Vivek Saraogi analyses the Companys robust 2015-16 turnaround
Balrampur Chini Mills reported a vigorous turnaround in 2015-16. The Company evolvedfrom a net profit of C3.64 Crore in 2013-14 to a net loss of C57.73 Crore in 2014-15 to anet profit of C99.42 Crore in 2015-16.
The extent of the turnaround will prompt a number of people to believe that this wasthe singular result of an improvement in sugar realisations.
That would only be partially true; there were actually a number of reasons why theCompany reported such a significant turnaround.
The improvement was the result of working in a certain manner whereby whatever thatcould not be earned from the marketplace was partly retrieved from within.
Retrieved from within is a deliberate statement whereby we continue tobelieve that any Company driven by thousands of operating variables can always maximiseits overall efficiency by reworking some or a number of those variables.
This tweaking is more potent than it appears. It comprises the replacementof high-cost debt with cheaper alternatives focus to improve sugar recovery qualityconsumption of entire molasses for ethanol production and reporting energy savings toenhance bagasse availability among others.
At Balrampur what may not appear significant to a number of observers is valuable tous. It provides us with a window into a larger latent opportunity. These could beinsignificant from a standalone perspective but attractive from an aggregated one.
For instance we focus on strengthening cane varieties. We focus on improvingrecoveries across our command area. We celebrate cost-cutters. We try to stretch our rupeethe farthest. We measure sugar quality every single day. We create captive downstreamcapacities to utilise the entire bagasse and molasses generated through cane crushing. Weproduce more ethanol for government OMCs to enhance fiscal stability.
The result is that Balrampur fine-tuned virtually every operational aspect within itscontrol with the objective to enhance efficiency. Anything that was good could be madebetter.
The result is there in the numbers. Balrampur reported a substantial cash profit ofC209.52 Crore and a profit after tax of C99.42 Crore (after valuing its sugar stock atcost). We always said that we would be among the first to get going in an industry reboundafter an extended downturn. The Companys performance during the last financial yearproved so. During the year we wrote o3 C169.00 Crores claim receivables from the UPGovernment under the New Sugar Investment and Promotion Policy 2004 in view of theuncertainty in realising this.
Over the years we have run our Company by some principles.
These principles indicate that we do not need to demonstrate extraordinary brilliancewhile running the Company on a daily basis. These principles entail a disciplined approachin which the routine is done better than anyone else. It means not trying to be needlesslycourageous while the storm is blowing. It means responding to our everyday businesspriorities without panic or euphoria. It means maintaining a long-term perspective beforeevery decision. It means investing during downturns. It means not necessarily being drivenby scale but by the excitement of creating a higher returns-driven company.
Principles at work
The principles have manifested into how we conducted ourselves in the last few years.
One over the years we have stuck to our core competence: the efficientmanufacture of sugar on the one hand and the planned integration into the processing ofdownstream byproducts on the other. The result is that we continue to do what we did a fewdecades ago encourage farmers to plant more cane replace legacy cane varietieswith superior alternatives and explore every possible means of enhancing farmerprofitability convinced that if the farmers grew more cane (and sold to us) we would notonly enhance our long-term viability but also theirs.
Two we kept leverage under control retained bankers confidence and stayedaway from the temptation of unrelated diversifications. The result was that we stuck tothe conventional model with a resolve to manage this better than anyone else.
Three while it would be evident that we remained conservative the reality is thatwithin this conservatism we redefined our dynamism. We invested in cane management a fewyears ago; we helped evolve a large proportion of our command area to superior canevarieties (warranting the farmers to work harder); we provided adequate pest and diseasemanagement inputs that induced farmers to believe that the pain was worth it. Under thecircumstances prevailing in the last couple of years we paid farmers on schedule and theresult was that this maximised cane availability without a reduction in our command areas.The result is that over the last couple of years we have remarkable results to present.Cane yields in significant portions of our command area increased 50%. To top thisrecoveries improved by 131 bps in 2015-16 over the previous sugar season to possibly thehighest in our existence. I have no hesitation in conceding that some of this increase wasclimate-induced over which we had no control but the reality is that even as we mightrelinquish some of these recovery gains next season we still expect to finishconsiderably higher than our retrospective average.
The other instance of our conservative-dynamic hybrid approach was our decision toinvest C225 Crore in incinerator boilers. In our business the scale of the incineratorinvestment was almost equivalent to investing in a new distillery plant. However withinthis conservatism lay dynamism. We believe that there will soon come a time when running adistillery in excess of 300 days will not be possible without this facility. Thisproactive investment could create favourable marketplace realities that Balrampur couldcompetently capitalise on. The bonus is that the Company has also been permitted to extenddistillery operations by almost 60 days a year enhancing revenues and shrinking paybacktenures.
This conservative dynamic approach has got us far. The Company is the second largestsugar manufacturer in India among the countrys largest ethanol manufacturers andUttar Pradeshs largest cogeneration company.
I am optimistic for a number of reasons.
One sugar output in the country declined in 2015-16 following reduced output inMaharashtra and Karnataka. I believe that we should see yet another decline in 2016-17stabilising sugar realisations at remunerative levels for the industry (after years)without this being prohibitive for the end-consumer.
Two we expect to counter the marginal decline in cane crushing through enhancedyield which means that we could generate an attractive quantity of sugar for sale atenhanced realisations.
Three we expect to allocate our entire distillery capacity towards the manufactureof ethanol which we expect to market to Oil Marketing Companies appointed by theGovernment. This is a rare industry reality where there are no marketing restrictions; theonus is on us to produce as much as we can. Besides the incinerator boiler investmentwill result in incremental capacity utilisation which is likely to enhancerevenue/profitability of the distillery segment.
Four our cogeneration business will play a stabilising annuity role generatingpredictable PPA-protected revenues and profits.
For the last few years the countrys integrated sugar sector lost heavily in themanufacture of sugar made a reasonable quantum on ethanol and generated predictablerevenues from cogeneration.
The time has come when we expect to breakeven (or more) on sugar enhance profitsthrough ethanol and continue generating predictable cogeneration revenues.
At Balrampur our principal objective will be to reduce debt and invest in overallplant balancing that would make it possible to moderate our costs (financial andoperational) strengthen our viability across market cycles and reward shareholders.