Home / Markets / Mark To Market /  As Balrampur Chini rides the ethanol wave, investors should tread with caution

A sharp turnaround in fortunes of sugar producer Balrampur Chini Mills Ltd is resulting in sweet profits for its investors. The stock has delivered returns of more than 53% so far in 2019.

Sugar firms have always been heavily dependent on the sweetener’s production and the vagaries of the sugar cycle. But thanks to the government’s National Policy on Biofuels, sugar producers are increasingly looking at raising ethanol production to generate revenues.

In the March quarter, Balrampur Chini Mills’ sugar segment’s revenue grew 22% to 1,266 crore, on the back of higher volumes and steady realizations. In February, the government raised the minimum support price for sugar to 31/kg. Note that the company’s average realizations stood at about 31.50/kg in the March quarter, around the same levels as a year ago.

Additionally, the distillery business saw revenue increase 45% year-on-year to 113 crore in the March quarter. About 24 million litres of ethanol was sold at an average price of 43.76/litre during the fourth quarter.

Analysts point out that ethanol production is more profitable for sugar producers as it is produced from molasses, a byproduct in sugar production. As a result, the contribution to profits becomes significant. The distillery segment’s Ebit (earnings before interest and tax) stood at 88 crore, up from 29 crore in the year-ago period. In comparison, the sugar segment reported an Ebit of 79 crore in the March quarter, compared to a loss in the year-ago period.

“With a shift in focus of the government towards higher ethanol blending and increase in procurement prices, ethanol business has proved to be a boon for the sugar producers in a period of ample supply," Edelweiss Broking Ltd’s professional investor research arm said in a note to clients.

All this has helped Balrampur Chini Mills post a positive Ebitda (Ebit plus depreciation, and amortization) of 258 crore in the March quarter as against a loss of 8 crore last year. Net profit increased to 286 crore in Q4 FY19 against a loss of 43 crore in Q4 FY18. .

To further capture some of the opportunity in the ethanol blending space, the company is expanding its distillery capacity.

But as is more often the case nowadays, the Balrampur Chini Mills stock’s performance over the past few months suggests it has priced in much of the growth. Besides, the government’s policies on sugar pricing could change, posing a risk to sugar realizations. And besides, last year’s sugar inventory overhang is not completely out of the way.

In short, the cyclicality aspect of the sugar business cannot be wished away. All this means that investors must not get carried away by the recent returns of sugar stocks such as Balrampur Chini Mills.

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