Marginal imports (~23% of expected production) paired with a 14% rise in sugar production will not suffice to counter the fall in Balrampur Chini Mills’ (BCML) inventories in SY10.
Low volumes will rein in profit growth at 23.2% to Rs2.8 billion. However, de-leveraging of the balance sheet and improving return ratios offer some insulation.
Although BCML may not be able to capitalize on the anticipated escalation in sugar price in the near term (due to its lower sales volumes), the company delivers stronger return ratios than its peers and has a comfortably leveraged balance sheet (0.4x in SY10 versus 0.8x in SY05). These factors will cushion its performance in the medium term.
We have valued BCML at 15% discount to its historical P/E during the second year of the previous sugar upcycle, which stretched from SY04 to SY06. During the last uptrend, the stock was trading at a P/E of 13.5–14x one-year forward earnings in SY05.
Although the company will have much lower earnings growth (primarily due to lower volumes), its lower leverage and higher return ratios as compared to peers offers comfort in the medium term. We value the stock at a P/E of 12x on FY10E, leading to a target price of Rs133. We initiate coverage on BCML with a HOLD rating.