>BALRAMPUR CHINI MILLS LIMITED (SKP SECURITIES)

Company Profile:
Balrampur Chini Mills Ltd. (BCML), promoted by K.N.Saraogi in 1975, is one of the largest integrated sugar companies in India. The allied businesses of the Company comprise of distillery operations, cogeneration of power and manufacturing of bio-composites.

Investment Rationale:
Sugar demand exceeding supply: Due to a demand-supply mismatch, the sugar prices have started to soar upwards. Against an estimated consumption of 23 million tonnes in SS 2009, the
sugar production is only projected to be 14.5 million tonnes.

Leader in the Eastern UP market: BCML is the largest sugar manufacturing company in eastern UP, which gives it an edge in procuring sugarcane in the region, where the cane prices are lower
than rest of the state. Also, the ground water level in the Eastern UP region is accessible at lesser than 100 feet, making the sugar cane produce lesser susceptible to droughts or low rainfalls.

One of the largest and most efficient integrated sugar companies in India: BCML is one of the largest sugar companies in India. Along with sugar, the company also has power and distillery businesses, which make its business model superior.

Outlook & Recommendation:
With the festive season round the corner, the demand for sugar is expected to go up. As the consumption is about to outweigh demand, the domestic sugar prices have already touched a 30 year high, and is projected to move up even further. BCML is well poised to substantially gain from the price rise, on account of lower contracted import cost, improved margins and better realizations.

We recommend a BUY on the stock with a 12 month target price of Rs. 157 at 10x FY10E earnings, giving it an upside potential of 39%.

Indian sugar industry overview

• India is the second largest producer of sugarcane next to Brazil. Presently, about 4 million hectares of land is under sugarcane with an average yield of 70 tonnes per hectre. The Indian sugar Industry is the second largest agro processing industry in India and it accounts for 15% of the total world consumption. About 50 million people are employed in this industry, that roughly contributes Rs 3000 crore to the Government exchequer. India's average recovery rate at 10.27% is quite meagre in comparison to the international average.

• Indian sugar industry is divided into organized and unorganized sector with the former accounting for 20 % of the total production. Sugar Industry is a cyclical industry with two years of deficit followed by two years of surplus, influenced by the production of sugarcane.

• In India, sugarcane is the key raw material for the production of sugar. Most of the sugarcane produced in India is a 10- 12 month crop planted during January to March. In northern Maharashtra and parts of Andhra Pradesh and Karnataka, there is also an 18 to 20 month crop. In most areas, the 12-month crop is followed by just one ratoon crop, that is, a new crop grown from the stubble of the harvested crop.

• At present, sugarcane is being cultivated throughout the country except in certain hilly tracts in Kashmir, Himachal Pradesh, etc. The sugarcane growing areas may be broadly classified into two agro-climatic regions—subtropical and tropical. The major sugarcane producing states in the sub-tropical areas include Uttar Pradesh (UP), Uttaranchal, Bihar, Punjab, and Haryana. In tropical areas of India, sugarcane is grown primarily in Maharashtra, Andhra Pradesh (AP),
Tamil Nadu (TN), and Gujarat.

• The sugarcane price in India is paid on the basis of weight of cane while in most other sugar producing countries, the same is paid after taking into account the sucrose content of the cane supplied to the mills. The latter system has an advantage as it provides incentives to the growers to plant high sucrose varieties and adopt cultural practices which increase the sucrose content of the cane at the time of its supply to the mills, including harvesting of cane at maturity and minimizing the time involved from harvesting of cane and its supply to the mills.

• The process of manufacturing sugar starts with pressing of sugarcane to extract the juice. Then it is followed by boiling the juice until it begins to thicken and sugar begins to crystallize. The crystals are spinned in a centrifuge to remove the syrup, producing raw sugar.

• The raw sugar is then transported to a refinery where it is washed and filtered to remove remaining non-sugar ingredients and color. Crystallizing, drying and the resultant packaging of the refined sugar then follow it.

By-Products of Sugar

• One tonne of sugarcane crushed gives 100 kg of sugar, 350 kg of bagasee and 45 kg of molasses and around 500 kg of pressmud. The 350 kg of bagasee can be converted to generate around 100 units of power. The 45 kg of molasses can be converted into 11 ltrs of ethanol. Hence, a tonne of sugarcane crushed gives 100 kg of sugar, 11-12 ltrs of ethanol and around 100 units of power.

• Bagasse is the fibrous material that results from the extraction of juice from the sugarcane. It can not only be used as a fuel for co-generation plants but also for the purpose of manufacturing paper, newsprint, insulation board, furniture and others.

• Pressmud, another by-product obtained in sugar factories contains sizeable quantity of micro and macronutrients besides around 20% of organic carbon. The organic manure made out of Press mud maintains Soil health, sustains sugarcane and sugar production, improves soils physical properties, retains soil moisture and reduces the erosion hazards. Application of enriched press mud, either alone or in conjunction with Bio fertilizers recorded higher sugarcane yield and sugar recovery.

• Molasses is a brownish liquid that is created during the crystallization of brown sugar in the refining process. It is used not only as a mixed cattle feed but also for manufacturing industrial and potable alcohol.

• Ethanol, resulting from the processing of molasses is used as an additive in fuels like petrol. Currently in India, 5% blending of ethanol in fuel is mandatory (in 9 states). Government is also looking into several options to increase its share to 10%.

To see full report: SUGAR SECTOR