Balrampur Chini Mills: More sour than sweet

CMP Rs47, Target Rs51, Upside 8.5%

We spoke to Balrampur Chini to gauge the impact of recently announced cane SAP of Rs240/qtl on sugar dynamics. Although BRCM made a net loss in H1, it expects decent profits in H2 if free sugar realization sustains at current level of ~Rs31/kg, up from Rs28/kg in Q2. Buoyant prices and robust volumes in alcohol and co-gen would cushion cost pressures in sugar. Although exports to the tune of ~1mn tonnes have been reportedly allowed, company believes at least another ~2mn tonnes of exports may be needed for sustained rise in domestic realizations. We significantly cut our FY12/13 margin and EPS estimates, incorporating a higher than expected cane SAP in 2011-12. We’ve also cut our rating to MP with revised 9-mth TP of Rs51.  

Production costs to rise on higher SAP; by-products, H2 sugar realizations to cover for H1 losses

Based on current season SAP of Rs240/qtl, we project BRCM cost of production at ~Rs29/kg for the ongoing crushing season, which is higher than the Q2 free sugar realization of ~Rs28/kg. However, our interaction with the management suggests H2 profitability in sugar would be a much improved affair with current free sugar realizations for the company reigning at Rs31/kg.

A ~15% yoy higher cane crush would boost distillery and co-gen volumes while blended distillery realizations would remain robust at ~Rs29/l. Along with higher cost of production, exports would play a key role in sustaining sugar realizations above the Rs30/kg mark. In addition to the 1mn tonnes, company believes another ~2mn tonnes should be allowed to relieve pressure on inventory. We factor in another 1mn tonnes of export which would leave Sep’ 12 stock at about 4 months of consumption.   

Cut rating, estimates & TP on higher cane SAP

In our previous update we had assumed cane SAP at Rs210/qtl, much lower in hindsight compared to actual 2011-12 SAP of Rs240/qtl. Accordingly, we have affected a significant cut in our FY12/13 margin and EPS estimates though cushioned somewhat by upward revision in sugar realizations. We value BRCM at 1.1x FY13 BV, a 45% discount to its historic 1-yr fwd average and lower rating to MP with a revised 9-mth TP of Rs51.