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Balrampur Chini: Integration is the key!! - Views on News from Equitymaster

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Balrampur Chini: Integration is the key!!
Aug 3, 2006

Performance summary
Sugar major, Balrampur Chini (BCML) announced yet another quarter of strong performance, wherein it reported 86% YoY growth in topline for the April to June 2006 quarter. However, on the back of higher raw material costs, operating margins declined by 280 basis points. Consequently, the bottomline grew at a relatively slower rate of 63% YoY during the quarter.

Rs(m) Apr- Jun05 Apr- Jun06 (%) Change
Gross sales 2,209 4,123 86.7%
Less: Excise duty 99 194 95.4%
Net sales 2,110 3,930 86.3%
Expenditure 1,481 2,867 93.6%
Operating profit (EBDITA) 629 1,063 69.0%
EBDITA margin (%) 29.8% 27.0%  
Other income 14 7 -50.0%
Interest 48 96 99.4%
Depreciation 86 138 60.3%
Profit before tax 509 837 64.3%
Tax 108 182 67.7%
Profit after tax/(loss) 401 655 63.3%
Net profit margin (%) 19.0% 16.7%  
No. of shares (m) 231.8 248.2  
Diluted earnings per share (Rs)*   8.84  
Price to earnings ratio (x)*   10.30  
* 12 month trailing earnings      
(The company has changed its accounting year from March to September henceforth. Hence FY06 is a 6 quarter financial year).

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 six sugar factories located in Eastern Uttar Pradesh, having an aggregate sugarcane crushing capacity of 47,500 TCD (tonnes crushed per day), distillery and power operations of 160 KLPD (kilo litres per day) and 58 MW (saleable) respectively.

What has driven performance?
‘Sweet’ topline: BCML reported an increase in net sales of 86% YoY for the Apr-Jun06 quarter. The company has registered an overall revenue growth across its business segments. Sugar business, which comprised 90% of total revenues in this quarter, was the key driver with increased sugar sales volumes on the back of better realisations in this segment.

Sugar revenues increased by 99% YoY during the quarter. Enhanced crushing lead by increased capacity, higher crushing days due to adequate cane availability and healthier sugar realizations were the main factors for this growth. The company crushed 1 million tonne (MT) of cane (up 154%) during the quarter. Average realisations increased by around 12% YoY to touch Rs 1,867 per quintal.

Distillery operations also have delivered sustained growth during the quarter (up 30% YoY), mainly due to higher sales across various products. The management continues to be positive on the future of this operation, especially with respect to the ethanol sub-segment.

During the quarter, BCML enhanced its total saleable power by 16% to 76.6 m units (sold at an average rate of Rs 2.89 per unit). Better availability of bagasse owing to higher crushing and intra-plant transfer of bagasse helped the company to operate its co-generation facilities for more number of days. In the 2007-08 sugar season, BCML’s total co-generation capacity will increase to 164 MW (Saleable capacity of 116 MW), which should add significantly to the company’s topline.

Segment wise performance
Rs m Apr- Jun05 Apr- Jun06 (%) Change
Sugar 1,871 3,732 99.4%
% of total revenues 84.2% 90.3%  
Distillery 253 329 29.7%
% of total revenues 11.4% 8.0%  
Cogeneration 203 269 32.8%
% of total revenues 9.1% 6.5%  
Others 3 4 32.1%
% of total revenues 0.1% 0.1%  
Total revenues 2,330 4,333  
Less inter segment revenue 107 203  
Net Revenues 2,223 4,130  

Higher input costs dent margins: BCML’s raw material costs have increased from 59% of sales in Apr-June05 to 63% of sales in Apr-June06. The company procured cane at a price of Rs 127 per quintal, which is expected to go up due to increasing competition in the area. As such, margins are likely to be under pressure going forward as well.

Cost break-up
As a % of net sales Apr- Jun05 Apr- Jun06
Total Cost of goods 59.4% 63.2%
Staff Cost 3.6% 3.1%
Other Expenditure 7.2% 6.7%

Bottomline story: Contraction in operating margins led to a slower growth in BCML’s net profits, as compared to its topline. Also, due to lower other income, higher interest cost and tax outgo the net profit margins have contracted by 230 basis points to 16.7%.

Rs m Apr- Jun05 Apr- Jun06 (%) Change
Sugar 349 785 125.0%
% of segment sales 18.6% 21.0%  
Distillery 111 66 -40.0%
% of segment sales 43.6% 20.2%  
Cogeneration 114 125 10.2%
% of segment sales 56.1% 46.5%  

Capacity expansion: BCML is implementing two new integrated greenfield projects at Kumbhi and Gularia in the Lakhimpur Kheri district of Central Uttar Pradesh adding up to 16,000 TCD crushing capacity and 51 MW (Saleable capacity of 30 MW) of co-generation power. Both facilities will have a crushing capacity of 8,000 TCD each. A capital outlay of Rs. 5.3 bn is entailed for the expansion. The company is also augmenting its distillery capacity at Balrampur unit to 160 KLPD from 100 KLPD and is further implementing a 100 KLPD unit at Mankapur.

What to expect?
At Rs 91, the stock is trailing at 10.3 times its trailing 12-months earnings. We are enthused by the consistent strong performance from the company and believe that the slated expansion in capacity will drive volumes going forward. Also, the integrated co-generation and distillery strategy will help the company to diversify its revenues. With the upturn in the sugar industry likely to continue for atleast the next two years, we expect the company to deliver on its promises in the future.

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