Sunday, December 02, 2012

Balrampur Chini Mills: Buy 
~~Nalinakanthi V
Photo: Business Standard
Sugar stocks are in a sweet spot, thanks to the strong domestic prices due to a lower sugar output forecast, and reform expectations. But which stock should you bet on? We think Balrampur Chini, a leading domestic focussed sugar producer, is well-placed to benefit from favourable industry dynamics.
Given the strong balance-sheet and robust outlook for the company, the stock looks attractive at the current market price of Rs 64, trading at around a third of the replacement cost of the company’s assets valued at Rs 4,371 crore.
Attractive realisations:
Sugar accounts for 85 per cent of Balrampur Chini’s revenues. The Government recently lowered its sugar production forecast for the current year to 23 million tonnes, translating into a 13 per cent lower sugar output than in 2011-12. This is due to lower sugarcane availability in the key States of Maharashtra and Karnataka on account of lower crop output and diversion of cane for fodder.
According to an estimate by industry body ISMA (Indian Sugar Mills Association), sugar production in Maharashtra and Karnataka is likely to slip by 26 per cent to nine million tonnes. As a result, sugar price in the spot market has jumped 22 per cent since this April and is ruling steady at Rs 33.5 per kg currently.
Healthy volumes:

In contrast, normal rainfall in the country’s leading sugarcane market — Uttar Pradesh — has led to a 10 per cent increase in crop acreage. This may boost the State’s sugar output by 13 per cent to 7.9 million tonnes.
With Balrampur Chini’s 10 crushing plants located in eastern and central UP, the company expects to crush 10 per cent more sugarcane in the current year. This, coupled with higher realisations, should help the company achieve healthy revenue and profit growth in FY13. Every one rupee increase in the sugar realisation per kg may add Rs 80 crore to Balrampur Chini’s operating profits.
The company’s sugar revenues grew 75 per cent year-on-year to Rs 824 crore in the September quarter, on the back of a 51 per cent jump in sales volume to 2.39 million quintals. The average realisation for free sale sugar was 21.6 per cent higher at Rs 34.3 per kg, compared to the same quarter last year.
The cane price for UP mills is fixed by the State government. The Government is yet to fix the SAP (State Advised Price) for the current year. The SAP for 2011-12 was in the Rs 235-250 range for a quintal (100 kg) of sugarcane. This was higher than the FRP (Fair and Remunerative price) of Rs 145 per quintal fixed by the Centre.
FRP is the minimum price that mills will have to pay farmers. Though one cannot rule out an increase in the SAP for the current year, higher realisation may mitigate the impact of higher raw material costs.
By-products gaining strength

Co-generation power and distillery segment account for 15 per cent of Balrampur Chini’s revenues. Molasses, a by-product, is used to produce rectified spirit, extra neutral alcohol, potable alcohol and ethanol. The pricing for ethanol, which was regulated by the Government until now, has been linked to the market.
The CCEA (Cabinet Committee for Economic Affairs) recently approved the proposal to free ethanol producers to fix the selling price in consultation with the end-user. In addition to the 13 States where ethanol blending is prevalent on a limited scale, the proposal for mandatory 5 per cent ethanol blending has now been extended to other states too. In the event of short supplies, the end-users are now free to import ethanol directly.
With this, the ethanol realisation for Indian sugar producers is expected to move in tandem with the international prices. The average ethanol realisation for producers such as Balrampur Chini may increase by 25 per cent to Rs 34/litre. This will add to the company’s operating profits beginning FY13.
Revenues from the distillery segment doubled to Rs 59 crore in the September quarter. Similarly, co-generation revenues increased 16 per cent to Rs 23 crore. The total units generated increased 28 per cent during the quarter to 46.76 million units.
Balrampur Chini’s total revenues grew 77 per cent to Rs 888 crore in the September quarter. Operating profits jumped eight times to Rs 121 crore. The company reported profits of Rs 49 crore as against loss of Rs 39 crore during the same quarter last year. Balrampur Chini had long-term debt of Rs 661 crore at the end of the quarter, of which Rs 314 crore will be repaid in a year. Post-repayment, the company’s debt-to-equity ratio will improve from the current 0.53 times, making it one of the low leverage companies in the sugar space.
Amidst frequent stake sale rumours, the promoters have managed to increase their stake in the company to 40.9 per cent currently. Institutional holding in the stock has increased by 3.2 percentage points in the last six months to 32.3 per cent.
Decontrol, a big positive:
The committee headed by C. Rangarajan has suggested de-control of the sugar industry. If accepted, the current 10 per cent levy obligation (sugar sold at a discounted price) may be removed and sugar trade may be liberalised by freeing import and export. The committee has also suggested abolition of the sugarcane reserve area and a revenue-sharing formula for cane procurement. Under this, farmers will be paid the FRP upfront and a 70 per cent share of the value realised from sugar and other by-products.
If the committee recommendations are implemented, it can lend stability and sustainability to the industry’s profitability, leading to re-rating of sugar stocks.