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Balrampur Chini: Sector woes! - Views on News from Equitymaster

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Balrampur Chini: Sector woes!

Jun 15, 2007

Performance summary
Sugar major, Balrampur Chini announced its results for its second quarter and half year ended March 2007. With the current dynamics of the sugar sector being detrimental to growth, the performance of the company was not good. It faced pressure both on the margins and the profit fronts. However, its integrated business model provided a hedge to the company.

Rs(m) 2QFY06 2QFY07 (%) Change 1HFY06 1HFY07 (%) Change
Gross sales 3,484 4,206 20.7% 6,490 7,733 19.2%
Less: Excise duty 161 237 47.2% 300 393 31.0%
Net sales 3,323 3,969 19.4% 6,190 7,340 18.6%
Expenditure 2,139 3,410 59.4% 4,441 6,266 41.1%
Operating profit (EBDITA) 1,184 559 -52.8% 1,749 1,074 -38.6%
EBDITA margin (%) 35.6% 14.1%   28.3% 14.6%  
Other income 22 22 3.3% 28 39 39.3%
Interest 66 150 127.3% 94 205 118.1%
Depreciation 116 194 67.2% 217 365 68.2%
Profit before tax 1,024 237 -76.8% 1,466 543 -63.0%
Tax 230 37 -83.8% 274 151.4 -44.8%
Profit after tax/(loss) 794 200 -74.8% 1,192 392 -67.1%
Net profit margin (%) 23.9% 5.0%   19.3% 5.3%  
No. of shares (m) 231.8 248.2   231.8 248.2  
Diluted earnings per share (Rs)*         5.5  
Price to earnings ratio (x)*         12.8  
* 12 month trailing earnings            
As the accounting year is changed to 30th September ending to align it to
the sugar season the currentquarter results are compared with Q4FY06 numbers.

What is company’s business?
BCML is one of the largest integrated sugar companies in India. The allied businesses of the company comprise distillery operations, cogeneration of power and manufacturing of bio-compost. The company presently has seven sugar factories located in eastern Uttar Pradesh, having an aggregate sugarcane crushing capacity of 56,500 TCD (tonnes crushed per day), distillery and power operations of 220 KLPD (kilo litres per day) and 85.2 MW (saleable) respectively.

What drove the performance for 2QFY07?
By products lead growth: Given the current sector scenario, the sugar division did not perform well. However, its allied businesses witnessed strong growth, thereby recording a topline growth of 19% YoY for 2QFY07.

Segment wise performance
Rs m 2QFY06 2QFY07 (%) Change 1HFY06 1HFY07 (%) Change
Sugar 3,305 3,753 13.6% 6,080 6,957 14.4%
% of total revenues 85.1% 77.4%   85.9% 79.7%  
Distillery 226 501 121.7% 419 721 72.1%
% of total revenues 5.8% 10.3%   5.9% 8.3%  
Cogeneration 344 588 70.9% 558 1,039 86.2%
% of total revenues 8.9% 12.1%   7.9% 11.9%  
Others 9 5 -44.4% 18 15 -16.7%
% of total revenues 0.2% 0.1%   0.3% 0.2%  
Total revenues 3,884 4,847   7,075 8,732  

Sugar division: The company recorded higher sugar production (up by 40% YoY) due to additional capacities at Mankapur (8,000 TCD). The increased volumes led to a 14% YoY growth in the sales of the division. However, its contribution to the total sales fell from 85% in 2QFY06 to 77% in 2QFY07. Along with lower recoveries of 10.4% as compared to 10.6% in corresponding quarters, the company faced pressure on the sugar realisations. Average sugar realizations were lower at Rs.1, 473 per quintal from Rs. 1,838 per quintal. The lower sugar prices along with lower recoveries and higher cane costs led to the poor performance of the company’s sugar division. Currently with sugar realisations further falling to Rs 13.3 per kg, the prices are below the cost of production. It acquired 47.6% shares of Indo Gulf, which would further add 3000 TCD to its crushing capacity. Though the volumes are expected to remain strong, the low realisations would dampen the performance.

Higher volumes due to increased capacities led to a 122% YoY growth in the distillery revenues. The production from distillery operations was 18,446 KLPD (Kilo litre per day) during the quarter, an increase of 66% YoY. The average realisation for its products was Rs 21.8 per litre. Going forward, the management expects this division to deliver better performance as the government is considering the hike in the ethanol blending limit to 10%. Also, it is increasing its capacity at Mankapur unit (100 KLPD), which would commence in the 3rd quarter. BCML expects strong growth from this segment.

The co-generation segment of the company witnessed a 71% YoY growth in the revenues. The - capacity was increased by 55.7 % to 111.8 MW as compared to previous quarter. 220 m units (up by 96% YoY) were produced by the company, which led to its contribution touch to 12% to the total sales. Capacities are expected to be operated for over 300 days during FY07 and hence this division should deliver an encouraging performance.

Rs m 2QFY06 2QFY07 (%) Change 1HFY06 1HFY07 (%) Change
Raw Material 1,552 2,609 68.1% 3,456 4,870 40.9%
% of sales 46.7% 65.7%   55.8% 66.3%  
Staff cost 142 217 52.8% 249 387 55.4%
% of sales 4.3% 5.5%   4.0% 5.3%  
Other expenditure 445 584 31.2% 737 1,009 36.9%
% of sales 13.4% 14.7%   11.9% 13.7%  

Margin pressure again: Lower realisations and higher cane prices led to a fall in the margins yet again. All the expenses rising as a percentage of sales led to the fall in margins from 36% in 2QFY06 to 14% in the current quarter. Further, with the sugar business going through a very tough scenario, having dropped significantly and cane prices increased, the sugar operation in the current quarter did not break even. However the by - products division provided the saving grace to the company’s performance. The PBIT margins of distillery segments improved from 18% in 2QFY06 to 34% in 2QFY07. Also, the contribution from the cogeneration segment to the total PBIT increased to 63% from 16% in 2QFY06.

PBIT
Rs m 2QFY06 2QFY07 (%) Change 1HFY06 1HFY07 (%) Change
Sugar 919 (7) -100.8% 1,277 130 -89.8%
% of total PBIT 27.8% -0.2%   21.0% 1.9%  
Distillery 41 171 317.1% 85 244 187.1%
% of total PBIT 18.1% 34.1%   20.3% 33.8%  
Cogeneration 182 277 52.2% 279 475 70.3%
% of total PBIT 52.9% 47.1%   50.0% 45.7%  
Others (1) (2) 57.1% 1 0 -63.6%
% of total PBIT -15.6% -44.0%   6.1% 2.7%  

Bitter bottom: Higher expenses, lower margins aided by higher interest and depreciation costs led to the net profits fall by 75% YoY for the quarter. The interest and depreciation costs were higher as the company increased its capacities. There has been an over production this crushing season and the expected level of production is 27 m. With the current realization at about Rs. 13.25 per kg, the sugar division would find it difficult to break even. The by-products however would continue to perform well.

What to expect?
At Rs 71, the stock is trading at 12.8 times its 12-month trailing earnings. The company’s sugar division has been severely hit due to the low realisations. However, the integrated model of its business was the saving grace in the overall performance. Cogeneration and distillery businesses would continue to deliver robust performance and enable the company to deliver decent earnings while the sugar segment is passing through a difficult phase. It is planning to expand crushing capacity to 76,000 TCD, total saleable co-generation capacity to 116 MW and distillery operations to 320 KLPD in the next couple of years. This would help the volumes remain strong. However, with over production of sugar, lower prices and non – conducive government regulations, the margins are likely to be bitter.

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