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Cane SAP rise – Key overhang now passé

SAP hike – INR 5 higher than estimated

The Uttar Pradesh (UP) government has increased sugarcane state advised price (SAP) by INR 20 (5.9%) per quintal to INR 360 for the ongoing sugar season. In our earlier estimates, we had already incorporated INR 15 per quintal increase in cane price. Hence, the actual price hike is incrementally marginally negative for UP-based sugar mills such as Balrampur Chini (BRCM IN). Q4FY24 is likely to be most significantly hit by the price hike.

Benefit of ethanol price increase eroded by cane price hike

The cumulative impact of: (a) additional compensation (INR 6.87 per ltr and INR 5.8 per ltr on C-heavy ethanol and Maize ethanol respectively) announced by oil marketing companies (OMCs) in the first week of January 2024 and (b) INR 5/quintal higher-than-expected increase in SAP may largely offset each other.

Impact on sugar and distillery segments

Per our calculations, INR 20/quintal increase in sugarcane SAP is equivalent to: (a) ~INR 2/kg rise in the cost of sugar production or (b) INR 0.25 per litre increase in the cost of juice ethanol production or (c) INR 1 per liter rise in the cost of production of B-heavy ethanol or (d) INR 1.43 per litre increase in the cost of C-heavy ethanol production

Valuation: Reiterate BUY with TP of INR 483

SAP announcement was long overdue and hence, the overhang is now behind. Post frequent changes in Ethanol Procurement Policy in the past two months and cane price increase, we do not expect any material negative policy changes or news/event marring the sector in the future (significant damage already done).

Between our prior report on BRCM dated 17 December 2023 and now, OMCs have increased the price of C-heavy & maize ethanol. And cane SAP has now been increased. The cumulative impact of these events may lead to further 16% dip in EBITDA and 19% decline in PAT for FY24E but 13% growth in EBITDA and 14% increase in PAT for FY25E.

We have also changed the valuation methodology from SoTP to blended EV/EBITDA as inter-segment transaction complexities have increased post granular changes in ethanol pricing. We reiterate Buy on BRCM with TP unchanged at INR 483, now valuing it at 9.5x FY26E blended EV/EBITDA.

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