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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 co-generation 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

Subdued quarter led by lower sugar sales and recovery

* During Q1FY22, Balrampur net sales declined by ~20.3% y-o-y to ~Rs 11,404.4 mn, mainly on account of lower sugar sales. Overall sugar volumes declined by ~32.4% y-o-y to 241.1 mn kg while average domestic realisation went up by ~4.3% y-o-y to Rs 33.2/kg. Sugar exports under MAEQ stood at 4 mn kg in Q1FY22 vs. 54.4 mn kg in Q1FY21. Sugar segment reported an EBIT of Rs 143.8 mn against Rs 949.5 mn reported in Q1FY21 owing to lower sugar off-take, adverse weather conditions and red rot disease impacting recovery and lower cane availability. Sugar inventory as on June, 2021 was 457.4 mn kg valued at an average rate of Rs 31.4/kg. The management believes this to be a one-off case where the sugar season had a short run and are hopeful to catch up in the ensuing season.

* Distillery segment revenue (including ENA & others) increased by ~19.7% y-o-y to Rs 2,672.3 mn during the quarter, led by higher contribution from B-heavy ethanol. Ethanol volume was up by ~8% y-o-y to 43.2 mn litres while average realization was up by ~10% to ~Rs 57/litre. Segment EBIT margin increased by 113 bps y-o-y to 44.1% or Rs 1,177.5 mn against Rs 958.6 mn reported in Q1FY22, mainly due to higher contribution from B-heavy ethanol.

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 2018-2019 which have started reaping benefits. Further, the GoI de-linked ethanol prices with crude and linked C-heavy price with FRP and B-heavy and direct sugarcane with MSP.

* With higher diversion of sugarcane towards ethanol and supportive exports policy, we expect pan-India sugar inventory at the end of SS21E at ~9 mn tn vs. 10.7 mn tn in SS20. With severe drought followed by frost in Brazil and lower sugar production in Thailand, we expect international sugar prices to remain buoyant, going forward.

* Thus, exports from India are likely to be ~6 mn tn for SS22E. With more ethanol capacities coming on stream, we expect higher sugarcane diversion towards ethanol production, leading to further decline in inventory levels for SS22E (closing inventory expected at ~7.5 mn tn), resulting in firm domestic prices going forward.

* SAP prices for SS20-21 are kept unchanged. On account of the election in UP next year, we expect an upward revision in SAP prices for SS21-22. Thus, we have factored in Rs 20/quintal hike in SAP prices for SS21-22 in Balrampur FY22E projections.

Moving to the next orbit with aggressive distillery expansions

* With higher ethanol blending and procurement prices, the ethanol business has proved to be a boon for sugar producers, especially in a period of surplus sugarcane production. To have a greater participation in the ethanol blending programme, the Company is laying foundation for next level of growth by increasing its ethanol capacity from 520 KLPD to 1,050 KLPD, with a capex of ~Rs 6.3 bn, funded through a mix of debt/internal accruals of 57%:43% (interest subvention of 50%).

* The Company is setting up 40 KLPD, 170 KLPD and 320 KLPD ethanol capacities at Gularia, Balrampur and Maizapur respectively. The capex for Gularia, Balrampur and Maizapur is Rs 150 mn, Rs 1.9 bn and Rs 4.25 bn respectively.

* Gularia distillery expansion is expected to commission by November 2021, producing ethanol from B-heavy/C-heavy molasses while, Balrampur and Maizapur distillery expansion are expected to commission by November 2022. Balrampur distillery will produce ethanol from Bheavy molasses/sugarcane juice and Maizapur distillery will produce ethanol from sugarcane juice during the crushing season and from grains during off season.

* Post expansion, the Company distillation capacity will stand at ~350 million litres, resulting in diversion of surplus sugar towards ethanol. The new facilities would start partially contributing to revenues and EBITDA by FY23E and complete in FY24E and will have a pay-back period of less than 3.5 years. 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.

* In addition, the management has also planned to modernize a few sugar plants along with setting up of refinery at Balrampur and Kumbhi, with a total capex of Rs 3.63 bn funded through a mix of debt/internal accruals of 39%:61%. The capex is expected to commission by November 2022 and will result in better plant efficiency, higher capacity utilization and better recovery.

* Going forward the management expects to have greater participation in B-heavy and direct sugarcane juice (post commissioning of new plants) ethanol and targets to sell ~175 mn litres and ~225 mn litres in FY22E and FY23E respectively. Given the current scenario, we expect Balrampur to report net sales of ~Rs 48 bn and ~Rs 53 bn in FY22E and FY23E, with strong operating cash flow generation of ~Rs 8.5 bn and ~8 bn during FY22E and FY23E respectively.

* The Company proposed a Buyback of Equity Shares (5th consecutive in a row) for an amount and price not exceeding Rs 2.15 bn and Rs 410/share respectively, under the ‘open market’ route. In the past promoters had always participated in the buyback, but under the proposed buyback, promoters for the first time will not be participating.

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 P/E valuation method and assigned a P/E multiple of 15x FY23E EPS of Rs 33.5/share, upgrading it from 12x led by Balrampur’s aggressive capex plan, strong cash flows generation and prudent capital allocation strategy. We maintain a BUY on the stock with a target price of Rs 488/- in 18 months (43% upside).

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