Balrampur Chini Mills Limited (BCML), promoted by Mr. Vivek Saraogi, Managing Director, is one of India’s largest integrated sugar business engaged in the manufacturing of sugar, ethanol and power and is best placed to capitalize on the positive structural changes witnessed by the industry in recent times. It has ten sugar factories located in UP having an aggregate sugar crushing capacity of 76,500 tonnes per day, distillery capacity of 320 KL/day and saleable co-generation capacity of 159.2 MW.
Strong Quarter - Sugar vertical steering profitability
During Q2FY17, BCML reported net sales of Rs 8,874.8 mn, registering growth of ~77.1% y-o-y basis whereas sales grew by ~47.4% during H1FY17, supported by better recoveries (due to better weather and variety of cane) and improving sugar realizations. Sugar segment grew by ~92% y-o-y to Rs 8,474 mn, contributing 87.4% to revenues backed by 48.8% y-o-y improvement in realizations to Rs 36.1/kg. BCML is carrying a sugar inventory of 17.84 lakh quintals as on September 2016. Sugar segment reported a profit of Rs 1,198 mn at EBIT level vis-à-vis loss of Rs 140 mn in Q2FY16.
Going forward, we expect BCML sales to grow at a CAGR of ~17% during FY16-18E resulting into better recovery rate and higher sales volume. Sugar recovery rate is expected to improve from 9.8% in FY15 to ~10.8% by FY18E and sugar sales to grow at ~18.6% CAGR over FY16-18E.
Distillery segment reports robust volumes growth; cogeneration remained soft on seasonality (low bagasse availability).
Distillery segment grew by ~32% y-o-y to Rs 1,052 mn, contributing 10.8% to revenues backed by 10.8% y-o-y improvement in realizations to Rs 43.2/bl. Distillery segment reported a profit of Rs 419 mn at EBIT level vis-à-vis profit of Rs 324 mn in Q2FY16. Going forward, we expect the distillery business to clock volumes of ~8.2 cr litres and realisations to improve, despite withdrawal of excise duty concession (Rs 5/litre) on ethanol. Cogeneration remained soft on seasonality (low bagasse availability). Segment's revenue grew by 21.4% to Rs 175 mn led by 16.6% YoY growth in volumes to 16.9 mn units. Realizations remained flat at Rs 4.5/ unit.
Margins to scale up with better operating efficiencies & capacity utilization
EBITDA margins have improved significantly from ~4.2% in FY15 to ~19.5% in Q2FY17 on account of 1) cyclical upturn in sugar prices (2) improvement in sugar realisations and (3) strong uptick in the distillery business. Furthermore, BCML enjoys robust cane output and recoveries, resulting in cost optimization and operational synergies. Going forward, BCML is likely to maintain its margin supremacy, backed by improvement in recovery rate, moderation in operating cost and we expect BMCL's EBITDA margins to improve to ~22.1% by FY18E.
Deleveraging balance sheet and focus on rewarding shareholders (company announces share buy-back of 10 mn shares at Rs175/share; 59% above CMP)
Management indicated that it will continue to reduce debt (reduced overall debt by Rs. 10.9 bn during H1FY17, out of which, Rs. 4 bn was relating to repayment of long-term debt outstanding as on 31st March 2016). In addition, it aims to repay Rs 394 mn of long-term borrowings during H2FY17 as per repayment schedule.
BCML announced buy-back of 10 mn equity shares (representing 4.08% of total equity shares) at Rs 175/share (59% above CMP) on a proportionate basis through “tender offer” route (total outflow of Rs 1.75 bn). The management had indicated in 1QFY17 that they are committed towards optimal utilisation of strong cash flow.
BCML is well positioned to capitalize on the positive structural changes witnessed by the industry led by improving sugar prices and recovery rates coupled with strong relationship with farmers, close proximity to raw materials and favourable government policies. We have valued the stock on the basis of P/B of 2x of FY18E BV and recommend a BUY on the stock with a target price of Rs 154/- in 18 months.
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