Price INR186

Market cap (bn) INR32.9/US$0.4

Free Float 45%

Shares in issue (mn) 175.8

Diluted share (mn) 177.0

3-mon avg daily val (mn) INR81.7/US$1.1

52-week range 392/184

Sensex/Nifty 34,377/10,316

INR/US$ 73.8

Price Performance % 1M 6M 12M

Absolute -10.3 -33.0 -48.6

Relative* 0.2 -34.5 -52.4

* To the BSE Sensex

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

Adjusted Net Profit 2,740 -57 986 1,387 1,516

Diluted EPS (INR) 15.6 -0.3 5.6 7.8 8.6

Diluted EPS Growth (%) 0.0 0.0 0.0 40.6 9.4

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

P/B (x) 2.2 2.0 1.8 1.8 1.7

EV/EBITDA (x) 12.2 25.6 24.0 19.9 18.8

Dividend Yield (%) 2.2 2.2 2.2 2.2 2.2

Source: Company data, JM Financial. Note: Valuations as of 05/Oct/2018

EID Parry 8 October 2018


Key Charts

Valuation Table Exhibit 50.

Base Case valuation

Particulars Unit Valuation

Replacement Value of Sugar and Related Capacities

INR mn 30,501

EV/Replacement multiple

x 0.50

Enterprise Value for Sugar Business A INR mn 15,250

India Bio Products EBIT

INR mn 100

PE Multiple

x 10

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

Valuation of stake in Coromandel International

Per share value of CRIN C INR 375

No of shares held by EID D mn 177

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

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

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

Investment in Silkroad Refinery H INR mn 3,491

Other Investments into subsidiaries I INR mn 1,818

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

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

No of shares L mn 176

Fair value per share M=K/L INR 230

CMP

INR 186

Upside potential

% 24%


Sensitivity to target price Exhibit 51.


### 316 356 395 435 474

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 290EV

/R

eplacem

ent

Market price of Coromandel



Implied discount to CRIN’s stake Exhibit 52.


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Prem/(Disc) to CRIN stake value Avg +1 STD DEV -1 STD DEV



Financial Tables (Standalone)

Income Statement (INR mn)


Net Sales 22,300 18,962 19,017 20,208 21,183

Sales Growth -12.9% -15.0% 0.3% 6.3% 4.8%

Other Operating Income 184 251 200 200 200

Total Revenue 22,484 19,213 19,217 20,408 21,383

Cost of Goods Sold/Op. Exp 14,308 12,690 12,307 12,943 13,590

Personnel Cost 1,253 1,351 1,486 1,605 1,733

Other Expenses 3,472 3,500 3,780 3,969 4,168

EBITDA 3,451 1,672 1,644 1,891 1,892

EBITDA Margin 15.3% 8.7% 8.6% 9.3% 8.8%

EBITDA Growth 465.8% -51.6% -1.6% 15.0% 0.1%

Depn. & Amort. 1,110 1,130 1,141 1,152 1,164

EBIT 2,341 542 503 739 728

Other Income 1,478 1,937 1,583 1,583 1,583

Finance Cost 1,399 1,129 1,100 935 795

PBT before Excep. & Forex 2,420 1,350 986 1,387 1,516

Excep. & Forex Inc./Loss(-) 0 0 0 0 0

PBT 2,420 1,350 986 1,387 1,516

Taxes -321 -337 0 0 0

Extraordinary Inc./Loss(-) 0 -872 1,710 0 0

Assoc. Profit/Min. Int.(-) 0 0 0 0 0

Reported Net Profit 2,740 815 2,696 1,387 1,516

Adjusted Net Profit 2,740 -57 986 1,387 1,516

Net Margin 12.2% -0.3% 5.1% 6.8% 7.1%

Diluted Share Cap. (mn) 175.9 177.0 177.0 177.0 177.0

Diluted EPS (INR) 15.6 -0.3 5.6 7.8 8.6

Diluted EPS Growth 0.0% 0.0% 0.0% 40.6% 9.4%

Total Dividend + Tax 844 850 850 850 850

Dividend Per Share (INR) 4.0 4.0 4.0 4.0 4.0


Cash Flow Statement (INR mn)


Profit before Tax 2,420 1,350 986 1,387 1,516

Depn. & Amort. 1,121 1,145 1,141 1,152 1,164

Net Interest Exp. / Inc. (-) 690 -288 37 -128 -268

Inc (-) / Dec in WCap. 1,466 -652 1,138 776 635

Others -659 -1,915 1,190 -520 -520

Taxes Paid 321 337 0 0 0

Operating Cash Flow 5,358 -24 4,492 2,667 2,527

Capex -602 -371 -800 -600 -500

Free Cash Flow 4,756 -394 3,692 2,067 2,027

Inc (-) / Dec in Investments 47 -27 0 0 0

Others 828 712 1,583 1,583 1,583

Investing Cash Flow 273 315 783 983 1,083

Inc / Dec (-) in Capital 5 7 0 0 0

Dividend + Tax thereon -704 0 -850 -850 -850

Inc / Dec (-) in Loans -3,769 745 -2,500 -2,000 -2,000

Others -1,470 -1,015 -1,100 -935 -795

Financing Cash Flow -5,937 -263 -4,450 -3,785 -3,644

Inc / Dec (-) in Cash -306 28 825 -135 -34

Opening Cash Balance 1,063 61 101 926 792

Closing Cash Balance 757 89 926 792 757


Balance Sheet (INR mn)


