Balrampur Chini Mills

Balrampur Chini Mills’ ex-factory sugar realisations have increased by around 25 per cent sequentially for the December 2009 quarter to Rs 32 per kg; average realisation for December month is higher at Rs 34 per kg. In the first week of January 2010, sugar realisations have spiked further and are currently at around Rs 38 per kg. With the overall sugar scenario likely to remain tight, prices in India and hence the realisations of sugar producers are likely to remain firm.

Balrampur is expected to report a hefty profit growth in the December 2009 quarter on the back of an 80 per cent year-on-year increase in sugar realisations and gains from the sale of lowcost sugar inventory. Thus, despite 44 per cent lower sugar sales volumes, net profit is likely to jump 67 per cent to Rs 85.5 crore. At Rs 141, the stock trades at 10.6 times and 10.2 times its 2009-10 (September year ending) and 2010-11 estimated earnings, respectively. The increase in sugar prices leaves scope for further up gradation of its estimates.

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

Stock Views on Tata Motors, Infosys Technologies, Balrampur Chini Mills, Aban Offshore

INDIABULLS on TATA MOTORS

INDIABULLS has downgraded Tata Motors from hold to ‘sell’ after the company reported a decline in sales volume over the past few quarters. The broking house expects this trend to continue in the coming quarters, “given the slowdown in the economy, the cautious lending environment and a significant decline in consumer spending.” Indiabulls feels that the biggest challenge for Tata Motors currently is to turn around its Jaguar Land Rover (JLR) business, for which it raised a bridge loan of $3 billion. “Given the tight liquidity scenario and bleak capital markets, Tata Motors is likely to roll over its bridge loan, thereby adding to the company’s finance cost,” says the report. Further, JLR’s sales volume is trending downwards, and given the current economic conditions in the US and Europe, we do not expect volumes to recover in the near term, it adds.

Prabhudas Lilladher on INFOSYS TECH

Prabhudas Lilladher has a ‘reduce’ rating on Infosys Technologies as it feels that the outlook for the company and the software industry is quite weak in the near-term. “While we expect Infosys to perform better than most other players in the industry, we rate the stock ‘reduce’ with a target of Rs 1,246,” says the report. With a difficult FY10E and full-tax FY11E, the two-year earnings CAGR (FY09-11) for the company is unlikely to be over 10-15%, it adds. According to the broking house, the company’s pricing power in fresh contracts would remain under pressure as “pricing behaviour by competition has turned aggressive in new contracts.” While Infosys has seen some weakness in the BFSI domain in the recent past, the outfit expects this weakness to “spread to retail and possibly the manufacturing domains as well.” Of the various service lines, Enterprise Solutions may be worst affected over the next few quarters, according to the management, it adds. The broking house is also expecting another reduction in US dollar guidance by Infosys.

PINC Research on BALRAMPUR CHINI

PINC has downgraded its rating on Balrampur Chini Mills to ‘sell’ as it feels that lower cane crushing would impact the company’s profitability. “Although we remain confident about Balrampur Chini Mills’ business model & efficiency levels and are positive about the turnaround in the sector, we believe that lower cane crushing in FY09 would impact its return ratios (assuming cane price of Rs 140/quintal),” says the report. The outfit expects the company’s revenues for FY09 to rise by 12% to Rs 1,650 crore, aided by higher sugar revenues. “Revenues from sugar sales should grow 12% to Rs 1270 crore as a result of inventory liquidation and higher sugar prices. OPM should dip by 90bps to 21.3% in FY09 on the back of higher cane costs at Rs 140/quintal,” it says. The report, however, does add that if cane prices are maintained at last year’s SAP of Rs 125/quintal, the target price works out to Rs 38 based on FY09E profits of Rs 160 crore.

Ambit Capital on ABAN OFFSHORE

Ambit Capital has maintained a ‘buy’ on Aban Offshore with a revised target price of Rs 1,603 (earlier Rs 1,566), implying an upside of 143% from the current levels. The upward revision comes after the company announced contract renewal of its jack-up ‘Deep-Driller-IV’ (DD-IV) in continuation of expiry of its current contract in December 2008. According to the report, the renewal is for a period of six months and is part of the two six-month options built into the agreement