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Company Background

Balrampur Chini Mills Limited (Balrampur), promoted by Mr. Vivek Saraogi, Managing Director, is one of India’s largest integrated sugar business engaged in the manufacturing of sugar, ethanol and power. It has ten sugar factories located in UP having an aggregate sugar crushing capacity of 76,500 tonnes per day, distillery capacity of 560 KL/day and saleable co-generation capacity of 165.2 MW. A slew of structural reforms undertaken by the GoI in recent years have positively changed the fortunes of the sugar industry from its erstwhile morass.

Investment Rationale

Stable quarter backed by better sugar realisation

* During Q3FY22, Balrampur net sales improved by ~13.1% y-o-y to ~Rs 12,121.5 mn, mainly on account of better sugar realisation. Overall sugar volumes including exports declined by ~0.7% yo-y to 271.6 mn kg while average domestic sugar realisation went up by ~12.2% y-o-y to ~Rs 36.4/kg. Sugar segment reported an EBIT of Rs 459 mn against loss of Rs 188.6 mn reported in Q3FY21 owing to better realisation. Sugar inventory as of December 2021 was 155.3 mn kg valued at an average rate of Rs 34.54/kg. The Company had lower cane availability during SS20- 21, owing to weather conditions and red rot disease.

* Distillery segment revenue (including ENA & others) improved by ~24.7% y-o-y to Rs 1,721 mn during the quarter, led by higher B-heavy ethanol sales. Ethanol volume was up by ~9.9% y-o-y to 31.1 mn litres while average realisation was up by ~10% to ~Rs 50.66/litre. Segment EBIT margin declined by 606 bps y-o-y to 29.6% or Rs 510.1 mn against Rs 492.6 mn reported in Q3FY21, mainly due to higher molasses transfer price.

GoI initiatives supporting sugar industry (SI), sustaining sugar prices

* Indian SI has been, till recently, known for its cyclical nature and volatility. With an intention to change the fortunes of SI, GoI announced a slew of positive measures in 2018-2019 which have started reaping benefits.

* With higher diversion of sugarcane towards ethanol and exports, pan-India sugar inventory at the end of SS21 was 8.3 mn vs. 10.7 mn tn in SS20. Severe drought followed by frost in Brazil, resulted in firm international sugar prices, which encouraged domestic sugar mills, especially from Maharashtra and Karnataka to enter into an agreement to exports ~4.5 mn of sugar for SS22E till date, of which ~2 mn tn is already exported. Thus, we believe, exports from India are likely to be ~6 mn tn for SS22E. With more ethanol capacities coming on stream, we expect higher sugarcane diversion towards ethanol production, leading to further decline in inventory levels for SS22E (closing inventory expected at ~7 mn tn), resulting in firm domestic prices going forward. As per ISMA, sugar production for SS22E is estimated at ~31.45 mn tn.

* SAP prices for SS21-22 is increased by Rs 25/quintal. However, impact of a higher SAP hike will get negated with better domestic sugar prices. On account of increase in FRP for SS22E, the Government has increased Ethanol prices for EY21-22, which augurs well for SI in general and Balrampur in particular.

Moving to the next orbit with aggressive distillery expansions

* With higher ethanol blending and procurement prices, the ethanol business has proved to be a boon for sugar producers, especially in a period of surplus sugarcane production. To have greater participation in ethanol blending program, the Company is laying a foundation for next level of growth by increasing its ethanol capacity from 520 KLPD to 1,050 KLPD, with a capex of ~Rs 6.3 bn, funded through a mix of debt/internal accruals of 57%:43% (interest subvention of 50%). The Company is setting up 40 KLPD, 170 KLPD and 320 KLPD ethanol capacities at Gularia, Balrampur and Maizapur respectively. The capex for Gularia, Balrampur and Maizapur is Rs 150 mn, Rs 1.9 bn and Rs 4.25 bn respectively.

* Gularia distillery expansion is already commissioned, producing ethanol from B-heavy/C-heavy molasses while, Balrampur and Maizapur distillery expansion are expected to commission by November 2022. Balrampur distillery will produce ethanol from B-heavy molasses/sugarcane juice and Maizapur distillery will produce ethanol from sugarcane juice during the crushing season and from grains during off season.

* Post expansion, the Company distillation capacity will stand at ~350 million litres, resulting in diversion of surplus sugar towards ethanol. The new facilities would start partially contributing to revenue and EBITDA by FY23E and complete in FY24E and will have a pay-back period ranging between ~1.15-3.75 years. The Company’s long-term strategy is to produce sugar that can be sold domestically; rest excess sugar to be diverted through B-heavy and direct sugarcane.

* In addition, the Company is modernizing a few sugar plants along with setting up of refinery at Balrampur and Kumbhi, with a total capex of Rs 3.63 bn funded through a mix of debt/internal accruals of 39%:61%. The capex is expected to commission by November 2022 and will result in better plant efficiency, higher capacity utilization and better recovery.

* Going forward the management expects to have greater participation in B-heavy and direct sugarcane juice (post commissioning of new plants) ethanol and targets to sell ~165 mn litres and ~235 mn litres in FY22E and FY23E respectively. Given the current scenario, we expect Balrampur to report strong operating cash flow of ~Rs 7.5 bn, Rs ~7 bn and ~Rs 9.5 bn during FY22E, FY23E and FY24E respectively.

* The Company successfully completed its 5th Buyback by buying ~5.96 mn shares at an average price of Rs 361.14/- for a total outlay of Rs 2.15 bn from the open market. Further, the Company has announced an interim dividend of Rs 2.5/-. The Board also approved the sale of entire 45% stake in its associate company - Visual Percept Solar Projects Private Limited.

Valuation

Presently, the sugar industry is recovering from its recent troughs, through timely and game changing policy intervention related to sugar MSP, higher ethanol pricing, blending mandates, favourable export policy etc., thereby, moderating sector cyclicality and improving profitability, leading to structural re-rating of the sector. We have valued the stock on the basis of P/E valuation method and assigned a P/E multiple of 14x FY24E EPS of Rs 41.9/share and recommend a BUY on the stock with a target price of Rs 587/- in 18 months (~41% upside).

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