Shareholders’ Fund 14,775 16,381 18,228 18,765 19,431

Share Capital 176 177 177 177 177

Reserves & Surplus 14,599 16,204 18,051 18,588 19,254

Preference Share Capital 0 0 0 0 0

Minority Interest 0 0 0 0 0

Total Loans 9,435 10,180 7,680 5,680 3,680

Def. Tax Liab. / Assets (-) -616 -683 -683 -683 -683

Total - Equity & Liab. 23,593 25,879 25,225 23,762 22,429

Net Fixed Assets 14,882 13,958 13,618 13,065 12,401

Gross Fixed Assets 31,420 31,653 32,453 33,053 33,553

Intangible Assets 0 0 0 0 0

Less: Depn. & Amort. 16,618 17,747 18,888 20,041 21,204

Capital WIP 80 53 53 53 53

Investments 7,858 8,783 8,783 8,783 8,783

Current Assets 11,040 16,998 16,688 16,636 16,670

Inventories 7,346 10,976 10,946 10,946 10,946

Sundry Debtors 2,105 1,345 1,345 1,428 1,496

Cash & Bank Balances 61 101 926 792 757

Loans & Advances 797 2,324 1,219 1,219 1,219

Other Current Assets 732 2,252 2,252 2,252 2,252

Current Liab. & Prov. 10,186 13,861 13,864 14,723 15,426

Current Liabilities 8,560 12,466 12,469 13,241 13,874

Provisions & Others 1,626 1,395 1,395 1,481 1,552

Net Current Assets 854 3,137 2,824 1,913 1,244

Total – Assets 23,593 25,879 25,225 23,762 22,429


Dupont Analysis


Net Margin 12.2% -0.3% 5.1% 6.8% 7.1%

Asset Turnover (x) 0.9 0.8 0.8 0.8 0.9

Leverage Factor (x) 1.8 1.6 1.5 1.3 1.2

RoE 19.9% -0.4% 5.7% 7.5% 7.9%

Key Ratios


BV/Share (INR) 84.0 92.5 103.0 106.0 109.8

ROIC 15.8% 4.0% 3.0% 4.8% 5.1%

ROE 19.9% -0.4% 5.7% 7.5% 7.9%

Net Debt/Equity (x) 0.6 0.6 0.4 0.3 0.2

P/E (x) 11.9 -576.6 33.4 23.7 21.7

P/B (x) 2.2 2.0 1.8 1.8 1.7

EV/EBITDA (x) 12.2 25.6 24.0 19.9 18.8

EV/Sales (x) 1.9 2.2 2.1 1.8 1.7

Debtor days 34 26 26 26 26

Inventory days 119 209 208 196 187

Creditor days 164 259 259 261 260




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).

Capacity and Replacement Costs Exhibit 53.

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



New capacity being installed by top players Exhibit 54.

in KLPD Existing

Proposed

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

State-wise applications for new distilleries Exhibit 55.

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



Annexure

Manufacturing Process Exhibit 56.

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.

https://www.feedipedia.org/node/561



APPENDIX I

JM Financial Inst itut ional Securit ies Limited ( fo rmer l y known as JM F inanc i a l Secu r i t i e s L im i ted )

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

the company(ies) mentioned in this report for rendering any of the above services.

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

the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other

compensation or act as a market maker in the financial instruments of the company(ies) covered under this report or (c) act as an advisor or lender/borrower to,

or may have any financial interest in, such company(ies) or (d) considering the nature of business/activities that JM Financial Institutional Securities is engaged in,

it may have potential conflict of interest at the time of publication of this report on the subject company(ies).

Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or

more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014.

The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling

debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by company(ies) covered under this report.

The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations,

2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the company(ies) covered

under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the time of publication of this

report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report.

While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or

developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may

not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This

report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision.



The investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk of

any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right to

make modifications and alterations to this statement as they may deem fit from time to time.

This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction.

This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or

other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional

Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be

eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of

and to observe such restrictions.

Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala ([email protected]) on +65 6422 1888 in

respect of any matters arising from, or in connection with, this report.

Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities, Inc. ("JM Financial

Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to conduct certain business in the

United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6, promulgated under the U.S. Securities Exchange Act of

1934 (the "Exchange Act"), as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission ("SEC") (together "Rule 15a-6").

This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research report" for

purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in Rule

15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research report and are

not a major U.S. institutional investor, you are instructed not to read, rely on, or reproduce the contents hereof, and to destroy this research or return it to JM

Financial Institutional Securities or to JM Financial Securities.

This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The

research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered

broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise required to satisfy the regulatory licensing

requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading

securities held by a research analyst account.

JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional Securities,

JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM Financial

Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report.

Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the

Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional experience in matters relating to investments

falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii)

are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are outside

the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial

Services and Markets Act 2000) in connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be

communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or

relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will

be engaged in only with relevant persons.

Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of the

securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities or as

a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only under an

exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable

securities laws or, alternatively, pursuant to an exemption from the registration requirement in the relevant province or territory of Canada in which such offer or

sale is made. This report is not, and under no circumstances is it to be construed as, a prospectus or an offering memorandum. No securities commission or

similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities

described herein and any representation to the contrary is an offence. If you are located in Canada, this report has been made available to you based on your

representation that you are an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus Exemptions and a “permitted client” as

such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Under no circumstances is the

information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the

needs of the recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their affiliates and authorized

agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of this research report or the

information contained herein.

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