Balrampur Chini Mills Ltd

“Chini” is the Hindi term for sugar and as the name suggests, Balrampur Chini Mills Ltd is the second-largest sugar-producing company in India. In this blog, we will study the important company updates of Balrampur Chini Mills Ltd (BCML).

• BCML posted a weak set of numbers in Q3. Revenue came in at Rs.10,722 mn, which was a 10.3% contraction from the same period last year.
• Earnings before interest, taxes, depreciation and amortization (EBITDA) was down 67%

Y-o-Y at Rs.364 mn with margins falling by more than 500 BPS to 3.4%.

EBITDA is a formula or measure used to analyze a company’s growth and economic performance.

• Profit After Tax (PAT) declined by 69% Y-o-Y to Rs.210 mn with margins contracting by ~380 BPS to 2%. The decline in revenue was primarily due to lower sales volumes.

PAT, as the name suggests, is the profit gained by a firm after paying the entire tax amount.

• The company has sold its Maximum Admissible Export Quota (MAEQ) entitlement; the subsequent lack of exports during the period led to volumes declining by 14.5%.

• Domestic sugar realization was stable at around Rs.32.5/Kg.
• The alcohol segment showed positive growth as expected, with volumes rising by 19% to

2.8 Cr Lit with the blended realization of ~Rs.46/Lit.

• The co-generation segment continues to struggle on the back of low realizations. The exported volume was at 11.31 Cr units with realization at ~Rs.3.2/unit.

Higher Cost of Production Led To Margin Contraction

We experienced some setbacks due to the following factors. One of the important parameters being the higher cost of production. Let us understand more facts in details:

• U.P witnessed lower sugarcane yields due to the spread of disease and adverse weather conditions.
• Advance estimates made by the Indian Sugar Mills Association (ISMA) put the expected sugar production at 10.5 mn tons for 20-21 SS as against 12.4 mn tons in SS 19-20.
• The company’s recovery rate for the quarter was lower at around 10.3% due to higher diversion for ethanol.
• The above factors and lower volumes contributed to a severe contraction in EBITDA margins, we believe this to be a one-time event and margins should normalize for Q4.

Outlook for Sugar Prices is Positive

After all, every business experiences profit and loss. To maintain a balance, there is always a growth and reduction factor involved, and that’s how we learn from the setback experiences. We have analyzed the outlook for the future sugar production is positive with the following pointers:

• ISMA estimates sugar production for SS 20-21 to be around 30.2 mn tons.
• Domestic consumption is predicted to be around 26 mn tons along with 6 mn tons of export already approved.
• The opening balance of sugar stocks is at 10.7 mn tons; with the above data, we can estimate closing stocks to reduce to around 9 mn tons. This should aid the domestic sugar prices and lead to better cash flows for the mills.
• BCML management remains confident in regards to domestic realizations and expects growth from March 2021.

We believe sugar prices can reasonably rise to Rs.34/kg bringing the average realization for the year to around Rs.33/kg.

Valuation and Outlook

We believe that despite weaker than expected numbers in Q3, the long-term outlook for Balrampur Chini remains largely unchanged. Following are the key aspects that we will focus to implement:

• Improving sugar realizations aided by an expected rise in Minimum Support Price (MSP).
• New ethanol capacity is expected to come online by Sept-22 (FY23). The increasing diversion to ethanol will assist the company in keeping inventories low and cash flows consistently.
• The government has announced its plans to achieve 20% ethanol blending in fuels by 2025, reducing the timeline by five years.
• Ethanol is expected to be a key driver for the sugar industry, BCML is well placed to take advantage of such tailwinds.
• We value BCML at 7x FY22 P/E to arrive at a target price of Rs.183 and maintain our “BUY” rating.

Key Risks

Implementing any major project isn’t very hassle-free, there are certainly some risk factors associated with it. For this project, we have analyzed the following key risk factors:

• There is a further delay by the government in increasing the MSP, which will affect the short-term cash flows.
• There is a rise in State Advised Price (SAP) for U.P sugarcane, this would further cause stress to the margins.

Con-call Highlights

Following are the important con-call highlights:

• ISMA early estimates put sugar production at 30.2 mn tons due to a fall in production in UP on account of lower sugarcane yield and the sugar recovery rate.
• Domestic sugar consumption is expected at 26 mn tons, along with exports of 6 mn tons. Closing inventory is expected to decline to around 9 mn tons by the end of the current sugar season.
• Management is confident in the sugar prices and believes it will rise to Rs.34/kg after March-21
• Sugar sales volumes were at 0.27 mn tons down 14.5% Y-o-Y as the company has sold its MAEQ entitlement; management plans to offload the extra stock in the domestic market.
• Sugar realization stood at Rs.32.5/kg, management remains confident in expecting this to rise (~Rs.34) as inventories continue to fall.
• Distillery volumes were at 2.8 Cr lit, up 19% Y-o-Y. The blended realization was around Rs.46/lit.
• Management expects to do around 16.5 Cr lit of alcohol sales for FY21, and 17-18 Cr lit for FY23.
• B-ethanol made up around 35% of sales, while C-ethanol constituted around 52% of total alcohol sales.
• Management expects the new 320 Kl/day distillery capacity to come online at the end of sugar season 21-22 (Sept-22). This new unit will utilize the direct sugarcane to the ethanol process.
• The company generated 20.2 Cr units of power in Q3 of which 11.3 Cr units were exported. The average realization per unit was at ~Rs.3.2.
• The current inventory level is at 0.21 mn tons down from 0.44 mn tons. The current inventory is valued at Rs.31.5.
• Management has indicated that their cost of production has increased to ~Rs.31/kg without considering any further price rises for sugarcane.
• The global prices are pegged at Rs.29-30/kg without considering the export subsidy approved by the government.