Balrampur Chini Mills: Wait for the sweet moment - Hold

After a protracted downcycle that lasted for five long years beginning 2010, sugar stocks have been on a roll over the last 18 months. This is thanks to the strong rally in the domestic sugar price (Sugar M contract on NCDEX) from the July 2015 lows of ₹21.6 a kg to ₹38.6 levels by April 2017. The strong price rise was aided by the steep drop in production from 28.3 million tonnes in 2013-14, to 25.1 million tonnes in 2015-16.

Sugar being a cyclical industry, the performance of stocks of sugar producers depends largely on the domestic price outlook. The stock of UP-based sugar producer Balrampur Chini Mills has nearly trebled in the last two years, following an improvement in the sugar price outlook.

The stellar stock performance is also justified by the company’s sound fundamentals. Even as peers such as Bajaj Hindustan are saddled with debt, Balrampur’s debt-to-equity ratio is comfortable at about 1.2 times as of March 2016 and this should further decline in the current year.

The stock now trades about nine times its 2017-18 estimated earnings. Given the cyclical nature of the business, the valuation multiple for the company during upcycles has been around 10-12 times. However, given the sharp rally in the stock price and uncertainty on the monsoon and acreage for 2017, investors can avoid adding the stock at current levels. However, those holding the stock can continue to stay invested, given the expectation of a steady market price in the near term.

Sugar business accounted for 85 per cent of Balrampur Chini’s consolidated revenue for the nine-month period ended December 2016, while distillery and co-generation accounted for the balance 15 per cent.

After hitting record high production in 2014-15, the country’s sugar production has been on a falling spree over the last two years. In the current sugar season – October 2016-September 2017 — sugar production is expected to be 19 per cent lower than in 2015-16 at 20.3 million tonnes, according to industry body ISMA (Indian Sugar Mills Association). This is largely on account of drought in key cane growing States — Maharashtra and Karnataka — and the consequent reduction in cane availability. Sugar production in these two states is expected to halve during the 2016-17 sugar season.

The expectation of lower sugar production in the current year aided the rally in the domestic sugar prices from ₹35/kg levels in December 2016 to a new high of ₹39.7 a kg in February 2017. The market price currently hovers at ₹38.6 levels and is expected to remain steady in the ₹36-38 levels. The closing stock is anticipated to drop from 7.7 million tonnes in 2015-16 to about 4.2 million tonnes this year.

The performance of sugar producers, particularly Balrampur Chini, is linked to the sugar cycle and the market price of sugar. While steady sugar price in the near term should help the company, the outlook for the next season 2017-18 hinges on the South West monsoon and sugarcane plantation in 2017.

The South West monsoon and cane acreage this year are critical to performance in 2018-19. However, the company is trying to improve its recovery through initiatives such as increasing the proportion of early maturing varieties. Through this, Balrampur expects its recovery to increase from the current 10.6 per cent to about 11. 2 per cent in the near future.

In addition to these, the industry is also expecting more rational cane pricing policy in the near to medium term. The modest 10 per cent increase in cane price after keeping it unchanged for three years, despite the State elections, is a case in point. This is unlike in the past, where the Government used to announce fat cane price hikes during election years.

Balrampur Chini reported 33 per cent increase in revenue and a six-fold jump in operating profit for the nine-month period ended December 2016.

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