Balrampur Chini Mills Q2FY17: Well positioned to capitalize on the positive structural changes; Buy

SKP Research | Nov. 4, 2009, midnight

Company Background

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.

Investment Rationale

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.

blog comments powered by Disqus