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Balrampur Chini - Brief overview
Mar 29, 2006

Sugar companies are in a sweet spot. The industry has been on an up cycle, driven by demand outpacing supply (both in the global and domestic sugar market). With demand continuing to outpace supply, inventory levels have plummeted resulting in higher price realisations for sugar companies. Among the host of sugar stocks that have had a sweet run is Balrampur Chini Mills Ltd.

De-risked business model…
The Indian sugar industry is highly fragmented and regulated with manufacturers having limited pricing power. However, BCML has a well-diversified business model with revenue streams from sugar, alcohol and power. The principal part of the business comes from manufacture and sale of sugar. Allied business of the company consists of manufacturing and marketing of alcohol, organic manure and generation of power. Though sugar is the major contributor to the revenue, over the years, its share has reduced.

Revenue stream (as a % of sales)
Segments FY02 FY03 FY04 FY05
Sugar 83.1% 74.6% 73.2% 73.7%
Alcohol 12.5% 19.4% 16.0% 20.5%
Power - 0.1% 5.3% 5.1%
Others 4.3% 5.9% 5.5% 0.7%

Strategically located mills
BCML is one of the largest integrated sugar manufactures in India. All of BCML’s manufacturing facilities are located in Uttar Pradesh (UP), which is one of the largest sugarcane-growing areas in India. The company has five sugar factories located in UP having an aggregate sugarcane crushing capacity of 40,000 tonnes crushed per day (TCD). Proximity to sugarcane field is important because crushing sugarcane shortly after the harvest result in better recovery rate. Proximity to fields is also important is light of the government regulation as well.

Recently, BCML acquired the Rauzagoan unit of Dhampur Sugar, having a capacity of 7,500 tcd, taking its crushing capacity for to 43,500 for the year 2005-06. Also with the 7,000 TCD Mankapur Unit, which will commence operations by the beginning of the next season (2006-07), total capacity will touch 54,500 TCD by 2007.

BCML - Sugar capacity
(TCD) 2004-05 2005-06 2006-07
Balrampur 11,000 11,000 12,000
Babhnan 8,000 8,000 9,000
Tulsipur 6,000 6,000 7,000
Haidergarh 4,000 4,000 5,000
Akbarpur   7,000 7,000
Rauzagoan   7,500 7,500
Mankapur     7,000
Total 29,000 43,500 54,500

In addition to above expansion, it is also in the process of expanding its distillery capacity (for ethanol) from 160 kiloliters per day (KLPD) to 220 KLPD and power capacity to 113 MW by 2007 (48 MW currently).

  2004-05 2005-06 2006-07
Balrampur 1 100 100 100
Babhnan 60 60 60
Manakpur     60
Total 160 160 220

Financial performance…
The upcycle in the sugar industry has helped the company grow its sales and net profit at a CAGR of 20% and 106% in the last three years (FY03 to FY05). BCML’s EBIDTA margin improved to 29.4% and the net margin expanded to 15.4% in FY05 (12.4% and 5.2% respectively in FY03). In FY05, the company also raised capital through a right issue and preferential allotment of shares to the tune of Rs 1.7 bn. This has enabled the company to lower its debt to equity ratio from 1.9 times in FY03 to 0.8 in FY05 (0.4 times by FY06).

Financials
(Rs m) FY03 FY04 FY05 CAGR
Net sales 5,649 7,382 8,133 20.0%
Operating profit 699 1,233 2,395 85.0%
Operating profit margin (%) 12.4% 16.7% 29.4%  
Net profit 294 605 1,251 106.4%
Net profit margin (%) 5.2% 8.2% 15.4%  
D/E ratio 1.39 1.94 0.79  

At Rs 175, the stock is trading at a P/E multiple of 24.2 times trailing 12 months earnings. Going forward, given the demand-supply mismatch and lower inventories, we expect sugar prices to remain stable at Rs 1,750 to Rs 1,850 per quintal for another 2 years. Also, with demand for ethanol growing (as a cheaper fuel), we expect BCML’s financial performance to remain robust. We are in the process of preparing a research report on the company.

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