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Balrampur Chini: Bitter quarter! - Views on News from Equitymaster

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Balrampur Chini: Bitter quarter!
Nov 29, 2006

Performance summary
Sugar major, Balrampur Chini (BCML) recently announced its results for the last quarter and full year ended September 2006. The audited figures for the current fiscal are for 18 months (the company having altered its financial year) and hence not comparable with those of the previous year. For the full year, the company recorded a topline growth of 133.6% YoY. The bottomline for the year was up 133% YoY. The management has recommended a final dividend of Rs 1.5 per equity share (dividend yield of 1.8%)

Rs(m) Jul- Sept05 Jul- Sept06 (%) Change FY05 FY06* (%) Change
Gross sales 3,015 4,062 34.7% 9,296 19,898 114.0%
Less: Excise duty 139 179 29.0% 1,169 914 -21.8%
Net sales 2,876 3,882 35.0% 8,127 18,984 133.6%
Expenditure 2,315 3,292 42.2% 5,732 14,388 151.0%
Operating profit (EBDITA) 560 590 5.3% 2,395 4,597 91.9%
EBDITA margin (%) 19.5% 15.2%   29.5% 24.2%  
Other income 4 20 466.7% 29 68 132.0%
Interest 37 70 87.7% 189 345 82.3%
Depreciation 86 144 66.8% 373 671 80.0%
Profit before tax 440 397 -9.9% 1,862 3,649 95.9%
Extraordinary income/(expense)     - 223   -
Tax 94 75 -20.7% 389 733 88.7%
Profit after tax/(loss) 346 322 -7.0% 1,251 2,916 133.1%
Net profit margin (%) 12.0% 8.3%   15.4% 15.4%  
No. of shares (m) 231.8 248.2   231.8 248.2  
Diluted earnings per share (Rs)         11.7 1.8%
Price to earnings ratio (x)         7.1  
* FY06 results are for 18 months as acounting year changed to Sept. Hence not comparable

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?
Topline: For the quarter, BCML recorded a topline growth of 35% YoY primarily driven by stable growth witnessed in sugar and distillery operation combined with robust contribution from cogeneration businesses.

Segment wise performance
Rs m Jul- Sept05 Jul- Sept06 (%) Change FY05 FY06 (%) Change
Sugar 2,768 3,815 37.8% 7,361 18,262 148.1%
% of total revenues 89.7% 90.5%   73.5% 86.8%  
Distillery 253 215 -15.1% 2,058 1,469 -28.7%
% of total revenues 8.2% 5.1%   20.6% 7.0%  
Cogeneration 62 182 194.5% 576 1,273 121.0%
% of total revenues 2.0% 4.3%   5.8% 6.1%  
Others 2 4 146.7% 17 30 75.9%
% of total revenues 0.0% 0.1%   0.2% 0.1%  
Total revenues 3,085 4,216   10,013 21,032  

Sugar division: The sugar segment reported an increase of 38% YoY in revenues on back of enhanced capacity leading to higher volumes. The volumes for this quarter were 0.20 MT as compared to 0.15 MT in the corresponding quarter last year. On a YoY basis, the sugar realisations were up 4% at Rs 1,764 per quintal. The contribution from the sugar segment to the total revenue increased to 91% as compared to 89% in FY05.

Distillery division: Revenues from distillery witnessed decline of 15% YoY on account of lower average realizations and reduced off take of distillery products. However, recent directive issued to oil marketing companies to blend ethanol with petrol to the extent of 5% across India and the revision of ethanol prices to Rs. 21.5 per liter from Rs. 18.75 per liter - should improve the performance of this business in the long run.

Cogeneration segment: This segment was a surprise with a 194% YoY increase in the revenues for the quarter. This robust performance can be mainly attributed to higher production of power. The company’s facilities were operated for additional number of days owing to better availability of bagasse and increased scale crushing in 2005-2006 season besides transfer of bagasse between factories. The company produced 51.5 m units during the quarter as compared to 22 m units in the previous quarter. BCML sold 38 m units of power to UPPCL (Uttar Pradesh Power Corporation Ltd.) at the rate of Rs 2.9 per unit. The contribution from the segment doubled as compared the same quarter last year.

Rs m Jul- Sept05 Jul- Sept06 (%) Change FY05 FY06 (%) Change
Raw Material 2,066 2,944 42.5% 4,341 12,191 180.8%
% of sales 71.8% 75.8%   53.4% 64.2%  
Staff cost 88 131 49.0% 350 666 90.4%
% of sales 3.1% 3.4%   4.3% 3.5%  
Other expenditure 161 217 34.4% 1,041 1,531 47.0%
% of sales 5.6% 5.6%   12.8% 8.1%  

Bitter margins: The operating margins declined by 430 basis points in the quarter. The main culprit for the decline was the higher raw material cost, which increased from 72% (as a % of sales) in September quarter of FY05 to 76% in this quarter. Sugar EBIT in FY06 declined by 8.3% YoY on account of lower realizations. Distillery revenues declined on account of lower offtake of the products. The EBIT of the cogen division increased by 720% YoY during the quarter due to higher volumes and realisations.

Rs m Jul- Sept05 Jul- Sept06 (%) Change FY05 FY06 (%) Change
Sugar 435 399 -8.3% 1,306 3,245 148.5%
% of total PBIT 15.7% 10.5%   17.7% 17.8%  
Distillery 67 57 -14.6% 346 386 11.4%
% of total PBIT 26.4% 26.6%   16.8% 26.3%  
Cogeneration 7 61 720.3% 269 586 118.2%
% of total PBIT 12.0% 33.4%   46.7% 46.1%  
Others (0) (2) 700.0% 2 (2) -246.7%
% of total PBIT -20.0% -64.9%   8.8% -7.4%  

Decline in net profits:For the quarter, the company witnessed a decline in the net profits. Lower operating margins combined with higher interest and depreciation cost led to lower net margins. The fall would have been more, but for the higher other income and lower tax outgo.

Capacity expansions: The company has lined up expansion plans for the next season. It will be expanding its capacities in Kumbhi and Gularia (UP) by 8,000 TCD each, which will coming up next year. It is also in the process of completing the open offer for Indo-Gulf, which has a 3,000 TCD factory. This will augment BCML’s capacity to 75,000 by the next (2007-08) crushing season. Last season, it crushed 47,000 TCD of cane and expects the crushing to be around 54,000 TCD this season. On the distillery front, form the current capacity of 220 KLPD, the capacity will go up to 320 KLPD. BCML’s saleable power would move up almost to 120 MW from 58 MW currently. Therefore, there will be expansion across all business segments highlighting the company’s strategy to follow an integrated model.

What to expect?
The stock is trading at 7.1 times its 12 month trailing earnings. This year, the expected sugar production is higher at about 23 million tonnes (MT). With consumption around 19.5 MT, surplus is expected in the country. Also, the government owing to its desire to curb inflation in the month of June and July had banned exports on sugar. This also coincided with a drop in international prices, and represented a lost opportunity in the hands of the industry, which could have exported sugar at a higher price. Going ahead, the sugar prices are expected to remain a little subdued owing to the higher domestic production as well as the international prices remaining at lower levels. However, the raw material prices are expected to rise going forward. This will affect the margins of the company.

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