Balrampur Chini Mills - uncertainty continues; result update Q1FY08

Balrampur Chini Mills (BRCM IN, INR 89, Under Review)

Balrampur Chini Mills’ (BRCM) Q1FY08 loss of INR 0.6 mn disappointed us, given the recent improvement in sugar realisations across the board for UP sugar millers. Higher-than-expected production costs in the sugar segment primarily explain the loss. Q1FY08 revenues, at INR 4.2 bn, up 27% Y-o-Y, were in line with estimates, led by volume growth across all business segments. Despite improving sugar outlook, we are holding onto our full year estimates owing to lack of clarity on various pending litigations. In the interim, we are withholding our recommendation and we will re-look the same post the Supreme Court judgement on cane pricing, which is likely to be out on February 12, 2008.

Sugar losses pared; co-products boost operating profits
BRCM’s revenue grew 27% Y-o-Y to INR 4.3 bn led by growth across segments. Distillery revenues grew 59% Y-o-Y to INR 350 mn, while both sugar and cogen reported ~ 20% Y-o-Y growth. Disappointing performance from the sugar segment (~ 80% of Q1FY08 revenues), which reported ~ 4.8% EBIT losses, severely impacted BRCM’s profitability. However, the performance of co-products continues to remain encouraging, with both distillery and cogen reporting 40% plus operating margins. While EBITDA margins for the quarter halved to 7.8%, EBITDA fell ~ 36% Y-o-Y to INR 332 mn. Due to operating disappointment of the sugar segment, BRCM’s Q1FY08 loss stood at INR 0.6 mn.

Cane pricing uncertainty continues; Supreme Court intervenes
The Supreme Court, on January 18, 2008, quashed the Allahabad High Court ruling dated December 19, 2007, and put on hold the process initiated on re-working of SAP for sugar season 2007 and 2008. In our view, if the revised SAP (Supreme Court hearing on February 12, 2008) is based on lines of SMP, it would be a big catalyst reviving the sugar sector with UP going through a complete transformation from a highly regulated to a relatively market-driven industry. However, given the sensitive nature of UP politics, balancing expectations of the large farmer base and the struggling sugar industry is going to be a herculean task.

Outlook and valuations: SC judgement holds the key

Over the past month, sugar realizations have improved by ~ INR 1,500/tonne. Although we expect these realizations to marginally soften over the next three quarters, as full fledged production for SS08 hits markets, BRCM’s integrated model is likely to help it post profits in FY08E. Despite improving sugar outlook, we are holding onto our full year estimates owing to lack of clarity on various pending litigations. In the interim, we are withholding our recommendation and we will re-look the same post the Supreme Court judgement on cane pricing, which is likely to be out on February 12, 2008.