Balrampur Chini Mills: Hold/Buy on declines

Recommendation: Hold/Buy on declines

B. Krishnakumar

The company would figure at the top end in the list of efficient sugar producers.

The company has consistently expanded its capacity, which has helped it remain afloat even amidst adverse business environment that prevailed from 1995-96 to 1999-2000. During this period, the company's performance was affected by the spurt in imports and the rather soft trend in sugar price in the international market.

Unlike other sugar majors, such as Dhampur or Bajaj Hindustan, Balrampur has refrained from diversifying. The company has used the lean phase to expand capacity. The capacity of the existing units at Balrampur and Babhnan and the recently-acquired Tulsipur Sugar has been expanded.

All production units of the company are located in the sugarcane-rich UP. This gives the company a distinct advantage in terms of cane availability and proximity to the source of raw material. With the merger of the recently-acquired Tulsipur Sugars, Balrampur has the capacity to crush 20,500 tonnes of sugar per day.

Financially, the unusually heavy rains and the resultant flood in 1998-99 affected the company's performance. The recovery rate, as a result, declined sharply to 9.26 per cent (9.87 per cent) at the Balrampur factory and 9.65 per cent (10.44 per cent) at the Babhnan factory. Apart from the decline in the recovery rate, the company also had to contend with a decline in the quantity of cane crushed in 1998-99.

The above factors coupled with a surge in sugar imports (which was put under the OGL) on account of a soft trend in international sugar prices dampened domestic prices. As a result, the performance was affected in the recent years.

However, the subsequent policy changes and the firm trend in international and domestic sugar prices has had a positive impact on the company's performance. The import duty on sugar was hiked to 60 per cent and restrictions were imposed on the distribution and sale of imported sugar in the domestic market.

These factors have checked the threat from imports. In the meantime, the company has also turned aggressive on export. Balrampur has tapped the Bangladesh, Sri Lanka and Pakistan markets and also managed to crush higher quantity of cane in the 1999-2000 season.

The positive impact of these factors is reflected in the performance for the fist half of this fiscal. The turnover improved 83.7 per cent to Rs 270.55 crore and the post-tax earnings rose five-fold to Rs 22.33 crore from Rs 4.10 crore.

Given that the sugar prices are likely to remain rangebound at current levels, the growth in earnings will have to come from increased volumes. Realising this, the company is set to commission expanded capacities. The Babhnan unit's capacity is planned to be raised to 8,000 tonnes from 5,000 tonnes; Tulsipur's to 6,000 tonnes and Balrampur's to 11,000 tonnes from 10,000 tonnes.

With capacity expansion in place, the company appears set to sustain the impressive performance recorded in the first half of this fiscal. Given the strong fundamentals and the recent capacity build-up, Balrampur would be among the major beneficiaries when the sugar industry is fully decontrolled and delincensed. Long-term investors can use price declines to pick up exposures in the company's stock.