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SAP announcement removes uncertainty; Maintain BUY on BRCM

The Uttar Pradesh (UP) government yesterday hiked (media link) State Advisory Price (SAP) for Sugar cane for SS22 by INR 250/t to INR3400/t (after keeping it unchanged for past 3 seasons; this implies 1.9%CAGR in SAP for SS18-22). While this is higher than INR 200/t hike factored in JMFe for Balrampur Chini (BRCM), it is lower than INR 500/t levels feared by industry and market.

Further, given the hike in an election year, concerns of significant price hikes recede from a longer term perspective. From earnings perspective, a) there may not be a significant impact FY22E as closing inventories will get valued at cost though FY23E earnings may see a modest impact, b) this will get partially offset through higher sugar price (to factor in higher cost) as well as ethanol prices (to be announced in Oct- Nov). We marginally revise our FY22E/FY23E estimates for BRCM by 3% each and maintain BUY with Sep’22 TP of INR 410/share. Key Risk: Unfavourable change in government regulations and a delayed increase in sugar MSP.

* UP SAP increased by INR 250/t: The UP State government increased UP SAP for SS22 (starting 01Oct’21) by INR 250/t as cane price for a) common variety is increased from INR 3,150/t to INR 3,400/t and b) for early maturing variety is increased from INR 3,250/t to INR 3,500/t.

* Our view: The cane price hike is higher than INR 200/t factored in our estimates. However it is lower than INR 500/t levels, feared by industry and market participants. Further, given the cane price hike has come in an election year, concerns of significant further price hikes will recede from a longer term perspective. We also point out that UP government had kept the SAP unchanged for past 3 seasons (last hike in SS18), which implies 1.9%CAGR in SAP for SS18-22 post this hike.

However, this was also accompanied with a) higher recovery rates for sugar mills (average UP recovery rate jumped from 9.5% to 11.2-11.5% range now), and b) rise in sugar prices (average sugar prices witnessed 1.4% CAGR in same period). Interestingly, FRP went up continuously while SAP was kept flat between SS18-21. As shown in Exhibit, the difference has narrowed from INR70- 115/quintal to INR 15-30/quintal.

* Impact on BRCM: We believe there may not a significant impact on FY22 earnings as closing inventories are valued at cost, unless sugar prices decline meaningfully. While the current domestic sugar prices at INR 36-37/Kg are trading higher due to seasonality, we believe there could be a potential increase in Minimum Selling Price (MSP) of sugar from current INR 31/Kg (UP mills usually have INR1-1.5/kg higher realisation than MSP due to grade and location).

We factor in INR 34/Kg and INR 35/Kg for FY22 and FY23 respectively. Further, with an increase in cane price (Union cabinet increased FRP from INR 285/quintal to INR 290/quintal) and potential increase in sugar prices, we believe there could be a commensurate increase in ethanol prices as well, to ensure mills divert excess sugar to ethanol production.

* Remain positive on the space: We believe India’s sugar sector has drifted away from cyclicality (in terms of sugar prices) as well as from partial deregulation (it is fully regulated now and is likely to remain so in the foreseeable future). This has been led by a) structural oversupply in terms of sugar production, b) the government’s efforts on the Ethanol Blending Program (EBP; from 0.8% to almost 8% now; 20% target EBP in 2025) through robust ethanol prices and c) the government’s objective to ensure sugarcane farmers are paid without significant arrears.

This augurs well for the sugar sector (especially efficient companies like BRCM) as government policies would ensure survival of the weakest and therefore augur well for efficient sugar mills. We revise our FY22/FY23 estimates for BRCM by 3% each and maintain BUY with Sep’22 TP of INR 410/share. Key Risk: Unfavourable change in government regulations and a delayed increase in sugar MSP.

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