IGI Logo

In a sweet spot; Reiterate BUY

Balrampur Chini’s (BRCM) 4QFY22 revenue grew by 26% YoY to INR 12.8bn (16% above JMFe) led by 26% YoY/ 8% YoY growth in sugar volume/ realisation while EBITDA was flat YoY (margin declined by 670bps YoY) due to higher cane cost, lower recovery rates and unabsorbed fixed cost due to a fall in crushing volume. PAT declined 1% YoY to INR 2.4bn (3% below JMFe). While SS22 volumes were impacted due to adverse weather conditions, the management expects cane volumes similar to SS21 on the back of a) 6-7% increase in cane area, b) 75% of ratoon area under the ratoon management programme, and c) increase in CO 0118 (superior recovery rates) area under cultivation from 13% to 23%. BRCM expects new distillery capacities and expansion programmes to get commissioned on time by Nov’22. The company pointed out that the government’s recent measure to put sugar exports under the restrictive category is positive for the industry as it clearly indicates the government’s priority to maintain sufficient inventories in the domestic market. We cut our FY23/24 estimates by 13%/5% respectively to reflect slightly lower cane crushing volume and sugar price assumption. We remain positive on Indian Sugar sector as it has now shifted to complete regulation, intended towards the survival of the weakest mill, which augurs well for efficient companies like BRCM. We maintain BUY with a Mar’23TP of INR 510 basis 15x Mar’24 EPS (earlier INR530). Key risks: Lower-than-expected cane crushing volume and any unfavourable change in government regulations.

* 4QFY22 Summary: BRCM’s 4QFY22 sales grew by 26% YoY (+6% QoQ) to INR 12.8bn (16 above JMFe) led by higher sugar volume (+26% YoY/-5% QoQ) and realisation (+8% YoY/ -5% QoQ). Distillery and Cogen Volumes grew by 35% YoY and 1% YoY respectively while realisations improved 5% YoY and 4% YoY respectively. Gross margin declined by 1170bps YoY due to a) higher cane cost (INR 3680/t vs. INR 3380/t LY), b) lower recovery rate (-30bps YoY), and c) under-absorption of cost due to lower crushing volumes. EBITDA at INR 3.3bn was flat (3% below JMFe) as the benefit of higher distillery volume was offset by lower recovery rate and cane prices. Adjusted PAT shrank 1% YoY to INR 2.4bn (3% below JMFe). Cash Flow from Operations (CFO) grew 6% YoY to INR 6.95bn.

* Lower crushing largely due to adverse climatic conditions; outlook positive: BRCM was adversely impacted by weather conditions last year (extended monsoon leading to 90 inches of rain vs. 35-40 inches in select catchment areas) leading to a drop in crushing volume (-14% YoY) and recovery rate. However, with a normal monsoon forecast, BRCM remains optimistic of returning to SS21 volumes and recovery on the back of a) 6-7% increase in cane area b) 75% ratoon area (accounts for 50% of crane crushed) now under the ratoon management programme c) improvement in variety (CO 0118 up from 13% to 23%). BRCM also has new varieties under aggressive multiplication plans and expects the whole cane landscape to change over the next 2-3 years.

* Export restrictions a positive development: BRCM views the government’s recent restrictions on sugar exports (capping it to 10mt this year) as a positive development and expects sugar prices to remain firm in the medium to long term. The industry has seen physical exports of 7.2mt so far and has contracted exports worth 8.5-9mt. In the coming years, the management expects government policy to be tweaked to maintain inventory levels at 2.5months (6mt) while the balance will be exported or diverted to ethanol production

* Maintain BUY: We cut our FY23/FY24EPS estimates by 13%/5% respectively factoring in a) lower cane crushing volumes basis FY22 actuals, b) marginally lower sugar realisation c) lower spread on opening inventories (INR 1.6/kg vs. INR4/kg earlier), and d) higher tax rate. We continue to value BRCM at 15x Mar’24 EPS and arrive at a Mar’23 TP of INR 510 (earlier INR 530). We maintain BUY and the recent correction has created a good buying opportunity. Key risk - Unfavourable change in government regulations.

Key takeaways from 4QFY22 concall

* As on 15th May, India’s production stood at 34.9mt. Maharashtra, on the back of increased water availability (leading to higher yields), produced 13.8mt vs. 10.6mt; Karnataka produced 6.1mt; UP produced 10.2mt while others produced 5.6mt.

* For SS22, Brazil is expected to produce 32.1mt sugar. Crushing in April has been lower and there is divergence to ethanol due to elevated crude oil prices. Next year, Brazil is expected to produce 29mt-34mt.

* Regarding ethanol blending compability, the management, based on interactions with SIAM, indicated that materials (rubber, etc.) are compatible for upto 15% blending levels.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

CIN Number : L67120MH1986PLC038784

Above views are of the author and not of the website kindly read disclaimer