The Hindu Business Line : Balrampur Chini Mills: Hold

AFTER two years of significant expansion in earnings, sugar companies may record modest earnings growth this financial year. Sugar prices are already beginning to flatten out, with production set to bounce back in the coming season (October-September). This makes it a good time to wind down exposure to the sugar sector.

However, shareholders of Balrampur Chini Mills may continue to hold the stock, as it is among the preferred exposures to the sector and has the potential to deliver double-digit returns over a year.

Though sugar prices may not rise much, the company's sales volumes are set to expand as it commissions new capacities this year. Revenue streams from by-products such as ethanol and power are also set to improve.

Balrampur Chini Mills operates sugarcane crushing capacities of 29,000 tonnes per day in Eastern Uttar Pradesh, with capacity to process 160 kl per day of alcohol and 39.8 MW of power from by-products. It has plans to add another 7,000 tcd unit at Akbarpur by November 2005, which will contribute to revenues in the coming sugar season.

With sugarcane acreage expected to expand sharply this year, the company should be able to scale up its volumes substantially this fiscal.

In contrast to the past two years, when soaring sugar prices contributed to a sharp expansion in the company's profitability, trends in sugar prices may be sedate this year. In 2004-05, Balrampur managed to nearly double its earnings after ramping up sales volumes at prices that were at least 30 per cent higher than the previous year's levels.

But sugar prices, which rose 50 per cent from Rs 1,200 a quintal to Rs 1,900 between June 2003 and January 2005, have cooled off in the recent months to about Rs 1,700. The market has been taking note of the impending recovery in sugar output to about 180 lakh tonnes in the coming sugar season (this may be lower, if the monsoon proves to be erratic).

With this level of production, the market will be tightly balanced with supplies just about adequate to take care of domestic demand. However, the supply situation is far more comfortable than last year and, therefore, sugar prices may rule flat or marginally firmer in the current year.

Balrampur Chini's earnings growth for the current year will thus hinge significantly on the expected improvement in crushing volumes, with an added boost from the new capacities.

The company has recently received a substantial infusion of funds from a rights offering and a private placement of equity with Citicorp, a foreign investor. These will be invested in the capital expansion programme at Akbarpur. Because of the substantial premium at which these funds were placed, the company's equity base has not suffered a significant expansion from this exercise, having gone up from Rs 18.9 crore to Rs 23.2 crore this March-end.

At the current market price of Rs 57, the company's stock price discounts its trailing 12 month earnings by about 10 times. This allows some scope for appreciation in line with earnings growth for this year.

However, investors should note that this valuation is based on numbers at the peak of the sugar cycle. The valuation is unlikely to be sustained once the sugar cycle reverts to a surplus phase. Investors should thus take an active approach to this stock and make profits once target returns of 15-20 per cent are reached.

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