Balrampur Chini: Sweeter than peers

The company is expected to reap larger benefits of improved sugar realisations and higher sugarcane crop in UP

The domestic sugar sector has recently seen some improvement in fortunes by way of better realisations leading to a rally in share prices of sugar producers. For instance, Balrampur Chini Mills and Shree Renuka Sugars scaled to their 52-week high in September, appreciating almost 44 per cent each from their June closing lows, while Bajaj Hindusthan has gained 38 per cent. However, among the three, analysts prefer Balrampur Chini given its proximity and exposure to Uttar Pradesh (UP), where cane production is relatively better and also considering far lower debt on its books.

Production-consumption gap narrows…
Sugar producers had seen realisations of Rs 28,000-30,000 a tonne during October 2010 to March 2012, much near their cost of production thereby limiting profitability. However, realisations have now improved to Rs 35,000-36,000 a tonne as sugar production estimates for Sugar Year 2012-13 (October 2012 to September 2013) has been cut. While Indian Sugar Mills Association (ISMA) had earlier estimated production at around 26 million tonnes (MT), the delayed monsoon, scanty rainfall in some sugar producing belts and some cane diversion towards fodder in Maharashtra has impacted sugarcane availability. Thus, sugar production estimates have been revised down to 24 MT. The consumption, however, is pegged at 22.5 MT levels, resulting in the narrowing of production-consumption gap and hence, higher sugar prices.

…but, cane and sugar prices hold key
Karnataka and Maharashtra that contribute 40-45 per cent of India’s sugarcane output are likely to see much lower production. However, with better sugarcane availability in UP, sugar producers such as Balrampur Chini and Bajaj Hindusthan will reap higher benefits in the form of higher crushing. The only factor to be watched for their profitability now remains the State Advice Price (SAP) for sugarcane, which is to be declared soon. While SAP in the last year was raised sharply from Rs 210 a quintal to Rs 240 levels, it was largely due to the upcoming elections. Thus, a further sharp increase may not happen this year, observe analysts. Sageraj Bariya at Equitorials adds that the central government too, must have cautioned state governments against sharp hikes that can fuel inflation (further hike in sugar prices). Sageraj also does not see any upside in sugar prices in the near-term as the government has released four MT of non-levy quota looking at the festive season ahead. That apart, if imports are eased, the relatively subdued global prices could get some support but mean a cap on domestic sugar prices.
 

PROFITABILITY BOOST
In Rs crore	FY12	FY13E
Net sales	2,310.0	3,294.7
% chg y-o-y	16.4	42.6
Ebitda	238.0	502.1
Ebitda (%)	10.3	15.2
Net profit	0.4	188.5
% chg y-o-y	NA	-

EPS (Rs)-7.7 PE (x)-8.8 % change for FY12 is based on annualised figures of 18 months period ended March 2011
E: Estimates                                         Source:  J M Financials

Balrampur Chini Mills
Analysts expect Balrampur Chini to benefit the most from improving sugar realisations. Arya Sen at Jefferies observes that Balrampur has high sensitivity of earnings per share (EPS) to sugar prices; and is the best stock to play sugar price in India. Balrampur’s FY13 EPS estimate increases by Rs 2.5 for every rupee increase in sugar price. Balrampur also has relatively much lower debt. After completing all its major capacity additions, it has been steadily repaying debt. Hence, long-term debt-equity ratio has declined from 0.85 in FY09 to 0.36 in FY12. Analysts at JM Financial observe that its current long-term debt is around Rs 680 crore (as of June 2012) and expect Balrampur to become debt-free over the next two to three years. They add that if levy obligation is abolished, Balrampur stands to see favourable impact of Rs 80 crore on profit before tax (PBT) (33-43 per cent of FY13/14 PBT respectively); they currently factor in 10 per cent levy obligation. Though the talks of levy obligations removal or some alternate methodology have been there for long, not much developments have taken place so far. A committee formulated to look into the issue is likely to give its recommendations in the first half of this month, which will have to be watched.

Balrampur Chini, which has major manufacturing facilities in eastern UP, also draws more advantage as analysts see lower competition from gur/khandsari in the region compared to western or central UP. Thus, with higher crushing, sugar sales volumes are estimated to increase 10 per cent, according to analysts at JM Financial; so will distillery and co-generation volumes. While consensus target price for the stock remains Rs 79 (upside of 18 per cent from current levels of Rs 66.65), a few analysts have much higher target prices ranging Rs 90-95.

Shree Renuka Sugars
The strong sugar player having exposure to Indian as well as Brazilian markets, however, may see lower cane crushing volumes in India. Analysts at JM Financial estimate a 20 per cent decline in crushing volumes year-on-year due to lower yields/acreage in Maharashtra and Karnataka coupled with higher cane prices. Also, comparatively, the company has much higher debt on its books (debt-equity ratio of almost four at the end-FY12, estimate analysts). However, the company will be the largest beneficiary if India’s production comes far below current estimates forcing the country to import sugar. Though chances of the same remain low as of now, Renuka will benefit the most considering its port-based refineries at Haldia and Kandla.

Bajaj Hindusthan
The company, too, will gain from relatively higher cane output in UP. It is expected to see good revenue growth led by higher sugar, distillery and power co-generation output. However, analysts say, the benefits get limited to the bottom line due to significant interest outgo on the back of investments into/loans to its associate company like Bajaj Energy.