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Balrampur Chini: Conference call extracts
Mar 3, 2011

Balrampur Chini recently hosted a conference call to discuss its 5QFY11 results. During the quarter, the company’s top line grew by 20.9% YoY on the back of strong performance by all of the company’s different business segments. Operating (EBITDA) margins however, fell by 16.4%. This was a result of sharp increase in raw material costs. Raw material costs increased by 57% YoY during the quarter. As a result, net profit of the company fell by 70% YoY.

The key excerpts of the conference call are given hereunder:

Segment performance: While sales of sugar grew by 21.2% YoY, sales of distillery segment grew by 36.7% YoY. Cogeneration business also performed well with a strong sales growth of 41% YoY.

On the EBIT front, margins for sugar fell from 21.2% in 1QFY11 to 5% in 5QFY11. This fall comes on the back of higher price of sugarcane coupled with fall in sugar realisations. EBIT margins for distillery segment were also lower as a result of lower realisation for alcohol. During the quarter, average realisation fell by 3% to Rs. 26.8 per litre. For the cogeneration business, EBIT margins declined by 14%. While realization per unit from bagasse generation increased from Rs 3.93 per unit in 1QFY11 to Rs 4.01 per unit in 5QFY11, realisation per unit from coal based generation stood at Rs 4.94 for the quarter. However, higher cost of feed resulted in the fall in EBIT margins.

Global outlook for sugar demand: Raw sugar prices globally are very volatile. However, 30 c/lb is a reasonable level for raw sugar to trade under the present circumstances. This is because there is no nation with surplus stock. All major sugar producing centres are currently facing adverse weather conditions which are not congenial for sugarcane growth. On the other hand, consumption from countries like China and India is picking up. Demand in India is expected to pick up in the summer as a result of soft drinks and industrial consumers. China is also undergoing a great upsurge in demand based on industrial consumption. In the opinion of Mr Vivek Saraogi, MD of Balrampur Chini, India and China would overtake the European Union in sugar consumption in 2014. Hence, the price of sugar will continue to remain firm going forward.

Deregulation: Deregulation in the sugar industry has to take place on two ends, raw material and finished goods. On the finished goods side, that is levy and release deregulation, Mr Sarogi believes that the moment a little bit of political stability is achieved; deregulation for the finished product should get onto fast gear. However, raw material deregulation will take some time. This is because the government is looking to politically stabilize itself and the cane pricing is a politically sensitive issue. For this reason, levy and release deregulation would be taken up immediately after some stability while deregulating cane pricing would be the next step.

Distillery business outlook: Balrampur Chini is planning to sell 65 m litre of alcohol in the next fiscal. Of this, 50% will be sold to oil marketing companies. The company expects to sell this at Rs 27 per litre as the price of ethanol has some linkages to oil prices. The balance alcohol, the company expects to sell at over Rs 29 per litre. Hence on an average, the company expects to earn Rs 28 per litre in its distillery business.

What we expect?

BMCL expects demand for sugar to increase going forward. This would give it room to grow. The company is also bullish on its distillery business as the government has decided to blend fuel with 5% ethanol. In fact, this is expected to move up to 10% in future. The company gained the benefit from the conversion of two of its boilers to multi feed during the quarter as is seen from the better performance of the power segment. On the down side, the sugarcane crop this season has been larger than expected due to higher yield per hectare. This is expected to put pressure on prices in the medium term. The company is seeing several triggers for long term growth and expects to benefit from high volumes in the coming year. However, we believe that the stock looks expensive at the current level. For this we would advise investor to be CAUTIOUS on the stock.

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