Balrampur Chini: Bitter sweet

Balrampur Chini's realisation dropped following drop in sugar prices in international market

Balrampur Chini's performance in the September 2006 quarter was hurt by increasing costs and higher interest depreciation, which resulted in its quarterly EPS declining 12.75 per cent y-o-y to Rs 1.3 a share.

Topline growth was an impressive 35 per cent, aided by higher sugar prices - Rs 17.64 a kg compared with Rs 17.01 a kg a year ago - as well as 25 per cent higher sugar volumes due to its capex and the acquisition of the Rauzagaon plant from Dhampur Sugar in March 2006.

But total expenditure went up 42 per cent y-o-y. As a result, its operating profit saw a rise of just 5.32 per cent. Operating profit margin declined 428 basis points y-o-y to 15.2 per cent.

The sugar cycle is not as bullish as it was a few quarters ago. Sugar prices have declined in the international markets due to rising production in Brazil, Thailand and India and a reduction in the diversion of Brazilian cane towards ethanol, which led to a fall in domestic prices too. As a result, Balrampur's sugar realisations have fallen by about a rupee over June 2006 quarter.

But Balrampur's strategy of becoming an integrated company has started yielding results. Though the contribution of the distillery and power divisions was 4.7 per cent and 3.4 per cent of sales, respectively, distillery accounted for 12.2 per cent and power brought 12.9 per cent of profit before income and tax.

Going forward, international sugar prices are likely to remain subdued, while cane prices are likely to remain high thanks to elections in UP. But sugar capacity expansions (about 60 per cent) will help in improving profits from 2007-08.

The management has highlighted that both ethanol and power are not going to be cyclical businesses. Realisation from the distillery business, where it makes ethanol, extra neutral alcohol and rectified spirits, is likely to be higher than Rs 21 per litre, as oil companies are expected to pick up ethanol at Rs 21.50, nearly 15 per cent higher than the prevailing prices. Also, capacity expansion in power (50 per cent) and ethanol (100 per cent) will come by Y08.

The stock price of Balrampur had doubled between November 2005 and April-May this year, and is back to the last year's levels, given the deteriorating industry scenario.

However, the company is one of the top picks in the sector, thanks to its broadbased revenue stream, and trades at about nine times estimated FY07 earnings and seven times FY08 earnings.

TVS Motors: Smooth drive

TVS Motors has done well to post a sales growth of 37 per cent y-o-y at Rs 1,077 crore in the September quarter, driven by higher volumes of 29 per cent y-o-y and an increase in the realisation of around six per cent.

Despite this, operating profit margin at 5.2 per cent was down by 60 basis points y-o-y. Net profit, too, fell 22 per cent to Rs 24.8 crore, due to lower other income.

The better realisations are on account of the 150cc Apache which has been selling around 15,000 units a month. Also in volume terms, motorcycles now account for 62 per cent up from 58 per cent a year back.

The momentum in the entry-level Star, which is now priced between Rs 30,000 and Rs 38,000, as also the Apache, which has 25 per cent share in its category, should ensure that sales continue to grow at a brisk pace.

The management says sales of the Apache should go up to 20,000 units soon, with additional capacity coming in. TVS is also planning some new launches, including variants for Victor, which the management admits it should have done earlier.

Besides, TVS is planning to launch a brand new product for the Indonesian market "� the third largest market in the world "� and is creating capacity for 3 lakh vehicles a year. It plans to enter the three-wheeler space in Q1 FY07 with a capacity of 60,000 units per annum.

At the current price of Rs 96, the stock trades at just under 19 times FY07 estimated earnings and at 14 times FY08 earnings.

The company has managed to expand its geographical reach "� more than 40 per cent of sales come from the North. With the demand being robust, topline growth should not be an issue.

However, margins could remain under pressure since advertising and marketing expenses will remain high and competitive pressures are unlikely to ease in a hurry.