Balrampur Chini Mills

Profile

Balrampur Chini Mills Limited (BCML) came into being in 1975 and is today, India’s second-largest integrated sugar manufacturing company. From a crushing capacity of 800 TCD (metric tonnes crushed per day) to 12,000 TCD, BCML has come a long way.

Its allied businesses consist of manufacturing and marketing of ethyl alcohol and ethanol, generation and sale of power and manufacturing and marketing of organic manure. The company has nine factories located across the sugarcane-rich belt of eastern Uttar Pradesh.
The company’s distillery and power cogeneration units enable the efficient use of by-products besides providing a steady stream of revenue. This cushion allows BCML to perform well even during business downcycles.

Promoters

The company is promoted by the Saraogi family led by Vivek Saraogi, Managing Director. 31.34 per cent of the 37 per cent promoter shareholding is held directly by various members of the family and the rest 5.5 per cent is routed through their other companies. Institutions such as domestic mutual funds (18%) and FIIs (17%) are the other major shareholders of the company.

Investment Rationale

• Sugar Bull Phase

The Indian sugar industry is in for some good times. After two years of falling sugar prices due to bumper harvests, which severely dented sugar companies’ profitability, production for the sugar year (SY) ending in September 2009 is expected to fall by 45 per cent y-o-y to ~ 14.5 million tonnes. As a result, sugar prices have rallied over the past year — in May 2009 they jumped by ~55 per cent y-o-y. Estimates are that this deficit production situation would last at least till the end of the next sugar season.

Being one of the largest producers of sugar in the country, BCML is expected to be a key beneficiary of the bull phase in the sugar cycle and report a compounded annual growth rate (CAGR) of 59.2 per cent in its net profit over FY08-11. Profit growth would be achieved on the back of a substantial increase in the realisation of its sugar and distillery segments.

• Hefty Cash Flows

Over FY05-08, BCML has expanded its sugar manufacturing capacity by 2.6x to 76,000 TCD, doubled its distillery capacity to 320 kilolitre per day (KLPD) and increased its cogeneration capacity to 180 megawatt (MW). These expansions will allow the company to ride through the current sugar bull phase without any further capex expenses. This in turn will allow BCML to generate free cash flows of approximately Rs 580 crore in FY09 and Rs 545 crore in FY10.

• Strong Balance Sheet

The company’s debt-equity ratio of 1.4x in FY08 and 0.8x FY09E is much less than its main competitor Bajaj Hindustan’s ~3x for FY09E. This ratio also enables the company to deliver much better shareholder returns as its interests outgo is less. Hence, BCML is expected to deliver RoE of 17.4 per cent in FY09 and 20.8 per cent in FY10.

Risk & Concerns

• High Sugarcane Prices

The UP sugar industry is currently facing high sugarcane prices which are decided by the government in the form of state advised price (SAP). While the industry is fighting the arbitrary sugarcane pricing policy in court, the SAP for SY09 has been fixed at Rs 140 per quintal. Furthermore, due to the acute shortage of sugarcane in SY09, all sugar mills had to pay a price higher than the SAP. BCML had to pay Rs151 for per quintal of sugar-cane. Such higher-than-expected sugarcane procurement price remains a key risk.

• Government Interventions

Sugar carries a weight of 3.62 per cent in the Wholesale Price Index. Hence, the government keenly monitors its price movement. Also, in India sugar is a strong political commodity and the government tries its best to check any increase in sugar prices, but on the other hand, the SAP (in Uttar Pradesh) is normally increased irrespective of the sugar mills’ capacity to pay for sugarcane. And although the central government is undertaking measures such as duty-free imports to check the rallying sugar prices, these concerns can adversely impact BCML.

• Valuation

BCML is currently valued at an EV/EBIDTA of 7x FY11E, considering the hefty profit growth expected over FY08-11. Based on this valuation, we arrive at a fair value of Rs 148 for the stock. At the current market price of Rs 98, the stock trades at 9.7x its FY10 and 7.9x its FY11 EPS estimates and 5.6x its FY10 EV/EBIDTA and 4.7x its FY11 EV/EBIDTA estimates.

Being a diversified company BCML is a complete package in this space provided of course the government does not deal the sugar industry a bad hand