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Massive capex; distillery to contribute 1/3 to revenue

About the stock: Balrampur Chini (BCML) is the second largest sugar company with sugar crushing capacity of 76000 TCD, distillery capacity of 520 KLD & co-generation capacity of 91 MW. It is undertaking a distillery capex of 530 KLD & modernisation, de-bottlenecking of its sugarcane crushing capacity at multiple plants.

* The company would be able to increase distillery volumes to 35 crore litre in FY24 from 16 crore litre in FY21. Moreover, the modernisation plan would result in higher sugarcane crushing, better recoveries.

Q1FY22 Results: BCML reported muted results in Q1FY22.

* Sales were down 20.3 % YoY, due to lack of exports during the quarter

* EBITDA was at | 134 crore, down 38.5% YoY, with margins at 11.8%

* Consequent PAT was at | 76.9 crore (down 44.9 % YoY)

What should investors do?

BCML’s share price has gone up 3x in the last five years (from | 114 in August 2016 to | 350 in August 2021).

* We expect 2.2x increase in distillery volumes to boost earnings with CAGR of 19.3% during FY21-24E

* We continue to maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 515, valuing the business at 15x FY23 PE.

Key triggers for future price performance:

* With distillery capex, BCML would be able to increase its ethanol volumes 2.2x to 35 crore litre by FY24. Distillery sales may witness 34.8% CAGR to | 2053 crore in FY21-24E, which would be 32% of total revenues

* It is undertaking modernisation & de-bottlenecking at some plants. This would lead to higher sugarcane crushing, better recoveries and, in turn, lead to stronger revenue growth. We expect 9.5% revenue CAGR in FY21-24E

* The company is introducing newer sugarcane variety in its catchment areas, which would reduce the dependence on Co-0238

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 & abundant sugarcane availability. It is increasing its distillery capacity to 3x in the next three years

* We value the stock at | 110/share with BUY recommendation

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