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Balrampur Chini: Conference call extracts - Views on News from Equitymaster

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Balrampur Chini: Conference call extracts

Feb 16, 2010

We recently attended the 1st quarter analyst conference call of Balrampur Chini Mills Ltd. (BCML). The company is the second largest sugar company in the country. It has 10 sugar factories based in Uttar Pradesh and has total cane crushing capacity of 73,500 tonnes per day. The past year has been good for sugar companies as due to a shortage of sugar cane, the price of sugar shot up, boosting profitability for all players in the industry.

The subpar monsoons came as a boon for sugar companies which had been suffering from low retail prices and high MSP (minimum support price) and SAP (state advised price). This is evident from the fact that the sales of BCML were up by 2.3% YoY during 1QFY10 but operating (EBITDA) income was up by 13.8% YoY. This growth has been driven by increase in sugar margins. EBIT margins for the sugar segment expanded by 5.2% during the quarter helped by a 72% YoY increase in sugar realisations.

On the other hand, the low availability of sugar cane was a negative for the distillery and power business. The topline of the distillery business fell by 72% while the EBIT margins fell by 35%. This performance comes on the back of low molasses available due to lower volume of sugar cane crushed during the quarter. Furthermore, due to the low availability of bagasse for generating power, the company witnessed a drop of 26.6% in the units of power generated during the quarter. This affected the sales of the company but due to higher realisation as a result of open access agreement with the government, the company was able to improve the EBIT margin of this segment by 2.4%.

The company going forward intends to capitalise on the power shortage in the country. BCML is in the process of converting one boiler at its Haidergarh factory, which will help generate power for the company and enable it to sell 17 MW of incremental power in the off season. The company also proposes to carry out a similar conversion at its Mankapur factory from where it will be able to sell the same amount of power in the off season.

Further, company is setting up a 500 MT refinery at its Haidergarh factory which will enable it to refine sugar during the off season and at the same time refine the sugar to an even higher level, allowing the company to charge a premium on it. There are talks of setting up a similar refinery at the company’s Mankapur plant as well.

Forward looking statements
The management of BCML estimates Indian sugar production in the current fiscal to be around 15 m tonnes while the demand is set to increase to around 23 m tonnes. Globally also, there is expected to be a shortfall on account of lower production in India and Brazil. The demand supply mismatch is expected to keep sugar prices buoyant going forward.

The company expects the production of sugar in the country to be about 20 m tonnes next fiscal. This is based on the reasoning that not enough seeds are available to take the production to beyond 20 m tonnes and the famers have been given sufficient incentives so it will not be lower than this. The company does not expect the levy to continue at 20%, instead it will be again lowered to 10%. However there will continue to be a deficit in sugar which will help keep prices buoyant. On the distillery side, the company expects to produce atleast 40 m litres of alcohol during the current fiscal.

What we expect?
At a price of Rs 117, the company is trading at 12 times its trailing twelve months earnings. The company has done well on the back of higher sugar realisations. With the peak in the sugar cycle yet to be reached, the stock still has upside left. Moreover, the volume in the next fiscal are expected to be higher aided by higher incentives with reward farmers for planting more cane. The company is also expected to reap dividends from investment in power and its refining capacity.

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