Balrampur Chini Mills – 4QSY2010 Result Update-Angel Broking

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Balrampur Chini Mills – 4QSY2010 Result Update

Angel Broking maintains a Neutral on Balrampur Chini Mills.

Balrampur Chini Mills’ (BRCM) 4QSY2010 results were below our expectations

mainly due to the increase in cane cost and higher contribution from levy sales.

Total sales grew 35% to `513cr in 4QSY2010, while PAT declined 282% to `78cr.

We have marginally revised upwards our SY2011 estimates to factor the new SAP

declared by the UP state government and higher sugar realisation. At current

levels, with the stock is trading at fair valuations, we maintain our Neutral view on

the stock.

High raw-material cost, levy sales impact margin: Gross margin declined by

2,774bp to 5% in 4QSY2010 from 32.8% in 4QSY2009 due to the increase in

the cane cost and higher contribution from levy sales. BRCM incurred cost of

`2,410/tonne of cane in SY2010 as against `1,510/tonne in SY2009, a yoy

increase of 60%. BRCM further booked losses of `9/kg (on revised levy price of

`18/kg) because of higher levy quota sales.

Outlook and Valuation: Going ahead, we expect the sugar prices to remain in the

region of `28-30/kg. The domestic ex-mill prices have corrected from the highs of

`42/kg to `28-29/kg, while the cost of inventory is at `28/kg. However, due to

declaration of SAP by the UP government, margins in the sugar business are likely

to be under pressure. At current levels, the stock is trading at fair valuations of

1.5x P/B and 1.3x enterprise value/invested capital on SY2011 estimates. Hence,

we maintain our Neutral view on the stock.

SY2010 -Key highlights

Total sales of the company grew 16.5% to `1,987cr driven by 36.5% and 16.5%

realisation growth in sugar and co-generation. However, realisation of the distillery

segment declined 6.8%.

Gross margins fell by 1,500bp to 25% on the back of higher cane cost due to the

shortage of cane. The company incurred `2,410/tonne of cane in SY2010 as

against `1,510/tonne in SY2009, an increase of 60% yoy. Cane prices increased

due to the high demand from the mill operators - the sugar prices kept increasing,

while the area under cane cultivation declined during the season. Consequently,

EBITDA margin declined 1,400bp to 12.5% in SY2010. However, lower interest

outflow restricted the decline in PAT, which de-grew 87.5% to `28.3 in SY2010.

Investment Arguments

Domestic sugar supply easing

India's sugar production is estimated to have increased by 27% to 18.5 –19mn

tonnes in SY2010 as against 14.6mn tonnes in SY2009 on account of higher

drawal rate of 65% (53%), as the mills offered higher compensation to the farmers

compared to the unorganised sector. Cane realisations for farmers in the current

rally increased 73% to `2,600/tonne, while in the previous rally they moved up

18% in SY2004, 7% in SY2005 and 10% in SY2006. In anticipation of this positive

trend extending, increasing number of farmers are expected to switch over to cane

cultivation resulting in the area under cane cultivation once again likely to hit the

SY2007 peak level of 5.2mn hectares (mn ha) in SY2011.

Given increasing number of farmers switching to cane cultivation, sugarcane

supply is expected to further ease in SY2011. This would result in cane realisations

turning unattractive from the unorganised sector and force the famers to shift over

to the mills for better realisations. Hence, we expect the drawal rate to once again

hit the SY2007 peak level of 78% in SY2011, resulting in total sugar production of

26.7mn tonnes. Moreover, with consumption likely to be 24mn tonnes in SY2011,

India would end the year with overall inventory of 7.5mn tonnes, equivalent to 3.8

months of consumption and an improvement over SY2010.

Power segment to cushion profit decline during the down cycle

BRCM’s diversified revenue stream is led by external co-generation power sales.

The company entered the power segment in 2003, much ahead of competitors

such as Bajaj Hindustan (BJH), which entered the segment in SY2008. While BRCM

has total installed capacity of 180MW, with saleable surplus of 126MW (70% of

total installed capacity), BJH has installed capacity of 428MW with saleable surplus

of 105MW (25% of total installed capacity). Operational performance of the

division is also set to improve on the back of the estimated spike in volumes by

99% in SY2011.

SY2011 to be better than SY2010

In SY2010, the sugar industry witnessed extreme sugar prices, both at the higher

and lower end. Thus, we believe that SY2011 would be a recovery phase for the

industry. Mill operators are likely to be more rational while deciding the cane

prices. The cane prices are likely to be in the current SAP range of

`2,050–2,150/tonne, while the sugar prices are likely to remain in region of `28-

30/kg. Going forward, we expect integrated players such as BRCM to benefit as:

(1) higher cane availability and lower cane prices would lead to higher utilisation

levels (95%), and (2) power revenue would receive a substantial leg up due to

higher cane crushing. Overall, we expect BRCM’s financials to improve strongly in

SY2011, with RoE improving to 22.4% from 2.4% in SY2010.

Outlook and Valuation

BRCM’s 4QSY2010 performance was below expectation. Going ahead, sugar

prices are likely to be under pressure because of the higher-than-estimated sugar

production in India and Brazil. Hence, sugar demand-supply would achieve a

balance in SY2011, resulting in further softening of prices. The domestic ex-mill

prices have corrected from highs of `42/kg to `28–29/kg, while inventory is in the

range of `28/kg. We have marginally revised upwards our SY2011 estimates to

factor in: (a) revised cane price based on SAP, and (b) revised sugar realisation. At

the current levels of `79, the stock is trading close to its fair valuations of 1.5x P/BV

and 1.3x enterprise value/invested capital on SY2011 estimates. Hence, we

maintain our Neutral view on the stock.