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Balrampur Chini v/s Bajaj Hindusthan - Views on News from Equitymaster
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Balrampur Chini v/s Bajaj Hindusthan
Apr 7, 2006

The sugar stocks have been in the limelight in the last one-year. In this article, we compare Balrampur Chini and Bajaj Hindusthan, the market leaders, in India’s sugar sector. Together, they have an aggregate sugar crushing capacity of 93,000 (tonne crushed per day) TCD (close to 50% of the combined capacity of the top nine players). About Balrampur Chini (BCML)
Balrampur Chini Mills Limited (BCML) is one of the largest integrated sugar company in India. The allied business of the company comprises distillery operations, cogeneration of power and manufacturing of bio-compose. It is one of the most efficient integrated sugar producers in the country and has grown its capacity aggressively over the past few years. It is also one of the most profitable companies in this sector.

Bajaj Hindusthan (BHL)
Bajaj Hindusthan is India’s largest sugar and ethanol manufacturing company with strong foothold in Western Uttar Pradesh (UP). It is a premier sugar producer with an installed capacity of 53,000 tonnes crushed per day (TCD). In sugar production terms it has the capacity to produce close to 2 million tonnes (MT) and is amongst the top 10 global sugar producers. It is also the largest distiller in India.

Capacity: Sugar mills are sprouting thick and fast in the UP’s cane belt. The UP government’s 2004 policy of providing capital subsidy of 10% on investment above Rs 3.5 bn and various tax concessions sparked of the investment boom. Also, with European Union withdrawing subsidies on sugar exports and Brazil diverting a lot of cane for production of ethanol, sugar deficit is projected at 4 MT globally in the next couple of years. This is likely to result in firm sugar prices. This may also open up opportunities for export for Indian firms, if allowed by the Indian government. Exciting opportunities in ethanol production are emerging and Indian sugar mills are expected to become significant global players. In this context, BCML and BHL have aggressive capacity expansion plans (greenfield, brownfield and acquisitions).

Capacity
Balrampur Chini 2005 2006 2007
Crushing capacity (TCD) 25,000 47,500 54,500
Distillery (KPLD) 160 160 220
Cogen (MW) 48 78 113

Looking at BCML, it has five sugar factories located in Eastern UP, having an aggregate sugarcane crushing capacity of 40,000 tonnes crushed per day (TCD). After its recent acquisition of the Rauzagoan unit (7,500 TCD) and Mankapur Unit (7,000 TCD), total capacity will touch 54,500 TCD by 2007. 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).

Bajaj Hindusthan 2005 2006 2007
Crushing capacity (TCD) 31,000 56,200 100,000
Distillery (KPLD) 160 320 800
Cogen (MW) 0 0 0

As far as BHL is concerned, the company’s total cane crushing capacity is expected to increase from 56,200 TCD currently to 100,000 TCD by 2006-07 (almost double than the nearest competitor). Further, the distillery capacity will also be augmented to 320 KLPD, making it the largest distiller in the country.

Revenue side of the business: Revenues from sale of sugar typically accounts for 70% to 90% of total revenues, depending upon the complexity of the facility. A large dependence on sugar sales therefore, exposes companies to cyclicality in sugar prices. So, companies have been looking at the revenues from by-products like molasses and bagasse to diversify the revenue mix. Also, with petroleum product prices shooting through the roof, the demand of ethanol has been growing, opening up new revenue streams for sugar mills.

Balrampur Chini 2003 2004 2005
Sugar 74.6% 73.2% 73.7%
Alcohol 19.4% 16.0% 20.5%
Molasses 4.6% 3.6% 0.5%
Power 0.1% 5.3% 5.1%
Others 1.3% 1.9% 0.2%

As can be seen from the table above, BCML has a well-diversified business model with revenue streams from sugar, alcohol and power (the share of sugar has reduced over the years). The company uses the power generated from bagasse (its cost, including depreciation, is Rs 1.80 per unit assuming Rs 600 MT as the cost of bagasse) for its own captive power requirement. The additional power generated is sold to the Uttar Pradesh Corporation at Rs 2.86 per unit. The company is extremely bullish on power revenues going forward, as Uttar Pradesh is facing huge power deficit.

Revenues (% of sales)
Bajaj Hindusthan 2003 2004 2005
Sugar 91.0% 90.8% 90.0%
Alcohol 6.9% 8.0% 6.6%
Molasses 2.1% 0.7% 2.3%
Others 0.4% 1.1%

As compared to BMCL, BHL is less diversified. While sugar accounts for 90% of revenues, the remaining is derived from the sale of alcohol and molasses. Unlike BCML, BHL does not have any cogen plant and sells all surplus bagasse. The reduction in bagasse prices due to higher availability of cane is likely to impact the total revenues going forward.

Operational details

Vis-a-Vis…
FY05 - (Rs m) Bajaj Hindusthan Balrampur chini
Total Sugar crushed (MT) 4.3 3.9
Total Sugar produced (MT) 0.43 0.39
Recovery 10.1% 10.1%
Alcohol produced (KPLD) 28,270 37,735
Sales 8,463 8,133
EBIDTA 2,101 2,395
EBDITA margin 24.8% 29.4%
Net Profit 1,404 1,251
Net margin 16.6% 15.4%
D/E ratio 0.8 0.8
RoA 22.9% 25.5%
RoE 11.1% 10.6%

As seen from the table above, BCML is a better player compared to BHL even though BHL’s capacity is much higher than BCML. Also, the cost of raw materials is 54% of sales for BCML as compared to 63% in case of BHL. This has led to better operating margin. However, in terms of net profit, BHL is stronger due to lower interest and deprecation costs.

Valuations: BCML is trading at a P/E multiple of 26.4 times trailing 12 months earnings, while BHL is trading at 39 times. Going forward, we believe that the upcycle in the industry will benefit both these companies (demand – supply mismatch, lower inventories and rising demand for ethanol). We expect the financial performance of both the sugar mills to remain robust.

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