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Balrampur Chini Mills Ltd:

BCML Posted weak set of numbers in Q3. Revenue came in at Rs.10,722mn a 10.3% contraction from the same period last year, EBITDA was down 67% Y-o-Y at Rs.364mn with margins falling by more than 500Bps to 3.4%. PAT declined by 69% Y-o-Y to Rs210mn with margins contracting by ~380Bps to 2%. Decline in revenue was primarily due to lower sales volumes, the company has sold its MAEQ entitlement and the subsequent lack of exports during the period led to volumes declining by 14.5%, domestic sugar realization was stable at around 32.5Rs/Kg. The alcohol segment showed positive growth as expected, with volumes rising by 19% to 2.8cr lit with blended realization of ~46Rs/Lit. Co-generation segment continues to struggle on the back of low realizations, exported volume was at 11.31Cr units with realization at ~3.2Rs/unit.

Higher cost of production led to margin contraction

U.P is witnessing lower sugarcane yields due to spread of disease and adverse weather conditions, advance estimates by ISMA put expected sugar production at 10.5Mn tons for 20-21 SS as against 12.4Mn tons in SS 19-20. The company’s recovery rate for the quarter was lower at around 10.3% due to higher diversion for ethanol. The above factors and lower volumes contributed to severe contraction in EBITDA margins, we believe this to be a one time event and margins should normalize for Q4.

Outlook for sugar prices is positive

ISMA estimates sugar production for SS 20-21 to be around 30.2Mn tons. Domestic consumption is predicted to be around 26Mn tons along with 6mn tons of export already approved. Opening balance of sugar stocks is at 10.7Mn tons, with the above data we can estimate closing stocks to reduce to around 9Mn tons. This should aid the domestic sugar prices and lead to better cash flows for the mills. BCML management remains confident in regards to domestic realizations and expect growth from March 2021. we believe sugar prices can reasonably rise to Rs.34/kg bringing the average realization for the year to around Rs.33/kg.

Valuation and outlook

We believe that despite weaker than expected numbers in Q3, the long term outlook for Balrampur Chini remains largely unchanged. Improving sugar realizations aided by expected rise in MSP. New ethanol capacity is expected to come online by sept-22 (FY23) and increasing diversion to ethanol will assist the company in keeping inventories low and cash flows consistent. The government has announced its plans to achieve 20% ethanol blending in fuels by 2025 reducing the timeline by 5 years. Ethanol is expected to be a key driver for the sugar industry, BCML is well placed to take advantage of such tailwinds. We value BCML at 7x FY22 P/E to arrive at a target price of Rs.183 and maintain our “BUY” rating

Key risks

* Further delay in increasing MSP by the government, which will affect short term cash flows.

* Rise in SAP for U.P sugarcane, this would cause further stress to margins.

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