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Balrampur Chini - Conference call extracts
May 5, 2006

We recently had a conference call with the management of Balrampur Chini (BCML) to get their view on the sugar sector, the company’s performance and the future prospects of the industry and the company. Following are the key excerpts of the same.

About the company
Balrampur Chini Mills Limited (BCML) is one of the largest integrated sugar companies 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 the sector.

Domestic Scenario
From the situation of unmanageable surplus, the Indian sugar industry moved into a state of deficit since the past couple of years due to an increase in sugarcane arrears (forcing farmers to look for alternative crops). Drought conditions in Maharashtra and South India and lower sugarcane yields in Uttar Pradesh, which are the key sugarcane producing markets, worsened the situation for sugarcane availability. From a record high of 20.1 million tonnes (MT) in FY03, sugar production fell down to 12.6 MT in FY05. However, the consumption of sugar outpaced production during these periods resulting into a supply deficit for two consecutive years. However, the company expects sugar production in India to have increased to 18 MT in FY06. The increase in sugar production will be mainly due to an increase in the acreage under sugarcane cultivation, led by remunerative cane prices, timely payment and repayment of past arrears, which will attract farmers towards planting sugarcane. Sugar consumption is expected to touch 19 MT due to increase in population and the expected increase in the per capita consumption of sugar.

International Scenario
The world sugar market scenario was not much different from that of India owing to:
  1. Large-scale conversion of cane to ethanol in Brazil on account of high crude oil prices

  2. Removal of EU sugar subsidies and consequently decline in EU sugar exports

  3. Drought conditions in major sugar exporting countries like Thailand.

World sugar production reached a high of 148.8 MT in FY03, consequently declining to 142.1 MT in FY05. However, global sugar production is expected to have recovered in FY06 to 153 MT, led by increased production in India and Brazil.

Capacity expansions of the company
The company has planned expansions to meet the growing demand for sugar. It recently acquired the Rauzagoan unit of Dhampur Sugar, having a capacity of 7,500 tcd (tonnes crushed per day). The company’s 7,000 tcd Mankapur plant in eastern UP would be operational by November 2006 taking the total capacity to 54,500 tcd. Along with its strong focus on sugar, the company is also expanding its distillery capacity to 220 KLPD (kilo litres per day) from the current 160 KLPD capacity after its Mankapur unit becomes operational by the next crushing season. Its power capacity will also increase from 48 MW to 113 MW.

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

Operational details
BCML has a well-diversified business model with revenue streams from sugar, alcohol and power. With the increased capacity from 25,000 TCD to 47,500 TCD in FY06, the company expects to produce about 0.6 MT of sugar in FY06, a rise of 53% YoY. On the realisations side, the company expects sugar prices in the range of about Rs18 to Rs 19 per kg while average alcohol realizations would be in the range of Rs 21 to Rs 22 per litre. 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 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.

Cost side
The major cost component for the company is sugarcane, which constitutes almost 78% of the total operating costs. Therefore, any increase in sugarcane prices impacts the company’s margins to a great extent. Currently BCML is paying State Advised Price (SAP) of Rs 115 per quintal for sugarcane and is expected to increase by 5% going forward. The UP government’s 2004 policy of providing capital subsidy of 10% on investment above Rs 3.5 bn and various tax concessions is likely to benefit the company. It expects to receive subsidies, estimated at about Rs 1.5 per kg of sugar, under the UP government’s sugar investment promotion policy after the Mankapur project is completed.

Our View
At Rs 185, the stock is trading at a P/E multiple of 25.6 times trailing 12 months earnings. The slated expansion of BCML’s production capacity will drive volumes. Further, higher realisations will fuel earnings. With the upturn in the sugar industry likely to continue for atleast the next two years, we expect robust performance from the company.

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