Balrampur Chini Mills - Reaffirm our best pick in the sugar sector - Aditya Birla Money

Balrampur Chini Mills Limited (BCML) has announced its 1QFY13 results and the results were below street expectation. Key highlights of results are as follow:

Key Highlights

- Net sales for 1QFY13 increased by 22.0% YoY to Rs.6919.6 mn mainly led by 23.8% YoY growth in sales of Sugar division to Rs.5819.4 mn. The growth in sugar division was due to increase in sales volume to the tune of 17.1% YoY to 0.19 mn tonnes coupled with 6.6% YoY increase in free sale sugar realisation to Rs.29.7/Kg.

- Consequently, EBITDA for 1QFY13 increased by 43.3% YoY to Rs.571.9 mn and margin expanded by 130 bps to 8.3%. Interest cost increased by 28.9% YoY to Rs.535.2 mn due to higher working capital requirement and higher interest cost scenario. Overall, the company reported loss of Rs.180.5 mn at bottomline.

- Outlook on domestic sugar cycle: The pan India sugar production in SY13 is likely to be in the range of 24-25 mn tonnes as against earlier expectation of ~25 mn tonnes. Weak monsoon is likely to reduce combined sugar production in Maharashtra and Karnataka to 10 mn tonnes against the earlier expectation of 13 mn tonnes. On the other hand, due to reasonably well rainfall in UP and payment of previous cane arrears, acreage under sugarcane cultivation is likely to go up 8-10%, whereas yield is expected to remain flat. Overall, sugar production in UP is likely to go up by 8-10% to ~7.7 mn tonnes.

- The sugar production in SY12 has been 26 mn tonnes and with sugar consumption of 22-23 mn tonnes coupled with ~3 mn tonnes exports in SY12, India is likely to enter into SY13 with inventory of 4-5 mn tonnes, which we believe is fairly balanced demand-supply scenario. Recently, ex-mill sugar price hit the high of Rs.36.5/kg, which we believe is likely to stabilise in the range of Rs.32-34/Kg. More clarity on sugar production and likely sugar price will emerge in next 5-6 months depending on monsoon and hence likely sugarcane output over next 2 months.

- International Scenario: Internationally, till 17th Jul12, sugar production in key sugar producing areas of Brazil like South Central and Sao Paulo is down 22% and 26% YoY to 9.3 mn tonnes and 6.1 mn tonnes respectively. Globally, as per industry estimates, sugar production is likely to be surplus in the range of 5-6 mn tonne and hence white sugar prices should stabilise around $600/tonne. In case, sugar production in key sugar producing countries like Brazil, Thailand, Australia, and India fells drastically, then international sugar prices may rally from here.

- Reforms in sugar sector policy: The industry is optimistic that the suggestions of Rangarajan Committee on sugar sector reforms will be accepted by the govt in next 6-8 months. It is expected that govt may completely or partially remove discounted levy sugar sales, link ethanol price to petrol price and link sugarcane price with sugar price.

Valuations

At CMP, the stock is trading at P/BV of 1.1x FY14E BV and EV/EBITDA of 4.0x FY14E earnings. We reiterate our BUY rating on the stock with rolled over Aug13 price target of Rs.80/share (based on average of target FY14E EV/EBITDA (adjusted for WC debt) of 5.0x and FY14E P/BV of 1.2x).

Source : Equity Bulls

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