The Hindu Business Line : Balrampur Chini: Buy (High Risk)

IMPROVING prospects for the sugar business have led to a sharp uptrend in the Balrampur Chini stock over the past four months, with the stock appreciating by nearly 50 per cent to Rs 165 levels. However, investors with an appetite for risk can still consider investments in the Balrampur Chini stock, as it has the potential to deliver reasonable capital appreciation over a three-year time-frame.

The sizeable crushing capacity (of 25,000 tonnes per day) has put Balrampur Chini in a strong position to thrive in a decontrolled scenario. Size will help it capitalise on export opportunities and negotiate with buyers for supply of downstream products such as ethanol and power. Over the past couple of years, the policy environment for sugar has turned more favourable. The government has reduced the levy quota for sugar mills, imposed protective tariffs against cheap imports and opened up avenues for liquidation of surplus cane stocks, by allowing blending of ethanol (a by-product) with petrol.

Balrampur Chini Mills has delivered modest financial performance both in 2002-03 and in the first quarter of 2003-04. This was largely on account of a fairly sharp decline in open market sugar prices and higher cane prices announced by the states. The outlook for the remaining part of the year 2003-04 appears better on three counts.

With the government tightening the release mechanism (which regulates the supply of sugar in the open market), sugar prices have firmed up quite significantly in the July-September 2003 period.

The government has recently announced a `package' for units located in five states (including Uttar Pradesh), which will compensate each unit for excess cane prices paid over and above the Statutory Minimum Price for cane (announced by the Centre). This may bring only temporary relief to players, as cane prices announced for 2003-04 are around 5 per cent higher than the cane prices paid for the preceding season. But it will certainly bring in one-time cash flows and ensure good cane availability in the ensuing sugar season (November-May).

Balrampur Chini has made substantial investments (funded mainly by debt and accruals) in setting up a greenfield sugar project at Haidergarh (4,000 tcd) in UP with power cogeneration facilities and a downstream ethanol unit. These will begin making a substantial contribution from the 2003 crushing season. The additional revenues from these sources may help compensate for the increase in costs on account of higher cane prices and brand-building expenses (because of forays into branded sugar and alcoholic beverages).

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