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Balrampur Chini Mills (BRCM)
Sugar
Weak quarter due to sales of high-cost inventory. BRCM reported operating loss of
Rs252 mn, which was lower than our estimates of profit of Rs18 mn, led by lower-thanestimated
profitability in the sugar segment. We have tweaked our assumptions for
selling price of sugar and the price of sugarcane in line with the current trends in the
market. Our estimates remain the same. Retain ADD rating with a target price of Rs102
based on 6X March ’12E EBITDA.
4QFY10 – weak quarter on account of sales of high-priced sugar inventory
BRCM’s 4QFY10 net loss at Rs783 mn was higher than our estimated loss of Rs467 mn due to
higher-than-estimated losses in the sugar segment. There being no crushing of sugarcane in the
quarter, the loss was expected on account of high-priced inventory (~Rs29/kg) that was sold in the
quarter at low prices. Revenues at Rs5.12 bn (up 35% yoy; down 5% qoq) were higher than our
estimates at Rs4.55 bn, led by higher-than-estimated sales in the sugar segment. 4QFY10 carries
very low relevance as there is no crushing during the quarter. The stock performance would
depend on how the sugar cycle will unfold in the coming year.
Government policy direction would be a major variable for the next year
With expectations of a surplus of ~2.5 mn tons in the sugar year starting from October ’10, the
price of the commodity would be dependant on the government policy towards allowing exports.
There have been news reports suggesting that the government might allow exports of ~1 mn tons
of sugar. The decision is expected to be taken shortly. Sugar prices in the domestic market have
gone up in the last month on expectations of policy action by the government on the exports front.
Domestic prices at ~Rs29/kg are only ~10% lower than the global prices at $710/ton (Rs32/kg) as
the global prices have corrected by ~13% in the last three days; tempering down expectations of
profits in the export market on account of large gap in the domestic and the global prices.
Global prices correct by 13% in three days; should stabilize in the short term
Global white sugar prices have corrected by 13% in the last three days, from $810/ton led by: (1)
European Union announcing plans to increase export quota by 0.35 mn tons and (2) ICE
increasing margin requirements for the future contracts in the commodity. The high volatility
suggests large build-up of speculative positions in the commodity. With crushing beginning in the
two countries (China and Pakistan) which were driving high global prices, we expect the prices to
stabilize at the current levels in the short term.
We adjust our operating assumptions; estimates retained
We have adjusted our assumptions for the price of sugar and sugarcane, for FY2011E and
FY2012E. We have changed the price of sugarcane for FY2011E, from Rs1,900/ton to
Rs2,050/ton, in line with the UP state government guideline for SAP and for FY2012E from
Rs2,000/ton to Rs2,100/ton. Consequently, we have increased our assumptions for the
average price of sugar from Rs26.3/kg to Rs28/kg for FY2011E and from Rs27.3/kg to
Rs28.5/kg for FY2012E, to reflect normalized gross margins and the recent strength in the
domestic prices. Our earning estimates and target price remain unchanged.
Global prices correct by ~13% in three days: should stabilize in the short term
Global white sugar price (LIFFE) corrected sharply by 12.3% in the last three days. The main
reasons are:
European Union announced plans to increase export quota by 0.35 mn tons to 1 mn tons.
Also, according to the spokesman, it will monitor the export prices to decide on
increasing the export quotas further.
One of the commodity exchanges, ICE, increased the margin requirements on raw sugar
future contracts by 10%. The amount of money the traders need to keep as margin, to
hold one contract has been increased from $4,970 to $5,460.
The high volatility in global sugar prices highlights the large amount of speculative positions
in the commodity.
Recent highs at $810/ton unlikely to be revisited in the short term
We believe the recent highs at $810/ton are unlikely to be revisited in the short term. In our
opinion, the current rally in the international sugar prices has been driven by:
Low inventories in China and Pakistan. The sugar year in China and Pakistan starts from
October and ends in September, similar to India’s. Considering that both the countries are
past the end of their sugar season, the inventories in both these countries are very low,
forcing both these countries to import sugar. This has led to the current rally in the global
sugar prices. We highlight that the current spot sugar price in China is close to 7,200 yuan
per ton which means that sugar is selling at ~$1,085/ton in the domestic market, which is
higher than the global price at $710/ton. Similarly, in Pakistan sugar is selling at the retail
level at Rs110/kg (Pakistani currency) which translates into $1,300/ton. There have been
news reports which have pegged the retail prices in some markets in Pakistan at $1,470/ton.
With sugarcane crushing set to begin shortly in both these countries, we expect sugar price
in the respective countries to stabilize a bit, which should take the lid off global sugar prices.
In China, the prices have not come down much in November on account of delay in
harvesting of sugarcane due to heavy rainfall.
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