02-11-2021 10:58 AM | Source: SKP Securities Ltd
Buy Balrampur Chini Mills Ltd For Target Rs.207 - SKP Securities
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Company Background

Balrampur Chini Mills Limited (Balrampur), promoted by Mr. Vivek Saraogi, Managing Director, is one of India’s largest integrated sugar business engaged in the manufacturing of sugar, ethanol and power. It has ten sugar factories located in UP having an aggregate sugar crushing capacity of 76,500 tonnes per day, distillery capacity of 520 KL/day and saleable cogeneration capacity of 165.2 MW. A slew of structural reforms undertaken by the GoI in recent years have positively changed the fortunes of the sugar industry from its erstwhile morass.

Investment Rationale

Weak quarter led by muted realisation, recovery and inventory drawdown

* During Q3FY21, Balrampur net sales declined by ~10.3% y-o-y to ~Rs 10,722 mn, mainly on account of muted sugar realisation, lower recovery and nil exports. Overall sugar sales volume declined by ~14.5% y-o-y to 273.6 mn kg while average domestic realisation was down by ~2.6% y-o-y to Rs 32.5/kg. Sugar segment reported an EBIT loss of Rs 330.1 mn against profit of Rs 486.8 mn reported in Q3FY20 owing to muted realisations, lower recovery and sugar inventory drawdown. Sugar inventory as on December 30, 2020 was 213.6 mn kg valued at an average rate of Rs 31.51/kg. For SS20-21, the Company is allotted 25 mn kg of export quota; it has already sold its entitlement. Balrampur will not do any physical export of sugar.

Distillery segment steering profitability

* Distillery segment revenue increased by ~31.2% y-o-y to Rs 1,348 mn during the quarter, led by higher contribution from B-heavy Ethanol. Ethanol volume was up by ~27.7% y-o-y to 24.9 mn litres while average realization was up by 2.7% to Rs 54.14/litre. Segment EBIT margin decreased by 220 bps y-o-y to 36.2% or Rs 488.6 mn against Rs 395.1 mn reported in Q3FY20, mainly due to higher cost of molasses

 

GoI initiatives supporting sugar industry (SI), sustaining sugar prices

* Indian SI has been known for its cyclical nature and volatility. With an intention to change the fortunes of SI, the GoI announced a slew of positive measures in 2018/19, which has started reaping benefits. To stabilize sugar prices, GoI introduced Minimum Selling Price (MSP), reintroduced sugar selling quota to control supply, provided export incentives to reduce inventory levels, created buffer stocks, provided soft loans etc. and re-introduced new National Biofuel Policy and new Ethanol Blended Petrol Program with an aim to reach 10% and 20% ethanol blending by 2022 and 2030 respectively. The 20% blending target is preponed by five years to 2025. Hence, sugar companies are making positive profit margins even with high sugar inventory levels.

* Continuing the Policy, with increase in FRP and sugar selling price, the Government has increased ethanol prices for EY20-21 and to balance surplus sugar announced exports policy for SS20-21. The Group of Minister (GoM) has proposed to increase sugar MSP from Rs 31/kg to Rs 33/kg, which is yet to get a Cabinet approval. Any positive development on sugar MSP hike will result in upward revision in domestic sugar prices and Balrampur’s profitability. SAP prices for SS20-21 are awaited.

* With higher ethanol blending and procurement prices, the ethanol business has proved to be a boon for the sugar producers especially in a period of surplus sugarcane production. To have a greater participation in the ethanol blending programme, the Company enhanced its distillery capacity by 160 KLPD to 520 KLPD in January 2020. Thus, Balrampur has been able to sell ~120 mn litre in FY20 against ~80 mn in FY18. Going forward the management expects to have greater participation in B-Heavy ethanol and targets to sell ~162 mn litres and ~180 mn litres of ethanol in FY21E and FY22E respectively.

* Further, the Company has announced an expansion of 320 KLD new distillery capacity at Maizapur plant, with a capex of Rs 3.2 bn, funded through debt/equity of 7:3. The new distillery will be utilised for producing ethanol from sugarcane juice during the crushing season and from grains during off season and expected to commission by November 2022. Post expansion, the Company will be able to sacrifice additional ~7 crore kg of sugar and will produce ~10 crore litre of ethanol by utilising sugarcane juice and grain. The new facility would start partially contributing to revenues and EBITDA by FY23E and complete in FY24E. The Company’s long-term strategy is to produce sugar that can be sold domestically, rest excess sugar to be diverted through B-Heavy and direct sugarcane.

* Given the current scenario, we expect Balrampur to report net sales of ~Rs 48.8 bn by FY22E with domestic sugar realisations at Rs 33.75/kg in FY22E. In our future estimates for FY21E and FY22E, we not factored both sugar MSP and SAP hike. Any changes in both sugar MSP and SAP prices will change our financial projections.

 

Valuation

Presently, the sugar industry is recovering from its recent troughs, through timely and game changing policy intervention related to sugar MSP, higher ethanol pricing, blending mandates, favourable export policy etc., thereby, moderating sector cyclicality and improving profitability, leading to structural re-rating of the sector. We have valued the stock on the basis of consolidated P/E and P/BV valuation method, assigning equal weights to P/E multiple of 7x FY22E EPS of Rs 28.7/share and P/BV multiple of 1.5xFY22E BV of Rs 142/share and maintain BUY on the stock with a target price of Rs 207/- in 12 months (28% upside).

 

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