Balrampur Chini Mills - Profitability of sugar business under pressure - Centrum

Balrampur Chini Mills' (BCML) Q4FY13 op. margin and profit was under pressure led by steep decline in sugar segment's profit. The company reported 36.1% YoY decline in op. profit to Rs1,237mn and OPM contracted 16.9pp YoY to 16.6%. Profit declined 45.4% YoY to Rs710mn. Going forward, the company is set to benefit from higher ethanol price (Rs35/litre vs. Rs27/litre in FY13) and abolition of levy quota mechanism, however, expectation of increase in cane cost remains a concern for the company. We expect sugarcane price to increase to Rs300/quintal for crushing season 2013-14 vs. Rs280/quintal in 2012-13. At the same time, subdued global price (raw sugar price is ~17.5cents/lb) would restrict any sudden spurt in the domestic sugar price as on import parity basis, landed cost of sugar is at Rs32-33/kg. We expect recovery in domestic price post the end of crushing season. Considering recent positive developments for the sector and low valuations, we maintain Buy rating on the stock with revised target price of Rs62 (earlier: Rs61), which gives an upside of 16.7% from CMP.

- Sugar segment's disappointing performance lead to lower profits: Revenue of the company increased 28.9% YoY led by 77.2% increase in revenue of distillery segment and 30.5% YoY increase in sugar segment's revenue. Despite higher revenues, EBITDA declined by 36.1% YoY primarily due to sharp decline in profit from sugar business (86.3% YoY decline). EBITDA margin contracted by 16.9pp YoY to 16.6%. Profit of the company declined 45.4% YoY to Rs710mn.

- Sugar segment's profit under pressure: Revenue from the sugar segment increased 30.5% YoY to Rs6,761mn led by 21.7% increase in sales volume and 11.6% YoY increase in realization. However, higher cane cost led to 86.3% YoY decline in EBIT from the sugar business. EBIT margin of sugar segment contracted 13.9pp YoY to 1.6%.

- Improved performance from distillery segment: Revenue from the distillery segment increased 77.2% YoY to Rs804mn led by 24.7% YoY increase in sales volume to 20,995kl and 8.4% YoY improvement in realization to Rs28.9/litre. Driven by volume and realization increase, EBIT from this division increased 109.1% YoY to Rs456mn and EBIT margin improved 8.6pp YoY to 56.8%.

- SY14E production estimates a key event: In SY13E, production of sugar is expected to be at ~24mt against annual consumption of ~22mt. Though the production in SY13E will be lower than 26.5mt in SY12, it is sufficient to meet domestic needs and negates the possibility of sharp upside in sugar price. However, going forward, production in Maharastra is expected to decline in SY14E due to water shortage and industry sources believe it could decline to ~4.5mt in SY14E. Lower production in Maharastra could result in a drop in domestic production and hence we expect sugar price to improve next year.

- Maintain Buy: The stock is trading at 9.2x FY14E EPS, 4.5x EV/EBITDA and P/BV of 0.86x. We value the company at 1x FY15E BV and maintain Buy rating on the stock with a price target of Rs62, upside of 16.7% from CMP.

Source : Equity Bulls

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