Balrampur Chini Mills - Results Update - SPA Securities

Balrampur Chini came out with better than expected set of numbers on the back of robust profitability clocked by sugar division, which were aided by sharp improvement in volumes, better realisations and liquidation of low cost inventory. Sugar prices have remained buoyant over the past six months on account of lower production estimate of 23 mt for this season (26 mt in 2011-12). Revenues from byproduct - ethanol and co-generation segments however remained subdued due to delayed start in crushing this season and lack of clarity on the ethanol pricing. We change our estimates to factor in higher sugar cane prices and retain our BUY rating on the stock with a revised target of INR 63.

Superlative performance from sugar segment

Sugar segment reported a strong revenue growth of 50.6% YoY in Q3FY13, on the back of 35.2% increase in sales volumes to 26.5 lakh qtl & 16.7% surge in free sugar sale realizations to INR 34.7/kg. Sharp surge in sugar prices coupled with liquidation of low cost inventory enabled BCML to report a profit of INR 634 mn on the EBIT level as against a loss of INR 821 mn reported in Q3FY12. Profitability of this segment is expected to remain muted due to the hike in State administered Price of sugar cane by 16% to INR 280/qtl (leading to cost of production of ~INR 34/kg as against price of ~INR 33/kg prevailing currently).

18.9% decline in crushing volumes

BCML crushed 2.27 cr qtl of cane during the last quarter compared to 2.80 cr qtl in the corresponding previous period. This is primarily on account of early start of crushing witnessed during the last season as compared to the current sugar season. The Recovery rate however improved to 9.0% as compared to 8.8% during the corresponding period of the previous season.

Sequential decline in interest expenses

Interest expenses declined sequentially by 48.7% to INR 216 mn, primarily on account of decline in working capital requirements owing to improving profitability. As on Dec 2012, BCML is carrying a long-term debt of INR 5970 mn and a working capital debt of INR 1100 mn.

Rangarajan committee report - Implementation remains the key

Although the Rangarajan committee report on decontrol of sugar holds tremendous potential, implementation of the same remains a serious challenge. Removal of 10% levy sugar quota (to improve realizations by ~INR 1.5/kg), market pricing of ethanol and doing away with monthly release mechanism (already increased from 1 month to 4 month), are the only recommendations that can be implemented as of now. The probability of other recommendations getting implemented like a) linking sugarcane price to realized value from sugar, molasses and bagasse with FRP forming a floor, b) removal on quantitative restriction on sugar exports and imports, c) removal of controls on sale of by-products, and d) gradual phasing away of cane area reservation and minimum distance criteria for mills, appears limited in near term.

Outlook & Valuation

BCML being one of the country's largest integrated sugar manufacturing companies is expected to successfully ride through current turbulent times. We believe Dr. Rangarajan's recommendations if accepted will lead to rerating of the sector. The company remains well placed to encash any opportunity due to deregulation, based on declining long term debt and healthier balance sheet.

Post the hike in SAP to INR 280/qtl, the stock has corrected significantly and is currently trading at 0.9x its FY14E BV of INR 57. We have changed our estimates to factor in higher sugar cane price and retain our BUY recommendation on the stock with a revised target of INR 63.

Source : Equity Bulls

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