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Buy Balrampur Chini Ltd For Target Rs.385

Maximising ethanol volumes to drive earnings…

Balrampur Chini (BCML) reported 37.7% growth in operating profit in Q4FY21 on account of higher distillery volumes & realisation. The absence of sugar exports resulted in 41.4% revenue de-growth with similar decline in sugar segment sales. The company sold 1.9 lakh tonnes (lt) of sugar vs. 4.5 lt in corresponding quarter whereas sugar realisation was flat at | 32.1 / kg. In 2020-21 sugar season, the company saw 22% dip in sugar production mainly on account lower sugarcane yield in its catchment area due to red rot disease.

Distillery segment sales increased 18.1% with 11.5% increase in volumes, 4.7% higher realisation. The higher proportion of B-heavy ethanol sales aided growth in the segment. BCML holds 6.4 lt of sugar priced at | 31.3 / kg as on March 2021. PAT saw de-growth of 2.5% to | 235.5 crore due to tax write back in the base quarter. Total debt for the company declined by ~| 250 crore whereas it generated operating cash flow of | 648.9 crore in FY21 with strong profitability.

Maximising B-heavy, capacity addition to drive earnings

With the prevailing sugar prices & current B-heavy & Sugarcane juice ethanol prices, it is profitable to maximise B-heavy & sugarcane juice ethanol sales. BCML also diverted 65% of its sugarcane towards B-heavy ethanol production & sacrificed 1.17 lt sugar for ethanol production in FY21. We expect B-heavy proportion to further increase to 80% next crushing season. The company would be commissioning 320 KLD distillery capacity in December 2022 to produce ethanol from sugarcane juice & grain. This would take total annual capacity to ~30 crore litre. We expect distillery volumes of 18 crore litre, 23 crore litre in FY22E, FY23E, respectively, which would result in distillery revenue CAGR of 25.4% in FY21-23E to | 1297.7 crore.

Strong cash flow generation; possibility of bigger expansion

With the strong distillery revenue generation, the company would be able to grow earnings in FY22 despite significant decline in sugarcane crushing. We expect BCML to generate operating cash flows of | 860 crore, 958 crore in FY22E, FY23E, respectively. The company would repay some debt and utilise cash flows for buybacks and dividend payment. However, given the opportunity in ethanol blending programme is much larger, BCML can further expand its distillery capacity by converting existing distillery for sugarcane juice / B-heavy ethanol production.

Valuation & Outlook

BCML is the most efficient sugar company with sustainable earnings and strong cash flow generation. We believe the company would increase shareholder’s payout (buybacks, dividend) to ~60% from current 40% payout. We believe the market recognises the big opportunity in ethanol blending programme and the stock is poised to command better valuation multiples. We value the stock at 10x FY23E earnings with a target price of | 385 / share (earlier: | 285) and maintain our BUY recommendation.

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