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In a sweet spot

We recently interacted with management of Balrampur Chini (BRCM) to take business update. The inclement weather has impacted yield/recovery rate adversely in Uttar Pradesh, leading to cane crushing volume/ production being 7-8% lower than initial estimates. BRCM’s expansion program tracking well (to commission in 3QFY23) and it continues to focus on cane development program to improve area /yield/quality of sugarcane. Government has been aggressive on Ethanol Blending Program, which augurs well for large players like BRCM, to raise capacity. Domestic sugar price outlook is positive given a) significant sugar exports (7.5-8mnt, highest ever) and hence correction in closing inventories in India (6.5-7mnt; 2 months consumption), b) strong global prices, and c) increased diversion of sugar for ethanol (3.4mnt in SS22 vs 1.8mnt in SS21). BRCM will decide on further capex, basis it’s experience of upcoming capacity utilisation, particularly of grain based distillery in Maizapur. We broadly maintain our estimates and now value BRCM at 15xFY24EPS (earlier 1.5xEV/Replacement) to arrive at Mar’23TP of INR530 (earlier INR410). We maintain BUY. Key risk- Unfavourable change in government regulations

SS22 season impacted due to inclement weather: Post SS21 red rot disease, UP sugarcane farmer faced another challenging year in sugarcane harvesting due to unfavourable climatic conditions (severe winter), impacting yield and also recovery rates. UP state sugar production estimates have been revised downward to 10.50mnt as compared to 11.35mnt in the initial estimates. Similarly, BRCM’s cane crushing volume is likely to be flat YoY vs. 7-9% increase expected in the beginning of the season.

Cane Development Program could provide a positive surprise; not built in our estimates at present: BRCM has indicated significant focus on the cane rejuvenation program as it a) aims to achieve 85% of planting in March, b) increase cane area by 10-15% in current year, c) unleash a robust varietal balance, wherein it no longer depend on just one high sugared variety, but 4-5, matching throughput of Co238 variety with superior ability to fight diseases, d) put up state of the art tissue culture lab to support all 10 units (to multiply new varieties faster) and soil testing labs at each mill location (for better results with lower cost to farmers), and e) improve ratoon management practices (with autumn planting). All this has a potential to improve cane crushing volume and consequently sugar/distillery output by 10-20%. We note that our cane crushing assumption of 10.67mnt in SS24E is still lower than 11.03mnt it achieved in SS19, implying we have not considered any explicit benefit of this program in our estimates at present.

In a ‘Sweet Spot’- industry tailwinds with best balance sheet: OMCs have contracted 3.92bn litres as against LOIs of about 4.16bn litres (4.6bn litres requirement at 10% EBP). India has achieved 9.45 per cent blending (average) during 1st Dec-15th March period, as per the industry association. Moreover, Indian millers have contracted for over 7.5mnt of sugar exports during current season, of which more than 4.5mnt is already shipped out till 15th March’22. Given production of 33.3mnt, consumption of 26mnt and exports of 7.5mnt, we estimate sugar inventory to decline by c.1.5mnt to 7mnt (i.e. ~3 months of consumption). This augurs well for the domestic sugar prices for medium term, as we head into summer season, followed by festival period (Aug-Nov). BRCM will one of the biggest beneficiary of these favourable impact of tailwinds (ethanol program, demandsupply balance in domestic market), especially given its ability to deploy capital for any growth opportunity

Tweak estimates; Maintain BUY: We tweak our estimates for FY22-24 by +/- 4% to reflect a) cut in sugarcane crushing assumptions by 4-7%, and b) 1-3% increase in sugar price realisation assumption. Given the government measures (Minimum Selling Price of sugar, Monthly Release Mechanism, Ethanol Blending Program), we believe there is reasonably high visibility of earnings and hence we now move to P/E based valuation for BRCM. We set fair value at INR530 basis 15xFY24EPS (implies 9.8xFY24EV/EBITDA) and maintain BUY. Any weakness in stock price should be used as an opportunity to add. Key risk- Unfavourable change in government regulations.

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