Hold Balrampur Chini

Balrampur Chini
Hold
Price: Rs 126 Target Price (Sep’10): Rs122

4QFY09 results lower than estimates

* 4Q09 profits significantly below our estimates-Balrampur Chini’s
(BCML’s) 4QFY09 net profit of Rs388mn, up 544%YoY, was significantly
lower than our estimate of Rs680mn. This was mainly due to (a) lower
sugar volumes and realisation and (b) lower co-generation and distillery
sales than estimates. However, this was partially off-set by tax write backs
of Rs130mn pertaining to FY02-05. While sales of Rs3.89bn were 14%
lower than our estimates, EBITDA came in at Rs0.75bn vs. our estimate of
Rs1.43bn. Lower EBITDA was due to ~9% lower sugar volumes and
realisation than estimates. Management acknowledged lower realisation in
sugar was on account of poor timing of sales. While we are not concerned
about lower sugar sales volume as sugar prices have moved up in 1Q10,
(thus leading to inventory gains), lower realisation still remains a concern.

* Raise our estimates by 11-2% for FY10/11E led by higher sugar
realisation– We raise our FY10 profit estimate by 11% to Rs3.65bn on the
back of higher sugar realisation, raw sugar and co-generation volumes. We
raise our blended sugar realisation assumption by 4% to Rs30.8/kg, in line
with management guidance. We believe our landed cane cost assumption
of Rs215/quintal (vs. current cost of Rs200/quintal) for FY10E seem
reasonable as strong sugar realisation and intense competition among
players would lead to higher cane prices as the season progresses. We
increase our raw sugar volume estimate to 1.2lt (lakh tonnes) from earlier
0.85lt as management guides additional imports of raw sugar in FY10E. We
raise our FY11E earnings by 2% to reflect higher sugar realisation.

* Coal based power contribution may not be significant- Based on
management guidance, we assume 100-80mn units of coal based power in
FY10/11E respectively. However, given high coal (BCML is yet to identify
sources for coal) and in-land transport costs and stable realisation, we
believe coal based co-generation may not be significantly profitable. While
we continue to believe that co-generation (coal and bagasse based
together) provides stability throughout the cycle, we think coal based
power will contribute only 2-3% to consolidated EBITDA for FY10/11E.

* Raise target price marginally, maintain Hold– We continue to value
BCML based on 1 year forward up- cycle multiple of 10x FY11EPS of
Rs12.2and arrive at our Sep’10 (rolled forward from Sep’09) target price of
Rs122 (from Rs119 earlier) and hence maintain Hold at current price
(potential downside of 3%). While stock prices may track sugar prices in
near term, we think concerns over the longevity/severity of the cycle and
higher SAP may emerge, thus impacting the valuation multiples. We
believe key risks to our call are sugar/alcohol realisation higher than our
estimates & lower cane prices than our assumptions.