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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

Stable quarter backed by better sugar realisation

* During Q2FY22, Balrampur net sales declined by ~5.9% y-o-y to ~Rs 12,138.3 mn, mainly on account of lower sugar sales, led by lower monthly sale quota. Overall sugar volumes declined by ~12.7% y-o-y to 268.4 mn kg while average domestic realisation went up by ~4.3% y-o-y to ~Rs 34.5/kg. Sugar segment reported an EBIT of Rs 252.2 mn against Rs 234.8 mn reported in Q2FY21 owing to better realisation. Sugar inventory as of September 2021 was 188.9 mn kg valued at an average rate of Rs 33.01/kg. The Company had lower cane availability during SS20- 21, owing to weather conditions and red rot disease.

* Distillery segment revenue (including ENA & others) decreased by ~3.7% y-o-y to Rs 2,530.8 mn during the quarter, led by lower ethanol sales. Ethanol volume was down by ~17.4% y-o-y to 46.0 mn litres while average realization was up by ~15.9% to ~Rs 52.9/litre. Segment EBIT margin increased by 572 bps y-o-y to 44.1% or Rs 1,117.1 mn against Rs 1,009.9 mn reported in Q2FY21, mainly due to higher contribution from B-heavy ethanol.

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

* Indian SI has been, hitherto, known for its cyclical nature and volatility. With an intention to change the fortunes of SI, 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 fair and remunerative price (FRP) and B-heavy and direct sugarcane with MSP.

* With higher diversion of sugarcane towards ethanol and exports, pan-India sugar inventory at the end of SS21 was 8.3 mn vs. 10.7 mn tn in SS20. With severe drought followed by frost in Brazil, we expect international sugar prices to remain buoyant, going forward. Thus, exports from India are likely to be ~5-6 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 ~7-7.5 mn tn), resulting in firm domestic prices going forward. As per ISMA, sugar production for SS22E is estimated at ~30.5 mn tn.

* SAP prices for SS21-22 is increased by Rs 25/quintal vs. our estimate of Rs 20/quintal. However, impact of a higher than expected SAP hike will get negated with better domestic sugar prices. On account of increase in FRP for SS22E, we expect an upward revision in Ethanol prices for EY21- 22, which if happens, will have a positive impact on Balrampur profitability going forward.

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 greater participation in ethanol blending program, 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 ranging between ~1.15-3.75 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 Company is modernizing 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 ~165 mn litres and ~225 mn litres in FY22E and FY23E respectively. Given the current scenario, we expect Balrampur to report net sales of ~Rs 47 bn, Rs 54 bn and ~Rs 61 bn in FY22E, FY23E and FY24E, with strong operating cash flow generation of ~Rs 8 bn, Rs ~7 bn and ~Rs 9 bn during FY22E, FY23E and FY24E respectively.

* The Company successfully completed its 5th Buyback by buying ~5.96 mn shares at an average price of Rs 361.14/- for a total outlay of Rs 2.15 bn from the open market.

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 31.6/share and recommend a BUY on the stock with a target price of Rs 474/- in 18 months (~43% upside).

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