Balrampur Chini Mills - 4QFY2013 Result Update - SPA Securities

Balrampur Chini came out with better than expected set of numbers on the back of robust profitability clocked by distillery segment coupled with strong sugar division performance. Sugar prices have inched northward over the past couple of quarters, due to expectation of ~20% decline in combined production of Maharashtra & Karnataka (accounting for 45% of India's sugar output) resulting in overall decline of 7.7% to ~24 mt in 2012-13. The removal of 10% levy obligation, abolition of monthly release mechanism coupled with increase in ethanol price will drive the growth of company. We introduce FY15 estimates and retain our BUY rating on the stock with a revised target of INR 71 (Previous TP 63).

Sugar - Price volume led revenue growth

Sugar segment reported a strong revenue growth of 30.5% YoY in Q4FY13, on the back of 21.7% increase in sales volumes to 18.5 lakh qtl & 11.6% surge in free sugar sale realizations to INR 32.4/kg. BCML crushed 5.67 cr qtl of cane during the last quarter compared to 5.64 cr qtl in the corresponding quarter previous year. However profitability of the division was impacted due to higher cane cost coupled with write-down on sugar inventory.

Softening in interest expenses

Interest expenses declined 35.2% YoY to INR 267 mn, primarily on account of decline in working capital requirements owing to improving profitability. As on Mar 2013, BCML is carrying a long-term debt of INR 4996 mn and a working capital debt of INR 10740 mn.

Prime beneficiary of partial decontrol of sugar

BCML will be one of the prime beneficiaries of recently concluded partial decontrol of the sugar sector. The removal of levy obligation will have a substantial impact on profitability as it would lead to ~9% improvement in blended sugar realisations in FY14 to INR 34.50/kg from INR 31.68/kg in FY13. The abolition of the release mechanism will enable the company to sell the output as per its cash flow requirements and thereby leading to reduction in working capital requirement.

Increase in ethanol prices bodes well

The Oil Marketing Companies (OMCs) have agreed to a price range of INR 34-36/litre for ethanol against INR 27/litre earlier to fulfil 5% compulsory blending requirement set by the Government of India in Nov 2012. This will positively impact the profitability of BCML. The landed cost of ethanol in various depots currently works out to ~INR 40-45/litre and hence we expect domestic ethanol prices to increase further from INR 34/litre levels.

Outlook & Valuation

BCML being one of the largest and most efficient sugar producers in the country is best placed to capitalize on the positive structural changes witnessed by the industry. We view these policy changes as a step in the right direction and expect the sugar industry to get transformed and re-rated in the coming years.

We have introduced FY15E estimates and expect the company to register a CAGR of 8.9% & 6.2% in topline and bottomline over FY13-15E. Currently the stock is trading at 0.8x its FY15E BV of INR 64.5. We retain our BUY rating on the stock with a revised target of INR 71 (Previous TP 63) based on 1.1x FY15E BV.

Source : Equity Bulls

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