Balrampur Chini Mills: Buy

Sugar stocks are usually best bought when the commodity is heading into a year of low domestic output, as that is when realisations and margins are at their highest levels for sugar producers. Given that sugar output is set to jump by 29 per cent in the current season (October to September 2011), this may not appear to be a great time to buy sugar stocks. However, the stock of Balrampur Chini Mills offers an attractive investment opportunity for those with the ability to hold on for two-three years.

The prospect of firm sugar prices over the next year or two, strong revenues and profits for the company from by-products such as ethanol and power, and low debt status, make it a safer bet in the sugar space. After a recent battering, the stock trades at an attractive valuation of just nine times its expected 2011-12 earnings. At the current market price of Rs 52, the company is also valued at less than half of the replacement cost of its assets (which is Rs 4,400 crore). As a purely domestic player with large and integrated capacities in Uttar Pradesh, Balrampur Chini Mills is not a direct beneficiary of the recent surge in global sugar prices or the government's move to allow additional sugar exports.

Brighter sugar prospects

Producers with coast-based facilities may be better placed to capitalise directly on this trading opportunity. However, the company is still likely to benefit indirectly, as higher exports will help reduce sugar surpluses in the domestic market, which can bolster prices.

Consider this equation. Adding the estimated production of 243 lakh tonnes for this year (October 2010-September 2011) to the opening stock of about 35 lakh tonnes, the total sugar availability this year was in the region of 278 lakh tonnes. Domestic consumption of about 230 lakh tonnes would have left us with a closing stock of about 48 lakh tonnes to flag off the next season, about 2.5 months' consumption. However, that is without reckoning total exports of about 25 lakh tonnes (recent permission to export five lakh tonnes in addition to exports of 20 lakh tonnes already allowed). Accounting for that suggests year-end inventories to just over 30 lakh tonnes. That is sufficient to cover less than two month's offtake, well below normal levels of three months.

This suggests that sugar prices may firm up further from Rs 27-28 per kg in the ensuing year. As the cane procurement costs for producers such as Balrampur Chini have already plummeted sharply this year, profit margins from the sugar business appear set to witness a strong revival.

More from by-products

The 10 per cent jump forecast for sugarcane output in the next sugar year (October 2011 to September 2012) will also allow Balrampur Chini to crush 12-15 per cent more cane in volume terms and process it into by-products such as ethanol and bagasse-based power.

Investments over the last four years have endowed the company with capacities to crush 76,500 tonnes per day of cane with a 320 kilolitres per day distillery, also producing 224 MW of power from bagasse.

With provisional ethanol prices fixed at Rs 27 /litre and attractive tariffs in the State of Uttar Pradesh (fixed until 2013-14) for bagasse-based power, both the distillery and power operations may chip in better sales and profits over the medium term.

In fact, it was the sharp jump in contributions from the distillery and power businesses that helped Balrampur Chini contain profits declines much better than its peers in 2010-11, a year of high cane costs. Even as the company's core sugar operations made a net loss in the recent June quarter (owing to it being a seasonally lean quarter), these losses were somewhat cushioned by a 64 per cent jump in profits from by-products.

Done with expansion

A final factor that makes Balrampur Chini Mills a preferred and relatively defensive stock in the sugar space is its low debt status.

With its capex plans concluded last year, the company's long-term debt stood at about Rs 680 crore in end-June.

Even taken with working capital loans of about Rs 720 crore, the company's overall debt-to-equity ratio is less than 1; which compares to two-three times for peers such as Shree Renuka Sugars and Bajaj Hindusthan.

The company has plans to completely pay off its debt over the next two years, which should reduce the interest burden during a period of rising interest rates.

The company recently concluded a share buyback programme, mopping up shares at an average price of Rs 71/share, reducing its equity base from Rs 25.9 crore to Rs 24.4 crore.

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