Gulshan Polyols Limited — Q3 FY25 earnings call

Call held 21 Feb 2025

Management summary

Gulshan Polyols reported on Q3 FY25, highlighting a challenging period for its ethanol segment due to raw material price volatility and policy changes. However, recent government decisions to subsidize FCI rice for ethanol production and a general softening of open market raw material prices are expected to drive a recovery in EBITDA and profit margins. The company has successfully completed its capex and is focusing on improving operational efficiency and margins in the coming year, projecting ₹1,500 crore revenue for ethanol in FY26.

Highlights

  • Government allowed FCI rice for ethanol industry at a subsidized rate of ₹22.50/kg, expected to have a very positive impact.

  • Softening of raw material prices (DFG rice, maize) in the open market, which will positively impact EBITDA and profit margins.

  • Company expects a recovery from challenging quarters, with the worst believed to be behind them.

  • Ethanol segment revenue is secured as it is government-regulated, ensuring fast turnover and customer readiness.

  • All planned Capex has been completed within the scheduled time and budget, with plants running at almost 70% capacity.

Concerns

  • Last few quarters were challenging due to the nascent and evolving ethanol segment with constant policy changes.

  • Raw material prices, especially maize, rose significantly (up to ₹26-27/kg) in previous quarters, impacting both segments.

  • EBITDA margins declined from FY22 to FY24 primarily due to high raw material prices caused by increased demand from new ethanol plants.

  • Grain processing segment experienced a loss in the first 9 months of the fiscal year, though Q3 showed improvement.

What they filed

Q1 FY27: revenue up 7.9%, net profit up 315.4% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue440 610 515 593 542 +23%627 +3%551 +7%640 +8%
EBITDA16 27 29 37 42 +163%85 +215%66 +128%85 +130%
Net profit1 7 7 13 16 +1500%41 +486%38 +443%54 +315%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • Ethanol
    ₹10 Cr EBIT2.5% EBIT Margin
  • Mineral Processing
    1.5% EBIT Margin

Capital allocation

high confidence
  • Capex Capex disclosed
    Yes, there is no additional capex we are looking at this year. (Aditi Pasari, page 11)
  • Debt Net ₹5.25 Cr
    Net debt is around ₹5.25 crore, which includes working capital as well as term loans. (Rajiv Gupta, page 12)

Guidance & targets

Volume

  • Ethanol Volume Volume · FY26 · High confidence 20-22 crore liters
    We're looking at 20 to 22 crore liters in the next financial year.

    — Aditi Pasari

Revenue

  • Ethanol Revenue Revenue · FY26 · High confidence ₹1,500 crore
    It will actually be about 1,500 crore.

    — Aditi Pasari

  • Grain Processing Steady State Revenue Revenue · steady state · High confidence ₹900 crores
    Yes, I think ₹900 crores is a steady revenue contribution from the grain processing segment.

    — Aditi Pasari

Margin

  • Ethanol EBITDA Margins Margin · coming quarters · Medium confidence improvement
    So, we definitely see that kind of improvement in EBITDA margins.

    — Aditi Pasari

  • Overall EBIT Margins Margin · coming years · Medium confidence 8-10%
    We do hope to achieve EBIT margins of 8-10% in the coming years.

    — Aditi Pasari

  • Grain Processing EBIT Margin Margin · next two quarters · Low confidence recovery
    I would not like to give a specific number here, but as I said, we are definitely looking at some kind of recovery from here.

    — Aditi Pasari

Capacity

  • Ethanol Capacity Utilization Capacity · corresponding years · Medium confidence 90%
    We will definitely try to push this to 90% in the corresponding years.

    — Aditi Pasari

What to watch in Q4 FY25

FCI rice supply and its impact on raw material prices

next quarter (March/April 2025)
Current FCI rice supply expected in 1-2 weeks. Maize prices have softened to ₹23.50-₹24.50/kg.
Target Actual receipt of FCI rice and further softening of maize/DFG prices.

Why it matters

Direct impact on raw material costs and ethanol segment profitability.

Not the full benefit, but FCI rice is expected to come in the next one to two weeks. We are expecting the supplies to come in... Yes, so definitely by March or April.

Risks & concerns

  • Raw Material Price Volatility

    high

    Raw material prices (maize, rice) were highly volatile, especially after FCI rice supply was halted in July 2023, causing prices to rise significantly (maize up to ₹26-27/kg).

    Management acknowledged

  • Government Policy Dependence

    medium

    The ethanol industry is heavily dependent on government policies, which can change (e.g., halting FCI rice supply), causing significant challenges for the industry.

    Management acknowledged

  • Competition & Demand-Supply Imbalance

    medium

    With more than 100 new plants coming up in the last two years, the demand for maize and rice skyrocketed, which also impacted the grain processing segment.

    Management acknowledged

  • Pricing Power Limitation (Grain Processing)

    medium

    For starch and starch derivatives, there's a limit to how much price can be passed to end customers due to import alternatives, potentially leading to operating at a loss if raw material prices are too high.

    Management acknowledged

Q&A highlights

8 direct
Linkages between grain processing and ethanol businesses, and raw material commonality. Direct
Yes, the major link between both segments is the raw material. The raw material is common for both segments, whether it is grain processing or the ethanol segment. The raw materials are maize and rice, which is the common factor.

Clarifies the fundamental connection and shared raw material risk between the company's two main business segments.

Asked by Anand Mundra

Government subsidy for FCI rice and its exclusive use for ethanol. Direct
The government runs a very, very transparent SAP scheme. The orders we receive from the government for the supply of ethanol from FCI are all tender-based... So it is very streamlined, very organized. There is no way that this rice can be used for anything else.

