Balrampur Chini:High sugarcane cost erodes bottomline- ICICI Sec

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High sugarcane cost erodes bottomline…
Balrampur Chini reported dismal results as the company reported a loss of
| 78.3 crore due to lower sugar prices and high sugarcane cost paid to
farmers earlier this year. Net sales grew 34.1% to | 508.3 crore from |
378.9 crore in the corresponding quarter on the back of higher volumes.
The company has sold 1.55 lakh tonnes of sugar at an average realisation
of | 27.1 per kg. The company reported a loss at the EBITDA level as raw
material cost increased by ~90% due to higher sugarcane price at | 240
per quintal; much higher than the state advised price (SAP) of | 165 per
quintal in SY10. The interest cost increased by 25.4% to | 23.1 crore due
to higher working capital requirements.


Operations highlights
The company holds 1.2 lakh tonnes of sugar inventory costing more than
current sugar prices of | 27 per kg. The government allowed 100,000 tonnes
exports to the industry under the advance license scheme. Of this, the
company has exported 20,000 tonnes of sugar.

Valuation
At the current price of | 79, the stock is trading at 12.1x its SY10E EPS of
|6.6 and 11.5x its SY11E EPS of | 6.9. Given the expected increase in
production to 25 million tonnes (MT) for SY11 on the back of higher yields
and more diversion from Gur and Khandsari, domestic sugar prices have
declined to | 27 per kg. Given sufficient domestic production in SY11 in
comparison to the domestic consumption, sugar prices would remain
around | 30 per kg. However, further 2 MT of exports allowed by the
government could result in higher sugar prices. We believe the millers will
be paying not more than the determined SAP (| 205 per quintal). This would
reduce the raw material cost considerably subsequently increasing the
margin for millers. We also believe the dip in sugarcane prices and increase
in by-product (ethanol and power) volumes would add to the bottomline.
Hence, we have valued the stock at 15x its SY11E EPS of | 6.9 to arrive at a
target price of | 103 with a STRONG BUY rating.