Deepak Kapur Dhampur Calculations

Dhampur Sugar deepak Kapur: twitter: @tapak7 : 12 m rough projections based on SS 1819 costs and various operating metrics Assumptions below are based on approximations. Noting is precise in a sugar mill. Cane yields vary week to week, field to field and variety to variety.

ASSUMPTIONS

SS 1819 sugar yield C molasses route (sugar / ton of cane crushed) 11.00% sugar yield B molasses route (sugar / ton of cane crushed) 9.50% C molases per ton of cane (tons) - ( I ) 4.50% ethanol per ton of C molasses (litres) - ( II ) 245 ethanol by C molasses route per ton of cane (litres) ( I * II ) 11.025 B molasses per ton of cane (tons) 6.60% ethanol per ton of B molasses route (litres) 320 ethanol by B molasses route per ton of cane (litres) 21.12 % of molasses production to be supplied to country liquor. These norms were set up when mills made only C molasses 15% r% price of molasses sold to country liquor (rs / ton) ** 1500 **In Sugar Season 1617 when market price of free sale molasses was 4500 rs / ton, the levy molasses sales to country liquor were at 1000 rs / ton ** in sugar season 1718 due to over supply, free sale molasses prices crashed to 450 Rs/ton OPERATING & FINANCIAL CALCULATIONS A assumed total tons of sugarcane crush for FY (5% higher similar to last year) 6900000 S r% of cane (simplifying the calculations - since r% of molasses reserved 4 country liquor) 1035000 X sugar from X tons of cane (c molasses route yield) 113850 F molasses produced from r% crush 46575 B assumed B molasses production (litres) 40000000 ethanol per ton of cane - B molasses route 21.12 hence total tons of cane needed t o produce assume qnty of B molasses 1893939 Y sugar produced frm ( Y ) tons of cane (B molasses route yield) 179924 G total cane used up so far (ton) total sugar produced (tons) C cane leftover to crush (tons) ( Z ) suar produced from ( Z ) tons of cane ( C molasses route yield) C ethanol produced from Z tons of cane - litres TOTAL PRODUCTION C ethanol ( cr litres) B ethanol (cr litres) sugar (cr kgs) power revenues from external sale Molasses sale to country liquor rev revenue from sale of other by products TOTAL revenues COSTS cost of cane at mill gate (unit tons) employess cost other expenses Total expenses PBIDT add PBDIT 20 rs per litres for 3 cr litres produced from outside purchased C molasses total PBDIT interest PBDT Dep PBT PAT

2928939 X+Y 293774 F+G 3971061 M - (X+Y) 436817 43780943 litres

4.38 4.00 73.06

selling price per total unit rev (crores) 43.46 190 52.43 210 32.00 2338 215 6.99 50 3010 per unit cost 3250.00 2243 125 from past P/L 250 from past P/L 2618 392 60 based on available capacity 452 75 estimated based on last year 377 50 estimated based on last year 327 218 Twitter @tapak7

