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Balrampur Chini Mills
Dec 10 Qtr: Sugar Shines, Cogen & Distillery Disappoint
Sugar Profitability Returns: BRCM reported
December quarter results with revenues, EBITDA and
PAT of Rs5.3bn, Rs724mn and Rs234mn.
Key highlights of the results: 1) Sugar division reporting
profits (Rs250mn) as against a loss in the previous
quarter (Rs540mn), 2) Realizations for sugar division
were down 10% YoY and 3) Unlike in Dec’10 quarter,
where BRCM had benefitted from carrying low cost
inventory, this time around BRCM has carried high cost
inventory in Q1. We do not expect cane prices to be bid
up this season and this combined with a tight domestic
sugar balance drives our OW rating on the stock.
Sugar division likely to earn ~Rs1.5/kg of sugar sold
(operating profit level): Interestingly, unlike peers
BRCM now has no high cost inventory from last season.
For the December quarter average sugar realization
was Rs28,700/MT while cost of production stood at
Rs26,790/MT. Sugarcane landed cost for the quarter
stood at Rs2164/MT. Interestingly BRCM’s sugarcane
recovery for the quarter is up 10bps YoY – in line with
our estimates. BRCM has maintained its cane crushing
target of 6.7mn MT for SY-11 (+24% YoY).
Distillery volumes up 34% but profits are flat:
Distillery division reported revenue growth of 37% for the
quarter under review driven by a40% increase in alcohol
volumes and ~3% decline in average price. Strong
volume growth notwithstanding, profit for the division is
largely flat on account of lower absorption of fixed cost
during the quarter (sales of 4970KL vs. production of
7621KL during the quarter). According to the
management BRCM is expecting to produce ~65mn
liters in SY2011 (up 66% YoY). A combination of longer
crushing season, higher molasses inventory and
demand for fuel ethanol is likely to drive strong growth,
we believe.
Debt/equity set to improve further: Management
plans to pay down long term debt by ~Rs4bn of the
Rs8bn outstanding driven by strong earnings in SY11.
Cogeneration division revenues up 40% YoY but operating
profits are flat YoY: According to the management, BRCM
sold 113mn units during the Dec-10 quarter (+35% YoY).
Average realization of bagasse based supply was Rs4 per unit
(+2% YoY) while realization of coal based supply was Rs4.94
per unit. According to the management, operating profit
margins reduced 1400bps YoY largely on account of higher
transfer pricing of bagasse in the quarter (Rs400/MT vs.
Rs250/MT last quarter)
Conference Call Details: The management has scheduled a
conference call to discuss December quarter results on
Monday 7th February, 2011 at 12noon IST.
Dial in details:
Primary access number: +91 22 2781 3189
Secondary access number: +91 22 6776 3889
Why buy sugar stocks now? 1) Most sugar companies are
expected report losses in the sugar division as they carry high
cost inventory from last season. But we expect a recovery in
operating profit growth over the course of the next nine months
as we believe costs of cane are unlikely to be bid up (like last
season, up ~40% through the season) implying profit of
~Rs1.5/kg of sugar sold at operating profit level (at current
sugar prices). Hence weakness around December quarter
earnings presents a good buying opportunity. 2) In our view,
domestic sugar prices currently are reflecting a production
estimate of ~24.5mn MT (vs. our estimate 24mn MT) and any
further weather shocks/more than anticipated exports could
lead to tighter sugar balance, implying upside risks to
consensus earnings estimates. 3) Most sugar companies’
Distillery division are likely to have strong earnings progression
in SY-2011, driven by a combination of longer crushing season
(higher cane availability), higher realizations driven by
government mandated ethanol blending program and lower
cane cost compared to SY10.
Sugar balance is tighter than the market believes: Severe
cold weather and excess rainfall in India’s key sugarcane
growing areas will likely limit F2011 sugar production to ~24 mn
MT as sucrose recovery could come in lower than expected.
This would translate into ~2 months of closing inventory for
SY2011. In our view, the market is underestimating this tight
balance; we reiterate our Attractive view on the industry.
Reiterate OW on BRCM: Low inventory pipeline is the key
positive for the stock. BRCM seems to be benefiting from its
low exposure to international sugar trade, relatively low high
cost sugar inventory, and a reasonably strong balance sheet.
This, coupled with a sharp increase in sugar production for
F2011, high alcohol and cogeneration realizations through our
forecast horizon, and an estimated sharp fall in cane costs
drive our OW rating.
BRCM - Price target Rs129: Our residual income (RI) model
generates a one-year forward intrinsic value for Balrampur
Chini of Rs129 per share. At our price target, BRCM would
trade at around 2.6x F2011e P/BV.
