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Given the higher closing inventory expected in SS24 and policy stability around the corner (post general elections), industry has started pressing government for a) removing the export ban and b) increasing the diversion of sugar towards ethanol production. In our view, there is a high probability of increased diversion playing out. Hence, from a medium-term point of view, Balrampur Chini’s outlook looks promising as we expect it to deliver 17%EPS CAGR over FY24-27E. Moreover, from a long-term point of view, poly lactic acid (PLA) contribution will start kicking in from FY28. In our view, with this project, Balrampur Chini has laid out a strong foundation for sustaining the growth momentum. Considering this investment, Balrampur can register 19% EPS CAGR over FY24-30E. Currently, the stock is trading at 13x Sep’26E EPS. Even if we don’t consider re-rating due to the company’s foray into bio-plastics, investors can make ~19% CAGR returns over the next 5 years, in our view. We tweak our estimates to reflect the possibility of higher diversion in FY26 and maintain BUY with Sep’25 TP of INR 515 (based on 15x Sep’26E EPS) from Mar’25 TP of INR 470 (based on Mar’26E EPS).

* Sugar production estimated at 32.1mnt, -3% YoY; ease on diversion likely: As per industry reports, Indian sugar mills are expected to produce sugar around 32.1mnt, showing a decline of 3% YoY (refer Exhibit 1); however, it is up from the industry’s first advance estimate of 30.5mnt. With opening inventory of 5.9mnt and estimated domestic consumption of 28.5mnt, closing inventory is expected to be around 9.6mnt with a surplus of 3.6mnt. Given the high closing inventory, mill owners are pressing to ease the restriction on diversion of sugar towards Ethanol production. Further, forecast of a favourable monsoon and increase in fair and remunerative price for sugarcane farmers has fuelled optimism in sugar production in SS25 (Oct’24-Sep’25). The recent PPAC data for Jun’24 highlighted Ethanol Blending Program (EBP) has achieved 15.9% blending in Jun’24 and 13% during Nov’23-Jun’24. In our view, to achieve the blending target of 20%, government will require ethanol volume of 10bn litres (refer Exhibit 4) which increases the possibility of higher diversion.

PLA project to provide long-term growth visibility: We believe that adequate sugar inventory level coupled with favourable monsoons may lead the government to consider removing the restriction on diversion of direct route and B-heavy. We estimate Balrampur’s ethanol production to grow at 14% CAGR over FY25-27E after a significant decline of 17% in FY25E. Our working on the BRCM’s upcoming project suggests it can incrementally add revenue of INR 13.8bn and EBITDA of INR 5.5bn in FY30E (refer Exhibit)

5). We expect the project to start commercial production in FY28 and reach 70% utilisation level in FY30. Our realisation and profitability assumptions are based on prevailing global PLA prices and consumption cost of raw sugar.

* Expect a subdued 1QFY25 owing to lower diversion: We expect BRCM’s revenue in 1QFY25 to decline 5% YoY to INR 13.2bn led by decline in distillery revenue (-25%) on account of lower production due to restriction in diversion, whereas sugar revenue could grow 6% YoY primarily on account of higher realisation. We expect EBITDA margin to contract 120bps YoY to 10.5% on account of higher cane prices and lower ethanol sales.

* Sugar prices remain firm; triggers for further strengthening of prices: Domestic sugar prices (ex-mill) are current trading at INR 39/kg (+6% YoY). Prices remained firm despite restriction on diversion largely on account of lower production estimates in SS24 and likelyhood of further diversion. However, they have softened from the peak of INR 40/kg in June’24. Removal of exports ban, ease in restriction in diversion and increase in MSP for sugar (from current INR 31/kg, unchanged since 2019) are key triggers for sugar prices to further strengthen. Global sugar prices corrected 20% YoY and from recent highs on account of expectation of improvement in supplies from various countries, including India (though India has NIL exports on account of restrictions).

* Long-term outlook robust; maintain BUY: By FY27, Balrampur’s sugar and ethanol production is likely to have achieved near-peak utilisation (assuming no further capacity addition). Beyond FY27, its PLA project would start contributing to the topline as well bottom line. Hence, Balrampur’s outlook is robust from a medium term as well as long term point of view. We expect the company to register a 17% EPS CAGR over FY24-27E. We maintain BUY with a Sep’25 TP of INR 515 (based on 15x Sep’26E EPS). We tranfer the coverage to Krishan Parwani.

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