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High sugarcane availability to bring back growth…

About the stock: Balrampur Chini (BCML) is the second largest sugar company with sugar crushing capacity of 77500 TCD, distillery capacity of 560 KLD and cogeneration capacity of 175.7 MW. It will complete its distillery capex of 490 KLD and modernisation, de-bottlenecking of its sugarcane crushing capacity by December 2022, which would take its total distillery capacity to 1050 KLD (35 crore litre).

* The company is working on replacing the existing Co-0238 sugarcane variety in its catchment area with newer varieties, which would improve sugarcane yields and recovery

Q2FY23 Results: BCML reported dismal results with 8.3% dip in revenues.

* Sales down 8.3% with 1%, 14% dip in sugar, ethanol sales, respectively

* BCML posted EBITDA loss of | 15.9 crore due to higher cost of production

* Consequently, the company posted a loss of | 28.9 crore

What should investors do? BCML’s share price has doubled in the last five years (from | 162 in November 2017 to | 329 in November 2022).

* We expect 39.5% distillery volume CAGR, which would boost the company’s earnings at 20.4% CAGR during FY22-24E

* We maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 485, valuing the business at 13x FY24 PE

Key triggers for future price performance:

* With distillery capex, BCML would be able to increase its ethanol capacity 2x to 35 crore litre. Distillery sales are expected to witness 44.0% CAGR to | 2021.2 crore in FY22-24E, which would be 33% of total revenues

* It is undertaking modernisation and de-bottlenecking at some plants. This would lead to higher sugarcane crushing, better recoveries by FY24. We expect 11.9% revenue CAGR in FY22-24E

* BCML would be replacing Co-0238 with newer sugarcane variety in its catchment areas, which would enhance sugarcane availability and sugar production through higher yields & better sugar recovery

Alternate Stock Idea: We also like Dwarikesh Sugar in our sugar coverage.

* The company is one of the most efficient companies with highest sugar recovery and abundant sugarcane availability. It has increased its distillery capacity to 11 crore litre

* We value the stock at | 135/share with BUY recommendation

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