Addresses concerns about potential misuse of subsidized raw materials and confirms the integrity of the government scheme.

Asked by Anand Mundra

Impact of FCI rice price reduction on raw material costs and EBITDA margins. Direct
If I look at the impact of ₹2 on the raw material, it has a direct impact of ₹2 multiplied by 2.6, which is the ratio in which maize is used in ethanol. This results in almost a ₹5 per liter impact on the EBITDA margin of maize ethanol.

Quantifies the significant positive impact of the FCI rice policy on raw material costs and, consequently, on EBITDA margins for ethanol production.

Asked by Harsh Shah

Pricing points and tender cycles (C1, C2, C3) for ethanol supply. Direct
But there are three pricing points in the grain ethanol segment. One is ₹72, ₹71.86, which is when we produce ethanol from maize. The second pricing point is ₹64, which is when we produce ethanol from rice, specifically damaged food grains. The third pricing point is ₹58.50, when we produce ethanol from FCI rice. These are the three pricing points that the government has given us.

Provides clarity on the government's multi-tiered pricing structure for ethanol based on raw material source and explains the tender process.

Asked by Harsh Shah

Raw material cost breakdown and margin calculation for ethanol. Direct
If I say I'm buying raw material at ₹24, then ₹24 multiplied by 2.6 gives me ₹62.4, which is the current cost of raw material at current prices. Then, we add ₹12, which includes power, salary, administration, chemicals, and other costs. The diversion cost adds another ₹12. So, if you add ₹12 to that, we get a total cost of about ₹75. Our revenue is ₹72, and we get additional revenue from byproducts, about ₹6. So, our total revenue is about ₹78, out of which the cost is ₹74. This leaves us with a margin of about ₹3 to ₹4.

Offers a detailed, albeit ballpark, breakdown of ethanol production costs and revenue, illustrating the margin structure.

Asked by Harsh Shah

Sustainability of the ethanol policy and government support. Direct
The government is already blending 16% ethanol in petrol, which means they are already substituting 16% of crude oil with a domestically produced product. So, there is no way the government will reverse this policy. They will not go back to buying crude oil... Each time there was an intervention required, the government intervened and supported the industry.

Reassures investors about the long-term commitment of the government to the ethanol blending program, reducing policy risk.

Asked by Harsh Shah

Working capital cycle for ethanol vs. grain processing. Direct
The working capital in the case of ethanol is basically with OMCs (Oil Marketing Companies). We receive payment in 21 to 25 days, so there is hardly any requirement. It's an assured return, with a 25-30 day cycle for ethanol. In other cases, it's 30 to 45 days for the working capital cycle.

Highlights the favorable working capital terms for the ethanol business due to government-backed payments, contrasting it with other segments.

Asked by Anand Mundra

Incentives provided by the Assam government for ethanol production. Direct
we have received a ₹2 PLI for any production done in Assam, as well as some state government incentives. So, there are incentives available from both the state and central government in Assam... we have about ₹3.5 per liter in incentives. This includes ₹2 PLI and other state incentives.

Reveals specific financial incentives that boost profitability for ethanol production in Assam.

Asked by Harsh Shah

2 min read 6 chapters

Detailed narrative

Ethanol Segment Recovery and Government Support

The company anticipates a strong recovery in its ethanol segment, driven by the government's decision to supply FCI rice at a subsidized rate of ₹22.50/kg. This policy is expected to significantly reduce raw material costs, with a direct impact of approximately ₹5 per liter on the EBITDA margin of maize ethanol. Management expressed confidence in the government's long-term commitment to the Ethanol Blending Program, citing the current 16% ethanol blend in petrol and the policy's benefits for farmers and the balance of payments.

Raw Material Dynamics and Pricing

Raw material prices, particularly for maize and DFG rice, have softened in the open market, with maize prices falling from ₹26-27/kg to ₹23.50-₹24.50/kg. This softening, combined with the availability of subsidized FCI rice, is expected to positively impact profitability. The company noted that the full benefit of these lower prices would be visible by March 2025, as existing raw material stocks are utilized.

Ethanol Production and Pricing Structure

Gulshan Polyols operates with three government-defined pricing points for ethanol: ₹72-₹71.86/liter for maize-based, ₹64/liter for damaged food grain-based, and ₹58.50/liter for FCI rice-based ethanol. The company participates in tender-based allocation cycles (C1, C2, C3) for ethanol supply to OMCs. The recent C3 tender, following the re-release of FCI rice, allows for bids to supply ethanol from FCI rice, further stabilizing raw material costs.

Grain Processing Segment Performance

The grain processing segment, which shares raw materials with the ethanol business, faced challenges due to increased demand and price volatility for maize and rice. While Q2 FY25 was particularly challenging due to high raw material prices (₹26-27/kg for maize), profitability improved in Q3 FY25 with an EBIT margin of 1.5% as new crops arrived and stocking began. Management expects a recovery towards 5-6% EBIT margins in the next two quarters for this segment, with a steady-state revenue contribution of ₹900 crores.

Capital Expenditure and Debt Profile

The company has successfully completed its planned capex within budget and time, with plants now running at approximately 70% capacity. No additional capex is planned for the current fiscal year, and only maintenance capex of ₹10-15 crore annually is anticipated for the next year, with no new projects approved by the board. Net debt stands at approximately ₹5.25 crore, encompassing working capital and term loans.

Future Outlook and Margin Expectations

Gulshan Polyols projects ethanol volumes of 20-22 crore liters and revenue of approximately ₹1,500 crore for FY26. The company aims to push capacity utilization to 90% in subsequent years. Management is hopeful for significant improvement in EBITDA margins, targeting overall EBIT margins of 8-10% in the coming years, driven by stable raw material prices and operational efficiencies.

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