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Decent qtr; slight concern on grain-based ethanol volume

Balrampur Chini’s (BRCM) 1QFY24 revenue grew by 29% YoY to INR 13.9bn driven by higher distillery and sugar volume (+43%/ +12% YoY) as well as higher realisation (+8%/ +4% YoY respectively). EBITDA increased 267% YoY (6% below JMFe) to INR 1.63bn while PBT and PAT increased 5x YoY to INR 693mn. The management reiterated its crushing volume optimism (at least 10% increase in sugarcane crushing volume in SS24) while it reduced its distillery volume guidance to 280-290mn litres for FY24 (vs. 330mn ltr earlier) given availability/pricing challenges of broken rice sourcing from FCI. We continue to be positive on India’s sugar sector and maintain BUY on BRCM. We cut our FY24EPS estimate while we broadly maintain FY25EPS and introduce FY26, and roll forward to Jun’24 TP of INR 490 (Mar’24 TP of INR 470 earlier), basis 15x June’25EPS. Key risks: Lower-than-expected cane crushing volume and any unfavourable change in government regulations.

* 1QFY24 summary: BRCM’s 1QFY24 sales grew by 29% YoY (-7% QoQ) to INR 13.9bn with higher distillery and sugar volume (+43%/ +12% YoY) coupled with better realisation for them (+8%/ +4% YoY) respectively. Gross margin improved by 800bps YoY to 25.6% while EBITDA improved 267% YoY (-6% below JMFe) to INR 1.63bn. PBT increased +501% YoY while PAT improved 497% YoY to INR 693mn.

* Cane crushing volume to improve: BRCM witnessed 3x increase in cane crushing volume (YoY) during the quarter, driving the better operating leverage. Rain patterns had been conducive for the company during 1QFY24. During SS23, there has been a 16% increase in crushing, and given the robust cane development programme, the management is optimistic of another 10% increase in SS24, though that is slightly contingent on how the monsoon pans out in Aug-Oct. The brownfield expansion at the Kumbhi factory (from 8000TCD to 10000TCD) is progressing smoothly and will be available for crushing in the upcoming season. Post this, the company indicated that it can expand capacity by 5-7% in some other areas through debottlenecking.

* ISMA pegs SS24 sugar production at 31.7mnt: India’s sugar production for SS23 is estimated at 32.8mnt. According to ISMA, the preliminary estimate for sugar production for SS24 is 31.7mnt though the company believes it is likely to be around 32.5mnt, thus providing a window for exports. Sugar inventory is sufficient in the system and, hence, it expects sugar prices to remain slightly firm until the onset of the next season.

* Distillery segment to shine bright, though dark clouds of grain availability/pricing emerge: Distillery business performed well during the quarter with newly expanded capacity now fully operational. Grain-based capacities are facing challenges amidst the stoppage of subsidised rice from FCI; however, the management highlighted that this is temporary and government will allow FCI rice to grain-based mills. OMCs have finalised tenders for 564cr litres of which 560cr litres has been contracted and 378cr litres have been delivered till 23rd Jul’23. BRCM has guided for 280-290mn ltr of distillery sales volume for FY24 (vs. earlier 330mn ltr) on account of a) lower production, particularly in the grain-based ethanol segment, b) slower-than-expected offtake by OMCs (however, this would get rolled over to next year and is, hence, just a timing issue, in our opinion). Further, the share of the distillery segment in overall revenue is expected to increase from 30% currently to 35% in future.

* Cut FY24 estimates to reflect lower distillery volume and RM cost inflation; Maintain BUY: We remain positive on India’s sugar sector as it has shifted to complete regulation decisively, intended towards the survival of the weakest mill, which augurs well for efficient companies like BRCM. We cut our FY24EPS by 15% to reflect lower distillery volume/higher cost while we broadly maintain our FY25 estimates. We introduce FY26 and roll forward to Jun’24 TP of INR 490 (INR 470 earlier), basis 15x June’5EPS. Key risks: Lower-than-expected cane crushing volume and any unfavourable change in government regulations.

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