Risks to price target: 1) Ad-hoc government policy on cane
prices and sugar exports. 2) Renewed inflation concerns.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Balrampur Chini Mills
Dec 10 Qtr: Sugar Shines, Cogen & Distillery Disappoint
Sugar Profitability Returns: BRCM reported
December quarter results with revenues, EBITDA and
PAT of Rs5.3bn, Rs724mn and Rs234mn.
Key highlights of the results: 1) Sugar division reporting
profits (Rs250mn) as against a loss in the previous
quarter (Rs540mn), 2) Realizations for sugar division
were down 10% YoY and 3) Unlike in Dec’10 quarter,
where BRCM had benefitted from carrying low cost
inventory, this time around BRCM has carried high cost
inventory in Q1. We do not expect cane prices to be bid
up this season and this combined with a tight domestic
sugar balance drives our OW rating on the stock.
Sugar division likely to earn ~Rs1.5/kg of sugar sold
(operating profit level): Interestingly, unlike peers
BRCM now has no high cost inventory from last season.
For the December quarter average sugar realization
was Rs28,700/MT while cost of production stood at
Rs26,790/MT. Sugarcane landed cost for the quarter
stood at Rs2164/MT. Interestingly BRCM’s sugarcane
recovery for the quarter is up 10bps YoY – in line with
our estimates. BRCM has maintained its cane crushing
target of 6.7mn MT for SY-11 (+24% YoY).
Distillery volumes up 34% but profits are flat:
Distillery division reported revenue growth of 37% for the
quarter under review driven by a40% increase in alcohol
volumes and ~3% decline in average price. Strong
volume growth notwithstanding, profit for the division is
largely flat on account of lower absorption of fixed cost
during the quarter (sales of 4970KL vs. production of
7621KL during the quarter). According to the
management BRCM is expecting to produce ~65mn
liters in SY2011 (up 66% YoY). A combination of longer
crushing season, higher molasses inventory and
demand for fuel ethanol is likely to drive strong growth,
we believe.
Debt/equity set to improve further: Management
plans to pay down long term debt by ~Rs4bn of the
Rs8bn outstanding driven by strong earnings in SY11.
Cogeneration division revenues up 40% YoY but operating
profits are flat YoY: According to the management, BRCM
sold 113mn units during the Dec-10 quarter (+35% YoY).
Average realization of bagasse based supply was Rs4 per unit
(+2% YoY) while realization of coal based supply was Rs4.94
per unit. According to the management, operating profit
margins reduced 1400bps YoY largely on account of higher
transfer pricing of bagasse in the quarter (Rs400/MT vs.
Rs250/MT last quarter)
Conference Call Details: The management has scheduled a
conference call to discuss December quarter results on
Monday 7th February, 2011 at 12noon IST.
Dial in details:
Primary access number: +91 22 2781 3189
Secondary access number: +91 22 6776 3889
Why buy sugar stocks now? 1) Most sugar companies are
expected report losses in the sugar division as they carry high
cost inventory from last season. But we expect a recovery in
operating profit growth over the course of the next nine months
as we believe costs of cane are unlikely to be bid up (like last
season, up ~40% through the season) implying profit of
~Rs1.5/kg of sugar sold at operating profit level (at current
sugar prices). Hence weakness around December quarter
earnings presents a good buying opportunity. 2) In our view,
domestic sugar prices currently are reflecting a production
estimate of ~24.5mn MT (vs. our estimate 24mn MT) and any
further weather shocks/more than anticipated exports could
lead to tighter sugar balance, implying upside risks to
consensus earnings estimates. 3) Most sugar companies’
Distillery division are likely to have strong earnings progression
in SY-2011, driven by a combination of longer crushing season
(higher cane availability), higher realizations driven by
government mandated ethanol blending program and lower
cane cost compared to SY10.
Sugar balance is tighter than the market believes: Severe
cold weather and excess rainfall in India’s key sugarcane
growing areas will likely limit F2011 sugar production to ~24 mn
MT as sucrose recovery could come in lower than expected.
This would translate into ~2 months of closing inventory for
SY2011. In our view, the market is underestimating this tight
balance; we reiterate our Attractive view on the industry.
Reiterate OW on BRCM: Low inventory pipeline is the key
positive for the stock. BRCM seems to be benefiting from its
low exposure to international sugar trade, relatively low high
cost sugar inventory, and a reasonably strong balance sheet.
This, coupled with a sharp increase in sugar production for
F2011, high alcohol and cogeneration realizations through our
forecast horizon, and an estimated sharp fall in cane costs
drive our OW rating.
BRCM - Price target Rs129: Our residual income (RI) model
generates a one-year forward intrinsic value for Balrampur
Chini of Rs129 per share. At our price target, BRCM would
trade at around 2.6x F2011e P/BV.
Risks to price target: 1) Ad-hoc government policy on cane
prices and sugar exports. 2) Renewed inflation concerns.
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