>BALRAMPUR CHINI MILLS (HDFC SECURITIES)

■ Higher realization to boost profitability
Average sugar realization for SY09E is expected to be around Rs 22.1 per kg against Rs 14.9 per kg in SY08, higher by about 47% YoY. Though we expect sales volume for SY09 to decline by ~23% YoY due to lower sugar production, higher realization will boost overall profitability of the company.

■ Better utilization of plant capacities
The company will also have better plant capacity utlisation as there are a limited number of sugar mills in the region and it has maintained good relations with farmers, ensuring easy availability of sugar cane.

■ Lower Debt burden
The company will have higher profit margins in SY09E and SY10E due to lower fixed costs (including interest and deprecation) than its peers as it chose not to expand at the pace of Bajaj Hindustan. The current debt equity ratio of the company is 1.33x, which is set to improve in SY09E to 0.71 and 0.32x in SY10E.

■ Significant drop in production estimates for SY09E
Domestic production of sugar is expected to be ~14.5 mn tonnes against our previous estimate of ~21 mn tonnes in SY09E mainly on the account of lower recovery rates, shorter crushing period due to lower availability of cane and higher sugar cane prices paid by gur and khandsari producers resulting in steep decline in the drawal rate.

Outlook & Valuation
As cane costs increase going forward, we believe firm sugar prices, higher realizations from distillery products and high inventories will enable the company to improve profit margins in SY09E and SY10E. However, due to a significant drop in sugar cane availability sales volumes will drop of distillery and cogen segments leading to an overall revenue drop in SY09E and SY10E. At the current market price of Rs. 93.8, the stock is trading at 11.6x and 9.5x its SY09E and SY10E earnings of Rs. 8.10 and Rs. 9.90 respectively. We have valued the stock at 6x EV/EBITDA for SY10E. We maintain our Buy rating on the stock with an increased target price of Rs. 103.5 (due to
higher sugar realizations) an upside of 10.3% over the CMP from our earlier target of Rs 90.5 on the stock.

To see full report: BALRAMPUR CHINI