Balrampur Chini Mills Ltd (BCML) is an integrated sugar manufacturing company. Established in 1975, its initial sugar manufacturing capacity was 800 tonnes crushed per day (tcd).BMCL now has nine manufacturing facilities, with a crushing capacity of 73,500 tcd, at various locations in the sugarcane-producing belt of Uttar Pradesh. Its subsidiary, Indo Gulf Industries Ltd (IGIL) at Maizapur, has a capacity of 3,000 tcd. Balrampur Overseas Pvt Ltd is another subsidiary.
Business: Besides sugar, BCML also has some allied businesses like manufacturing and marketing of ethyl alcohol and ethanol, generation and selling of power and manufacturing & marketing of organic manures.During the fiscal ended September 2008 (it follows October-September fiscal in tandem with the sugar year), sugar contributed 75.08% to the company’s total segment revenues, including inter-segment revenues. Distillery contributed 9.66%, cogeneration 14.56% and organic manures contributed only a meagre amount. During this period, it produced 7,906.88 lakh units of power, both for captive consumption and commercial use.
BCML’s diversification from sugar started in 1995 with a 60 klpd distillery at Balrampur. It ventured into power generation in 2003 by setting up a 19.55 mw bagasse-based power unit at Balrampur.
BCML started growing organically in 1990 with the acquisition of a sugar mill at Babhnan. It later acquired more sugar mills at Tulsipur in 1998 and Rauzagaon in 2005. The company also acquired 53.6% stake in IGIL at Maizapur in 2006. It continued with its capacity expansions. New greenfield facilities were set up at Haidergarh (2003), Akbarpur(2005) and Mankapur, Kumbhi, Gularia in 2006.
Its product range includes sugar, molasses, alcohol, ethanol, power, bagasse and organic manures.
Investment rationale: This is the year of sugar’s cyclical upturn. Sugar prices, which remained subdued in the previous years have surged this year. The low cane acreage, adverse crop climate conditions, lower yields and recovery have led to a fall in production. Production of sugar in the year ending September 2009 is estimated to fall 45% over previous year. Production is likely decrease to around 14.5 million tonnes from 26.3 million tonnes last year. However, domestic consumption will be much higher at around 18-20 million tonnes. This disparity will deplete reserves, leading to the effect being carried over to the next year. So sugar prices are likely to remain firm next year, too. This will continue to drive profitability and margins for sugar producers in India at least till the end of sugar year 10E.
International prices for sugar are also high because of a supply-demand mismatch. Brazil, the largest producer of sugar, is also unable to meet the demand as there are certain operational constraints for capacities in that country. Large sugar companies in Brazil are under severe financial crisis. Australia and other sugar-producing countries, too, have seen lower production.
In the distillery segment, while volumes are falling with reduced crushing, improved realisations have helped profits remain stable. Availability of bagasse for power production is also poor. However, BCML stands to benefit from the Rs 4 per unit window provided by the government during March-May, leading to about 33% higher realisation. Post tariff fixation for the next five years in July, tariffs should remain around these levels, thus boosting cogeneration revenues in FY10E.
BCML, even during the cyclical downturn, had been boosting its sugar capacities. It has increased capacities from 47,500 tcd in FY06 to 76,500 tcd at the end of FY08.
“All the planned capacity expansions have been completed and there are no more plans (for capacity expansion) now,” said Vinod Patwari, general manager -finance, BCML.
BCML will accrue the benefits of these expansions in the future. There will be a free cash flow and a stronger balance sheet position. The debt-equity ratio of 1.4x at the end of FY08 was already favourable. It is now expected to improve further.
Concerns:
Keeping the prices of sugarcane and sugar steady is a top priority for the government. While the government keeps setting state advised prices (SAP) for sugarcane as a populist measure, irrespective of the sugar price, it also monitors sugar prices, which comprises 3.62% of the wholesale price index (WPI). However, the methodology for deciding the SAP is contested in court every year. Thus, any unfavourable verdict and a higher SAP a sugar year can impact the players in this space.
Valuations:
BCML’s topline grew 15.27% to Rs 355.06 crore for the second quarter ended March 2009 from Rs 350.06 crore in the same period of the previous year. This growth was due to improved realisation, despite a notable fall in volumes. Average realisation improved from Rs 14.52 per kg to Rs 20.30 per kg. BCML crushed 483 lakh quintals of cane against 806 lakh quintals crushed during the same period last year. Due to adverse climatic conditions, recovery was also lower at 9.19% compared with 10.16% during the same period last year. This led to a 1.74% fall in its operating profit.
BCML’s net profit in the period increased a tad, to Rs 66.19 crore, from Rs 65.65 crore last year. Looking at the favourable business conditions, strong balance sheet positions and attractive valuations, the stock, which is trading at 14.02x FY09E earnings, is a good addition to the portfolio with a medium- to long-term prospects.
Disclosure: The writer does not hold any share in the company
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