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Balrampur Chini: Policy pressure - Views on News from Equitymaster
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Balrampur Chini: Policy pressure
Aug 24, 2007

Performance summary
  • BCML records a topline decline of 7% YoY for 3QFY07 driven by poor performance of its sugar division. The division records a 12% YoY fall.

  • While the distillery operations of the company reports a strong growth of 73% YoY during the quarter, the cogeneration division grows by 94% YoY.

  • BCML continues to face pressure on the margins front. Higher growth in the expenses than the revenues leads to a 116% YoY fall in the operating profits for 3QFY07.

  • For the quarter, the company witnesses a 172% YoY decline in net profits.

Rs(m) 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Gross sales 4,123 3,920 -4.9% 10,613 11,653 9.8%
Less: Excise duty 191 267 39.4% 491 660 34.4%
Net sales 3,932 3,653 -7.1% 10,122 10,993 8.6%
Expenditure 2,869 3,821 33.2% 7,310 10,087 38.0%
Operating profit (EBDITA) 1,063 (168) -115.8% 2,812 906 -67.8%
EBDITA margin (%) 27.0% -4.6%   27.8% 8.2%  
Other income 7 22 210.0% 35 61 70.9%
Interest 96 207 116.5% 189 413 117.8%
Depreciation 138 205 49.0% 355 570 60.5%
Profit before tax 837 (559) -166.8% 2,303 (16) -100.7%
Tax 182 -86 -147.1% 456 65.5 -85.6%
Profit after tax/(loss) 654 (473) -172.3% 1,847 (82) -104.4%
Net profit margin (%) 16.6% -13.0%   18.2% -0.7%  
No. of shares (m) 248.8 248.2   248.2 248.2  
Diluted earnings per share (Rs)*         1.0  
Price to earnings ratio (x)*         52.7  
* 12 month trailing earnings

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 64,500 TCD (tonnes crushed per day), distillery and power operations of 320 KLPD (kilo litres per day) and 86 MW (saleable) respectively.

What drove the performance for 3QFY07?
Not at all sweet: BCML recorded a topline decline of 7% YoY for 3QFY07 driven by poor performance of its sugar division. The division recorded a 12% YoY fall in the revenues leading to its contribution to the total revenues go down from 86% in 3QFY06 to 75% in this quarter. Sugar production was higher by 93.5% YoY to 2.1 m quintals, primarily due to augmented capacities leading to higher sales volumes. However, average recoveries were at 9.45% as compared to 10.77% in 3QFY06. Also, the average sugar realizations were lower at Rs. 1,340 per quintal from Rs 1,867 per quintal in the corresponding quarter last year. The company is expanding its crushing capacity to 73,000 TCD by beginning of the next season. This would lead to higher volumes going forward. However realisations are expected to remain under pressure.

Segment wise performance

Rs m 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Sugar 3,732 3,291 -11.8% 9,812 10,248 4.4%
% of total revenues 86.1% 75.1%   86.0% 78.1%  
Distillery 329 568 72.9% 748 1,289 72.4%
% of total revenues 7.6% 13.0%   6.6% 9.8%  
Cogeneration 269 521 93.8% 827 1,561 88.8%
% of total revenues 6.2% 11.9%   7.2% 11.9%  
Others 4 2 -43.2% 22 17 -20.5%
% of total revenues 0.1% 0.0%   0.2% 0.1%  
Total revenues 4,333 4,383   11,408 13,115  

The contribution from power and distillery, up to a certain extent, did help the company to sail through the rough waters. While the distillery operations of the company recorded strong growth of 73% YoY during the quarter, the cogeneration division grew by 94% YoY. Distillery operations reported 202 % growth in production due to higher off-take and capacity enhancement The company expects the revenues to improve due to additional 100 KLPD capacity at Mankapur To be commissioned by April 2008. Average realization on ethanol was Rs. 18.7 per liter. Co-generation segment generated 186 m units as compared to 97 m units, an increase of 92.1% YoY. Additional 23 MW of capacity was added in the quarter under review. BCML sold surplus power generated to the state grid at an average price of Rs. 2.93 per unit. By 1Q FY08, it would have an aggregate capacity of 181 MW (Saleable: 126 MW), which should help the company report strong growth in revenues from this segment.

Rs m 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Raw Material 2,499 3,310 32.4% 5,955 8,180 37.4%
% of sales 63.6% 90.6%   58.8% 74.4%  
Staff cost 122 179 46.6% 371 566 52.6%
% of sales 3.1% 4.9%   3.7% 5.1%  
Other expenditure 248 332 33.9% 985 1,341 36.1%
% of sales 6.3% 9.1%   9.7% 12.2%  

SAP worries: BCML continued to face pressure on the margins front. Higher growth in the expenses than the revenues led to a 116% YoY fall in the operating profits for 3QFY07. Raw material is 70% of the total cost for a sugar company. In Uttar Pradesh the sugar companies have to pay Rs 125 per quintal (last year it Was Rs 115 per quintal). With sugar realisations being below the cost of production the companies are facing losses. The government interference regarding the state advised sugar cane price (SAP) is causing maximum problems. The state government has power to fix prices and as long as the UP Government or probably the governments in North India decide to do it, the sugar companies would continue facing pressure on margins. On the PBIT front, though distillery and cogeneration segments have been the saving grace, the sugar segment PBIT are down 195% YoY for 3QFY07.

PBIT

Rs m 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Sugar 785 (744) -194.8% 2,061 (615) -129.8%
% of total PBIT 21.0% -22.6%   21.0% -6.0%  
Distillery 66 160 141.2% 151 404 167.1%
% of total PBIT 20.2% 28.2%   20.2% 31.3%  
Cogeneration 125 274 118.7% 404 749 85.2%
% of total PBIT 46.5% 52.5%   48.9% 48.0%  
Others 0 (1) -466.7% 1 (1) -150.0%

Losses continue: The sector woes continue to affect the performance of the company. Higher operating expenses and lower revenue growth have aggravated the losses for the company. For the quarter, the company witnessed a 172% YoY decline in net profits. Further, higher depreciation cost by 49 % YoY primarily due to commissioning of greenfield capacity and 117% YoY rise in the interest cost owing to increased capacities as well as higher working capital requirement added to the fury. With the dynamics of the sector having reversed, sugar realisations have come down from Rs18 per kg to Rs 13 per kg. Also, the sugar companies are paying a higher cane price by Rs10 as compared to last year. Till the raw material prices are not aligned to the realisations, BCML would continue facing losses.

What to expect?
At Rs 51, the stock is trading at 52.7 times its 12 month trailing earnings. The company’s integrated model has yet again provided some grace to the bitter performance of the sugar division. The company is also augmenting its capacities, which would lead to higher volumes. However, the sector as a whole is facing tough times due to factors like higher production, lower prices and government regulations. India in the midst of an over supply zone. Further, even more of an over supply is expected next year. This might lead to excess inventory burden, which would further dampen the prices. Low realisations combined with higher cane prices would continue to pressurise the performance. Also, on increasing the offtake of ethanol, no progress has yet been made, which would act as a saver going forward. Even the exports is not very attractive as India till now, had never exported sugar on a large scale and this would act as further dampener in the global markets. Hence, till the government does not come out with suitable policies in terms of raw material prices and subsidies, bad times would continue for the sugar companies.

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