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Major disruption though temporary

India’s sugar production to increase ~6%

The government’s moves to restrict the use of sugarcane juice and syrup for ethanol blending and limit the blending of B-heavy ethanol until existing contracts are expected: 1) to increase all-India sugar production by ~6% from 29.0-30.0mn tonne to 31.5-32.0mn tonne for the ongoing sugar season (Source: Elara Securities Estimate), and 2) to reduce ethanol blending in petrol for this year.

BRCM sugar production to revise up 20%, ethanol down 31%

We expect Balrampur Chini Mills (BRCM IN) sugar production volume to increase by 20% during FY24-25E cumulatively. Ethanol volume is likely to decline by 31% over the same period. Limited molasses availability due to higher sugar production is the biggest constraint on ethanol volume. The ethanol feedstock is going to rise significantly in favour of B-heavy and C-heavy molasses during H2FY24-H1FY25, post which the share of ethanol derived from sugarcane juice is expected to go up  again in the next crushing season. We estimate INR 15/quintal increase in sugarcane state-advised price (SAP) for the current season, which has further dented financials. We also expect 1) resumption of sugar exports from H2FY25, 2) resumption of Food Corporation of India’s (FCI) fixed-price rice as feedstock for grain ethanol from Q2FY25, and 3) domestic average sugar price of INR 38.5/kg and INR 38.0/kg for FY24E and FY25E, respectively.

Valuations: reiterate Accumulate with a lower TP of INR 431

The notification is a one-off event and is valid between November 2023 and October 2024; hence, it will impact only H2FY24-H1FY25 financials. We expect normalization from H2FY25. Since this exceptional event has significantly dented FY25 financials, we introduce our FY26 estimates and rolling forward our valuation. We reduce our EBITDA by 28% and PAT by 34% for FY24E and EBITDA by 57% and PAT by 67% for FY25E. We reiterate Accumulate with a lower TP of INR 431 from INR 495 based on a SOTP method, assuming the sugar segment valuation at 8.5x (unchanged) FY26E EV/EBITDA and distillery at 10.0x (unchanged) FY26E EV/EBITDA.

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