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BCML: Conference call extracts

Dec 7, 2010

We recently attended the 4QFY11 conference call of Balrampur Chini Mills Limited (BCML). The company’s performance has been in line with the industry. The top line grew by 35% YoY on the back of higher sales of sugar. However, the company suffered an operating loss of Rs 254 m as a result of higher raw material prices. Raw material costs increased by 90% YoY during the quarter. As a result of the operating loss, the company’s bottom line was also in the red. BCML made a net loss of Rs 771 m for the fourth quarter.

The key excerpts of the conference call are given hereunder:

Estimated production for next year: BCML has estimated for next year the total sugar production, would not be over 25 m tonnes. This is up from 19 m tonnes produced in 2009-2010. As SAP is Rs 205 per quintal, it may be assumed that production of sugar would be higher. However, it has been noted that when cane crushing carries on till June for the year, sugar cane production for the next year is lower. Given that cane crushing carried on till June this year, sugar cane production is expected to be lower for the current year. Secondly, as result of high cotton prices, farmers in Maharashtra are expected to plant cotton instead of sugar cane. In UP, on the other hand, the company sees a 10% - 15% increase in acreage.While the production was expected to be higher initially, rainfall in September played spoil sport. This as per the company would cap the growth in sugar cane production.

Sugar price outlook: The company is expecting consumption to be around 23 m tonnes. This would result in a marginal surplus of 1.5 m tonnes for the year. With the government allowing the Advance Licence Scheme (ALS) exports and other exports, the surplus is expected to be exhausted. This leads to company to expect a price dip during the season from the current Rs 29 per kg to Rs 27 per kg. The price of sugar is then expected to climb over Rs 30 per kg when the crushing season ends.

Allied business performance: BMCL’s allied businesses are expected to perform well on the back of higher volume of crushing. With increase in raw material available for feed for power generation, the power costs are expected to come down. Moreover, the company has entered into a power purchasing agreement (PPA) with the government. This would give BMCL a double benefit. On the distillation front the company has contracted 60% of its available alcohol. On the other hand 60% of the company’s distillation capacity is geared for producing ethanol. On this front also the company has locked entered into contracts with OMCs and as a result there is price visibility.

Possible upsides: The key to world sugar prices remains Brazil. Brazil is the largest producer of sugar. Asian markets are in a deficit while European Union has only a marginal quantity of excess sugar. With the dry weather in Brazil, the sugar production in the country is expected to be low. This presents a great opportunity for companies like BCML. With higher prices ruling and the government allowing exports, BMCL would be in a position to take advantage of higher international prices.

What we expect?
At a price of Rs 78, the stock is trading at 71.6 times its trailing 12 month earnings. BMCL expects demand for sugar to increase. This would give it room to grow. The company is also bullish on its distillery business as the government has decided to blend fuel with 5% ethanol. In fact this is expected to move up to 10% in future. The company gained the benefit from the conversion of two of its boilers to multi feed during the quarter as is seen from the better performance of the power segment. On the down side, the sugarcane crop this season has been larger than expected due to higher yield per hectare. This is expected to put pressure on prices in the medium term. The company is seeing several triggers for long term growth and expects to benefit from high volumes in the coming year. However, we believe that the stock looks expensive at the current level. For this we would advise investor to be CAUTIOUS on the stock.

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