Balrampur Chini: Good Crushing Season
|Date||Tipwala Reco||Timeframe||CMP||Target||Exit Decision|
|23-Dec-2016||Buy Balrampur||6 Months||Rs. 119||Rs. 160||Time Frame or Target|
Company Background: Balrampur Chini Mills Ltd is an Uttar Pradesh based integrated sugar manufacturing company with 10 manufacturing unit over the state. It is the second largest sugar manufacturer and largest ethanol manufacturer in India. From being a pure sugar manufacturer, Balrampur has partially de-risked the business model with manufacturing of ethanol and selling power with the help of a co-generation plant.
Why Buying Balrampur Chini at current levels?
1. Early Crushing Period Along With Better Recovery: The 2016-17 crushing season has started earlier in UP due to good monsoon and early harvest of sugarcane in the region. Sugar prices are on the rise and will thereby help the company to monetise sugar at good rates. In addition to early crushing season, the sugar recovery in the region has also substantially improved from 9.83% in FY15 to 11.06% in FY16 and a similar gain is expected in this year too. Better yield along with better prices of Sugar will help the company very well.
2. Huge Inventory Benefit: As on 2QFY17, sugar inventory stands at 17.84 lakhs quintal at cost of Rs. 27.5 per kg. The current price of sugar is much higher at in the range of Rs. 35-36 per kg. The upcoming results will see a sharp jump in due to inventory gains and thereby generate handsome profits for the company.
3. Value Addition from By-Product: Minimum Sale Price of Sugarcane is fixed by government whereas sale price of sugar is market determined and remains quite volatile depending upon market cycle. Due to this, it is very difficult to predict the profits for a Sugar company. For the same reason, the company has been able to generate alternate sources of revenues through sale of power and manufacturing of ethanol:
- Ethanol & Industrial alcohol: During FY16, Company has utilised 87% of its distillery capacity towards ethanol production. Company plans to utilise its 100% of expanded distillery capacity by FY17 to produce ethanol. This will use its entire production of molasses for ethanol production. Ethanol is comparatively a high margin business than industrial alcohol and thereby help improve profitability of the company. During FY16, company has expanded its distillery capacity which will help the company to increase working days from 270 to 330 in a year.
- Co-Generation: Company had taken a constructive measure to consume entire bagasse for power generation by installing 247 MW power plants across 8 units. Out of this, 153.2 MW are sold to State Electricity Grid and balance is utilised for self-consumption. Recently the company has also increased power capacity by 9MW.
4. Debt Reduction: Company has already reduced its long term debt by Rs.410crs in H1FY17 and plans to reduce further by Rs. 40 crores in H2FY17. As of 2QFY17, the total long term borrowings stand at Rs. 267 crores with no cane arrears to farmers. By the year end, Long term borrowing will stand on Rs. 227 crores out of which Rs. 149 crores is an interest free loan under SEFASU. All this will help the company to reduce interest cost much better.
SEFASU: Scheme for Extending Financial Assistance to Sugar Undertaking / SDF: Sugar Development Fund
5. Proposed Buyback at Large Premium: The Company has recently proposed a Buy Back of 1 crores equity shares of the company @ Rs. 175 per share under tender offer system. The success of buyback will further improve earnings per share (EPS) and return ratio of the company.
1. Sugar sector is highly vulnerable to political intervention
2. Seasonal factor/ Poor monsoon
3. Increase in Regulatory price (State Advised Price) of Sugarcane by Uttar Pradesh Government. However, it will not affect much due to strong prevailing sugar price
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