Sugar stocks have U/PF in the past 3 months
Leading sugar stocks have lagged the benchmark indices in the past three months by ~11-17%. The fall has tracked the decline in wholesale sugar prices to ~Rs37-39/kg, down 10-15% from the highs reached in January 2010. Also, to talk down prices, govt has made noises about potential white sugar imports (possibly up to 1mn MT) and the proposed ban (reportedly) on domestic sugar purchase by bulk buyers. However, we note that 1) any large scale white sugar import is unfeasible due to shallow international market in whites and 2) Practical difficulties in tracking end-user demand which would render any ban on bulk buying ineffective.
Production surge in SS11 but prices seen firm
In our conversation with Balrampur, the company sees up to 40% higher output to about 21mn MT in SS11. Even so, Sep’ 11 inventory is estimated at ~2.5 months (assuming 4mn MT of raw sugar imports), about half of the average ~5 months holding recorded for the past 16 years. Therefore, ex-factory sugar prices could again climb >Rs40/kg. According to BRCM, a bumper harvest akin to that in SS07 is unlikely next season as farmers are cashing on the high cane prices, leaving little seeding for the next season.
Refined sugar to account for 14% PAT share for BRCM
In addition to 85,000MT of raw sugar import, BRCM is expected to tie up another 0.2mn MT for processing in SS11. We build in operating margin of Rs2.5/kg on sale of refined sugar, much lower than the current run rate of ~Rs12-13/kg which is clearly unsustainable. Based on average realization of Rs37/kg, we reckon refined sugar sales could contribute ~14% of F9/11 PAT.
Correction provides buying opportunity; Reiterate BUY
BRCM has U/PF the Sensex by ~13% in the past three months even as Sep’ 10 closing stock is projected at just 1.4 months worth of demand. Robust sugar realizations coupled with a 19% RoE in F9/11 supports our BUY on BRCM for an upside of 36%.
Valuation summary
Y/e 30 Sep Rs m
|
F9/08
|
F9/09
|
F9/10E
|
F9/11E
|
Revenues
|
14,909
|
17,471
|
26,813
|
35,111
|
yoy growth (%)
|
6.9
|
17.2
|
53.5
|
30.9
|
Operating profit
|
3,640
|
4,472
|
6,848
|
5,574
|
OPM (%)
|
24.4
|
25.6
|
25.5
|
15.9
|
Pre-exceptional PAT
|
1,280
|
2,091
|
3,955
|
2,931
|
Reported PAT
|
783
|
2,091
|
3,955
|
2,931
|
yoy growth (%)
|
|
166.9
|
89.2
|
(25.9)
|
|
|
|
|
|
EPS (Rs)
|
3.1
|
8.1
|
15.4
|
11.4
|
P/E (x)
|
38.1
|
14.4
|
7.6
|
10.2
|
P/BV (x)
|
3.0
|
2.6
|
2.1
|
1.8
|
EV/EBITDA (x)
|
11.9
|
8.9
|
5.3
|
6.6
|
Debt/Equity (x)
|
1.4
|
0.9
|
0.6
|
0.5
|
ROE (%)
|
13.8
|
19.6
|
30.7
|
19.0
|
ROCE (%)
|
10.6
|
14.0
|
24.0
|
17.5
|
Source: Company, India Infoline Research