A consolidation phase at Dwarikesh should translate into superior
resource efficiency, margins and cash flows
Overview
There is a tendency to miss the fine print in the pursuit of the
headline.
This is evident in the need for an accurate appraisal of our company
following the announcement of the National Biofuel Policy in 2018.
This landmark policy addressed the overcapacity within India's
sugar sector by enhancing the quantum and realization incentives related to the creation
of a new revenue line (ethanol). A cyclical business entered a new phase of long-term
sustainability. What is important is that the government addressed four long-standing pain
points: announced superior realisations for ethanol; it announced a long-term policy that
spelt out the growing proportion of ethanol within the country's fuel mix; it
provided sugar companies with subsidised debt to commission large distilleries; it
encouraged oil marketing companies (buyers of ethanol) to pay within 30 days,
strengthening the cash flows of ethanol manufacturers.
When this policy was announced five years ago, Dwarikesh was a
sugar-heavy company largely influenced by free market sugar realisations. The year sugar
realisations strengthened, Dwarikesh performed better, and vice versa.
The principal message that we wish to communicate is that there has
been a paradigm shift since. Dwarikesh has grown into a company that is now relatively
counter-cyclical and hence more sustainable.
In 2019, Dwarikesh enhanced its legacy distillery capacity from 30 KLPD
to 100 KLPD in the first phase, which was later enhanced to 162.5 KLPD. Following the
third expansion, the Company's distillery was raised yet again, this time to 337.5
KLPD effectively from June 24, 2022. At the close of 2022-23, Dwarikesh was one of the
largest ethanol manufacturers among sugar companies in Uttar Pradesh. This paradigm shift
was achieved on account of Dwarikesh's responsiveness, strategic clarity, speed of
asset commissioning and scaling of new investments to peak utilisation in the shortest
time.
The paradigm shift also represented a validation of the way Dwarikesh
conducts business, an attitudinal platform that is expected to become increasingly
profitable, efficient and scalable.
So, if there is a latent message that I would like to leave you with,
it would be that even as the National Biofuel Policy proved to be a sectorial gamechanger,
it was the manner in which Dwarikesh responded that resulted in paradigm shift.
The numbers
A five-year scoreboard is necessary to appraise the extent of our
paradigm shift.
Barring occasional ups and downs, domestic sugar prices largely
remained flat and were range-bound between H34 to H35 per kg during 2017-18 and also
during 2022-23.
Average ethanol realisations for Dwarikesh strengthened and moved from
H38.88 per litre during 2017-18 to H63.12 per litre during 2022-23.
We did not just ride a transforming sectorial trend; we transformed our
Balance Sheet instead.
We had H365 crore of net worth and H342 crore of debt as on March 31,
2018; we had H739 crore of net worth and H372 crore of debt on our books as on March 31,
2023.
The message that I wish to communicate is that we did not just respond
with higher margins and surpluses during the last five years; we utilised the critical
mass of the positive outcomes to report one of the most extensive shifts in Balance Sheet
health in India's sugar sector.
Responsiveness
Some sectorial observers have indicated to me that perhaps our
transformation was the result of a general improvement in the water line of the sector
that raised the level of all ships. I wish to state with all humility that Dwarikesh moved
with speed to capitalise and outperform the broad sugar sector. This outperformance was
based on the following initiatives:
One, we recognised immediately that following the National Biofuel
Policy there would be a larger incentive to broad-base our product mix towards non-sugar
products and revenues.
Two, we felt that within the non-sugar portfolio, there would be a
premium on the accelerated creation of a sizable distillery capacity.
Three, we felt that there would now be an even larger focus on the
selection of the right distillery technology that would make a complete utilization of
resources with negligible or no release of effluents.
Four, we felt that even as we were extending our business forwards
(towards ethanol manufacture), there was now an even larger need to broad-base our
existing resources (command areas and manufacturing capacities).
Five, the concurrent growth in the availability of resources at one end
and manufacturing capacity of end products on the other warranted critical planning so
that we never suffered from a resource abundance that compelled us to sell the excess in
the market and we never at any point had a larger resource appetite than could be
generated within.
Six, we recognised that even as we would need to generate investable
resources upfront to kickstart a non-sugar capex cycle, we would need to use every
incremental rupee in repaying the debt on our books - a concurrent combination of
deleveraging and capital investments.
Outcome
The outcome of this strategic clarity is reflected in the valuation of
our company on the stock exchanges. Before the National Biofuel Policy was announced,
Dwarikesh was valued at H476.40 crore on the stock exchanges as on March 31, 2018; on
March 31, 2023, the Company's valuation had strengthened to H1,607.72 crore. This
appreciation has conclusively validated that the effectiveness of our business model and
consequent paradigm shift.
The performance of the last financial year represents a validation of
our business model and we expect to build on this going ahead with a relatively smaller
Balance Sheet. A consolidation will mark whatever we do in the current financial year: our
objective will be to recover our distillery investments in a shorter time; we will
endeavour that our Balance Sheet generates a stronger Return on Capital Employed, the
basis of all profitability.
Besides, we expect to utilize accruals - minimum debt - in growing our
business, ensuring that the value arising from our growth is transmitted extensively to
shareholders.
Elements of our personality
01 An overarching outperformance culture (best of the line across
matrices)
02 Making timely right-sized investments leading to optimal returns
03 Investment in cutting-edge cane varieties to broadbase resource
stability
04 Broadening the portfolio pyramid, enhancing the proportion of
non-sugar revenues
05 Moderating debt; growing the business mainly with net worth
06 Sustaining a culture that makes it possible to generate more from
less
| G. R. Morarka, Executive Chairman |