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Balrampur Chini Mills (BRCM) reported a poor performance for 5QSY2011 due
to increased cane cost and lower sugar realisation. Total sales grew by 21% to
`532cr in 5QFY2011, while PAT declined by 69% to `23cr. We are introducing
FY2012 estimates and rolling forward valuation on the same. At current levels,
the stock is trading at fair valuations; hence, we remain Neutral on the stock.
High raw-material cost and low sugar realisation impact margin: Gross margin
declined by 1,680bp to 27% in 5QFY2011 from 44% in 1QFY2011 due to
increased cane cost and lower realisation. BRCM incurred cost of `2,160/tonne of
cane in 5QFY2011. Further, realisation during the quarter stood at `28.7/kg
compared to `32.3/kg.
Outlook and valuation: Going ahead, we expect sugar prices to remain at
`28–30/kg. 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 1.2x P/B
and 1.1x enterprise value/invested capital on SY2012 estimates. Hence, we
maintain our Neutral view on the stock.
High raw-material costs and contribution of levy sales impact margins: BRCM’s
gross margin fell substantially by 1,680bp to 27% in 5QSY2011 from 44% in
1QFY2011. Margins were hit by increased cane costs, higher contribution of levy
sales and lower sugar realisation. The company incurred `2,160/tonne of cane in
5QSY2011. During the quarter, levy sugar was sold at a fixed price of `18/kg
(revised price), which led to a loss of ~`6/kg for the company. Lower sugar
realisation of `29 during the quarter also contributed to reduction of gross
margins.
Investment arguments
Domestic sugar supply easing
India's sugar production is estimated to increase by 40% to 26mn tonnes in
SY2011 as against 18.5mn tonnes in SY2010 on account of higher drawal rate of
78% (65%), as mills offer higher compensation to farmers compared to the
unorganised sector. Cane realisations for farmers in the current rally increased by
73% to `2,600/tonne in SY2010; while in the previous rally, they moved up by
18% in SY2004, 7% in SY2005 and 10% in SY2006. In anticipation of this positive
trend extending, a large number of farmers switch over to cane cultivation resulting
in the area under cane cultivation touching 4.9mn–5mn ha in SY2011. On the
back of crop economics, we do not see any significant shift towards any other crop
and, hence, expect farmers to continue sugarcane plantations in SY2012.
We expect the area under cane cultivation to remain steady at 5mn ha. Further,
with yield of 68 tonnes/ha and drawal rate of 75%, we expect the country to
produce 25.8mn tonnes of sugar in SY2012. With opening inventory in access of
6mn tonnes and consumption at 24mn tonnes, closing inventory at the end of
SY2012 would stand at 8mn tonnes or equivalent to four months of consumption.
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). Over the long term, BRCM has added
advantage compared to its peers that would help protect its profitability during the
down cycle in sugar.
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 SY2011 would be a recovery phase for the
industry. Mill operators are likely to be more rational while deciding cane prices.
Cane prices are likely to be in the current SAP range of `2,050–2,150/tonne,
while sugar prices are likely to remain at `28–30/kg. Going forward, we expect
integrated players such as BRCM to benefit as higher cane availability and lower
cane prices would lead to higher utilisation levels (61%) and 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 15.9% in
SY2012 from 2.4% in SY2010
Outlook and valuation
Going ahead, sugar prices are likely to be under pressure because of higher-thanestimated
sugar production in India and Brazil. Hence, sugar demand-supply
would achieve a balance in SY2011, resulting in further softening of prices.
Domestic ex-mill prices have corrected from the highs of `42/kg to `28–29/kg,
while inventory is at ~`28/kg.
We are introducing our SY2012 numbers and rolling forward our valuation on the
same. At the current level of `69, the stock is trading close to its fair valuations of
1.2x P/BV and 1.1x enterprise value/invested capital on SY2011 estimates. Hence,
we maintain our Neutral view on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Balrampur Chini Mills – 5QFY2011 Result Update
Angel Broking maintains a Neutral on Balrampur Chini Mills.
