Saturday, August 18, 2012


In a Sweet spot; initiate with Buy

Balrampur Chini Mills (BCML) is one of India’s largest integrated sugar manufacturing companies with a crushing capacity 76,500 tonnes/day. Considering higher production in UP compared to Maharashtra and Karnataka (affected by lower planting and deficient rainfall), we believe BCML will be the key beneficiary due to its locational advantage as we expect sugar production in UP (due to better planting and stable climatic condition) to grow by 12.1% in SY13E compared to drop of 7.6% in SY13E for pan India. Higher production coupled with our expectation of better pricing (Rs32/kg in FY13E and Rs34/kg in FY14E) led by expected
decline in the inventory levels for the industry is likely to drive earnings CAGR of 61.7% over FY12-FY14E for the company. Also, we expect gearing for the company to remain comfortable over FY13E-FY14E factoring the increase in working capital requirement due to change in the accounting year. We initiate coverage with a Buy rating and a target price of Rs80.

Sugarcane crushing to increase in line with expected increase in UP: BCML would benefit from higher sugarcane production (sugarcane production in UP is expected to increase by 8-10% in
SY13E). We expect sugarcane crushing for BCML to increase by 10% YoY to 9.3mt in crushing season SY13E and 8% YoY to 10.1mt in crushing season SY14E. In SY12 (current season),
BCML’s sugarcane crushing increased by 22.6% YoY to 8.5mn tonnes against 6.9mt in SY11. Recovery rate was also higher at 9.54% in SY12 against 9.4% in SY11.

Sugar prices to remain firm: We believe that expected decline in inventory level in India would support higher domestic sugar prices. We have assumed BCML’s free market realizations at
Rs32/kg in FY13E and Rs34/kg in FY14E against Rs28.7/kg in FY12. Current ex-mill realization has increased significantly over the last 45 days due to weather-related uncertainties in a few states and we expect the prices to cool-off post Oct ’12 when the crushing season starts. The company will benefit for the next two quarters if prices sustain at current levels (of ~Rs35/kg) as it had higher inventory of 0.47mn tonnes at the end of June ’12.
Gearing comfortable, adjusted for increase in working capital: BCML’s D/E ratio increased to 1.4x in FY11 and 1.6x in FY12 from 0.8x in SY09 due to increase in working capital requirements due to change in its accounting year. Adj. for additional increase in working capital requirements, we believe that D/E of the company is comfortable compared with other
players (D/E of Bajaj Hindustan was at 2.8x at SY11-end; whereas Shree Renuka Sugar’s was at 4.6x as of Mar-12). We expect D/E (adj. for working capital requirements) to be at 0.8x in FY13E and 0.78x in FY14E against 0.87x in FY12.

Outlook and Valuation: The company is highly sensitive to increase in sugar prices and as per our calculation every Re1 increase in sugar realization would boost the bottom-line by Rs546mn in FY13E (EPS increase of Rs2.23) and hence, higher sugar prices than our estimates would result in much higher than- estimated profit for the company. The stock is currently trading at 8.7x FY13E and 8.6x FY14E EPS of Rs7.5 and Rs7.6, respectively. On a P/BV basis, it trades at 1.18x FY13E and 1.07x FY14E. We initiate coverage with a Buy rating and a target price of Rs80 (based on 10.5x FY14E EPS).