Notes to understand sugar co financials/operations (UP mills) 1) in this business government policies and industry operations are as per sugar season: Oct to Sep 2) however financials of a company that we study are as per financial calendar April to March 3) hence any given year's financials straddle two sugar seasons. Example: Q1 and Q2 FY19 will reflect SS 1718 policies whereas Q3 & Q4 FY19 will belong to SS1819 4) above matters because cane pricing and govt subsidies are declared as per sugar season (SS) and not financial year. 5) for UP mills crushing of cane of new season begins in Oct mid and goes on till mid April or early May -varies from mill to mill depending on cane avabilibility 6) so all sugar is produced in about 6 months and this has to be sold over 12 months. Because of this it's a high working capital business 7) hence the balance sheet of a UP sugar mill will show hardly any inventory / working capital when seen at start of sugar season (30 Sep) but will be very heavy in inventory and WC when seen at end of crushing (March end or April end Balance sheet) season 8) UP mills are mandated to sell a certain % of their molasses production to country liqour cos at lower than market prices (sample date presented in calculation sheet). The exact no for this SS is unclear but it's 10-20% as per most sources 9) what this means is that almost 15-20% of molasses cannot be used to produce ethanol. Remember this policy was made at a time when only C molasses based ethanol was the norm. 10) When looking at financials, sugar sold in months of Oct and Nov is usually from inventory carried forward from previos SS and hence reflects costing of cane / subsidies etc of previous sugar season. 11) Also since by mid Oct some crushing of new SS has started, the Q3 mid Nov to Dec sales of sugar will reflect sales from this new crush. Their costing will be as per new SS cane costing / subsidies 12) What all this means is that extrapolating any quarters margins etc is not a sensible way to analyse a sugar company 13) The UP government declared the price of cane (SAP price) at 3150 rs per ton for SS1718 and did not change the same for SS1819. The SAP for early variety (high yield) cane is 3250 per ton 14) tranport and other levies add another 100-150 rs per ton. So depending upon the mill and kind of cane the non subsidised landed cost of cane at mill gate can vary from 3250 to 3450 per ton 15) For SS 1718 the mills got a production subsidy of 55 rs per ton of cane crushed. This was paid directly to farmers by govt on behalf of mills. Effectivly reducing the cane cost of mill by 55 rs a ton. A significant part of this subsidy was account for in Q3 FY 19 thus distorting results of sugar segment 16) For SS 1819 central govt announded assistance os 138.8 rs per ton of cane (only to eligible cos that fulfill certain criteria). Again this would be paid directly to farmers. Thus landed price of subsidised cane for SS 1819 should be about 3110 to 3310 per ton - depending on type of cane 17) since high yield variety % has been rising - I would estimate landed cost of cane after subsidy at about 3210-3230 for SS 1819 and higher by 50-60 rs per ton for SS1718 18 ) as per commentary during Q3 concalls some cos said cane crushed will be lower than previous season and some said cane crushed will be similar or marginally higher. Yields are expected to be similar 19) extrapolating margins of sugar, ethanol and power segment as reported in segment results is a recipe for disaster while analysing integrated sugar mills. This is because of internal transfer pricing 20) molasses and baggase are by products of sugar production. Molasses is input for ethanol productin and baggase for power. The internal transfer pricing for purpose of accounting, should be at higher of cost of market value. In SS 1617 molasses market price was 4500/ton. In SS1718 it crashed to 450/ton. 21) this crash in molasses prices would lower sugar segment profits but increase ethanol segment profits. So when one sees segmental results they might find SS1718 ethanol margins jumpin over previous season and be tempted to extrapolate 22) however as molasses prices are slowly firming up and expected to firm up more and distillery capacities increase, the segment margins will again see a drop. 23) so its easier to forecast the results of a sugar company by taking a non segmental view. Revenues have 4 sources: sugar, power, ethanol and some other minor by products like molasses etc. Costs are mainly, cane, power, employee, interest , depreciation, miscellaneous 24) this is the approach I have used in my calculations 25) earlier sugar mills used to extract as much sugar as can be extracted from cane in an economically feasible manner and the left over molasses ( C molasses) was used to make ethanol or sold outside 26) in UP, one gets approx 4.5% C-molasses per ton of cane crushed in such a manner. And each ton of C molasses can give 230-250 litres of ethanol 27) in a sugar mill - the cane is crushed to make cane juice. This goes through first round of processing: sugar and molasses A are by products. Molasses A liquid is further processed: gives more sugar and Molasses B. Molasses B gives more sugar and Molasses C. 28) Its not feasible to extract more sugar form molasses C and hence this is sold or converted to ethanol 29) Earlier there used to be only one price of ethanol - irrespective of whether it is produced from B or C molasses. There r trade offs. If one converts B molasses to ethanol - one will get 310-330 litres per ton of B molasses. But the overall sugar produced per ton of cane falls 30 ) based on ethanol and sugar prices mills can decide what to do. Since earlier only one fixed (and not v remunerative) price of ethanol existed - irrespective how it was made, mills almost never found any sense of making ethan0l from B molasses. In fact, even making ethanol from C molasses was a function of molasses prices .Many a time it made more sense to just 31) Now since the govt has declared differential price for ethanol produced from B molasses vs that from C molasses, mills can calculate the economics and depending on sugar prices, might convert some B molasses also to ethanol 32) such a dynmaic decision is a function of ethanol and sugar prices. As per my estimates, at current costs, if ex mll sugar price is above 34-34.5 rs/kg it makes sense to produce as much sugar. Below 30-31 it makes sense to produce as much ethanol. Between these numbers its a mix and match - will make only marginal difference to overall co financials but can help ba 33) going forward as more distillery capaicty comes up - molasses demand will go up and so will prices. At some price mills will again want to just sell the molasses rather than convert to ethanol. Also plans of mills to use excess distillery capacity to produce ethanol from outside molasses will go for a toss 34) going forward - as mills adjust to the dynamic world - by producing more ethanol from B molasses they can balance sugar supply and thus prices 35) the biggest issues with the industry is govt control : today govt controls: a) cane price b) MSP of sugar c) qnty of sugar than mill can sell d) ethanol prices e) ethanol policy that keeps changing every year f) molasses policy. 36) so the givt risk is huge. But this govt has taken good measures. Linking cane price to sugar / ethanol prices is the only way to rid the industry of this govt control. But it's a v difficult move politically. More so because of multiple states involved 37) the interplay of variables of cane price, ethanol price , molasses price and sugar price makes this a very complicated industry 38) on global front the world investory levels are still at 2 year highs. This is the reason that inspite of a 10mn ton lower production by Brazil last season, world sugar prices haven't risen much 39) brazil market has true free pricing of cane, sugar and ethanol. Hence a mill takes v v dynamic decisions on how much sugar or ethanol to make depending on global sugar and ethanol prices. So very tought t predict what will happen next season 40) india has protected it's industry with 100% import duty on sugar. india is also pushing cos hard to export 5mn by stick and carrot approach. Some mills are complying - some not 41) cane itself is a source of huge operating leverage. Weather, type of variety, whether it is fresh crop or ratoon crop and other micro factors play a role in how much cane grows per acre, how much sugar is there per ton of cane 42) small changes in sowing area, yield per acre or sugar yield per ton can lead to revenue losses or gains of 10's of crores for sugar cos with fixed costs remaining same Deepak Kapur twitter: @tapak7