Balrampur Chini Mills (BRCM) reported a poor performance for 5QSY2011 due
to increased cane cost and lower sugar realisation. Total sales grew by 21% to
`532cr in 5QFY2011, while PAT declined by 69% to `23cr. We are introducing
FY2012 estimates and rolling forward valuation on the same. At current levels,
the stock is trading at fair valuations; hence, we remain Neutral on the stock.
High raw-material cost and low sugar realisation impact margin: Gross margin
declined by 1,680bp to 27% in 5QFY2011 from 44% in 1QFY2011 due to
increased cane cost and lower realisation. BRCM incurred cost of `2,160/tonne of
cane in 5QFY2011. Further, realisation during the quarter stood at `28.7/kg
compared to `32.3/kg.
Outlook and valuation: Going ahead, we expect sugar prices to remain at
`28–30/kg. 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 1.2x P/B
and 1.1x enterprise value/invested capital on SY2012 estimates. Hence, we
maintain our Neutral view on the stock.
Growth across segments
BRCM posted net sales of `532cr in 5QFY2011 as against `439cr in 1QFY2011.
Strong top-line growth came on the back of higher volumes reported by the
distillery and power divisions. Sugar volumes for the quarter increased by 18% to
0.15mn tonnes, the distillery division posted sales of 4.97mn litres against 3.56mn
litres in 1QFY2011, and the power (cogen) division witnessed a 35% increase in
sales to 113mn units.
High raw-material costs and contribution of levy sales impact margins: BRCM’s
gross margin fell substantially by 1,680bp to 27% in 5QSY2011 from 44% in
1QFY2011. Margins were hit by increased cane costs, higher contribution of levy
sales and lower sugar realisation. The company incurred `2,160/tonne of cane in
5QSY2011. During the quarter, levy sugar was sold at a fixed price of `18/kg
(revised price), which led to a loss of ~`6/kg for the company. Lower sugar
realisation of `29 during the quarter also contributed to reduction of gross
margins.
Investment arguments
Domestic sugar supply easing
India's sugar production is estimated to increase by 40% to 26mn tonnes in
SY2011 as against 18.5mn tonnes in SY2010 on account of higher drawal rate of
78% (65%), as mills offer higher compensation to farmers compared to the
unorganised sector. Cane realisations for farmers in the current rally increased by
73% to `2,600/tonne in SY2010; while in the previous rally, they moved up by
18% in SY2004, 7% in SY2005 and 10% in SY2006. In anticipation of this positive
trend extending, a large number of farmers switch over to cane cultivation resulting
in the area under cane cultivation touching 4.9mn–5mn ha in SY2011. On the
back of crop economics, we do not see any significant shift towards any other crop
and, hence, expect farmers to continue sugarcane plantations in SY2012.
We expect the area under cane cultivation to remain steady at 5mn ha. Further,
with yield of 68 tonnes/ha and drawal rate of 75%, we expect the country to
produce 25.8mn tonnes of sugar in SY2012. With opening inventory in access of
6mn tonnes and consumption at 24mn tonnes, closing inventory at the end of
SY2012 would stand at 8mn tonnes or equivalent to four months of consumption.
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). Over the long term, BRCM has added
advantage compared to its peers that would help protect its profitability during the
down cycle in sugar.
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 SY2011 would be a recovery phase for the
industry. Mill operators are likely to be more rational while deciding cane prices.
Cane prices are likely to be in the current SAP range of `2,050–2,150/tonne,
while sugar prices are likely to remain at `28–30/kg. Going forward, we expect
integrated players such as BRCM to benefit as higher cane availability and lower
cane prices would lead to higher utilisation levels (61%) and 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 15.9% in
SY2012 from 2.4% in SY2010
Outlook and valuation
Going ahead, sugar prices are likely to be under pressure because of higher-thanestimated
sugar production in India and Brazil. Hence, sugar demand-supply
would achieve a balance in SY2011, resulting in further softening of prices.
Domestic ex-mill prices have corrected from the highs of `42/kg to `28–29/kg,
while inventory is at ~`28/kg.
We are introducing our SY2012 numbers and rolling forward our valuation on the
same. At the current level of `69, the stock is trading close to its fair valuations of
1.2x P/BV and 1.1x enterprise value/invested capital on SY2011 estimates. Hence,
we maintain our Neutral view on the stock.
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