Limited upside for Balrampur Chini from here on

May see better volumes, but limited upside on realisations will keep its shares under check

In the past two years, the Balrampur Chini Mills stock has surged 4.4 times with a favourable turn in the sugar cycle and consequently improving profitability for the company, which is one of the key players in the domestic sugar industry. The June quarter (Q1) performance stands as testimony to the improving financials. Operating income at Rs 1,078.3 crore, for instance, grew 27.4 per cent year-on-year (y-o-y) and 37 per cent sequentially. Operating profit at Rs 207 crore grew 11.3 per cent, despite expenses growing almost by half. Net profit grew 8.4 per cent, despite the quarter being an off season and power co-generation segment performance being soft. Sugar segment sales volume grew 30 per cent y-o-y and realisations were up six per cent. 

However, within sugar, the better realisations continued to boost the company’s profitability. Sugar prices have consistently moved up in the past two years as demand-supply balance turned favourable. The sugar production in sugar year 2017 (SY17) — the season is from October to September — is likely to be close to 20.2 million tonnes (mt) as indicated by the Indian Sugar Mills Association’s (ISMA’s) earlier projection, much lower than 25-26 mt in SY16. Sugar consumption has continued to remain close to 25 mt-levels. Thus, carry-over sugar stock or buffer at the end of each sugar year continued to decline. In fact, this had forced the government to allow some imports to maintain demand-supply balance and sugar prices.

However, given the changing supply scenario, Monday’s four per cent rise, taking total gains to over 18 per cent in the past two months, may look difficult to justify. 

For one, India’s sugar production is seen improving; the decline in the previous year was due to lower sugarcane acreage in Maharashtra, the largest state in terms of output. The state is now seeing 60-90 per cent improvement in sugarcane acreage with better monsoon, say analysts. The production in UP, India’s second largest cane producer, too might rise. Thus, sugar production in SY18 is seen touching 25 mt, which will cap prices.

On the other hand, sugarcane prices are also on the rise. The government has already increased fair and remunerative price (FRP) of sugarcane by about 11 per cent (Rs 25 per quintal to Rs 255 per quintal) for SY18. UP already had state administered price (SAP) of Rs 305-315 a quintal for sugarcane in SY17 and its stand on SAP in SY18 is awaited.

The company, however, has maintained a bullish outlook to analysts after the Q1 results. Analysts at JM Financial say they estimate profitability to remain steady for the second consecutive year on account of higher cane crushing volume (up 12 per cent y-o-y to 9 mt) boosting sugar and other related segments’ performance, higher recovery rate on account of a higher proportion of “early variety” (from 40 to 60 per cent, according to the company) and stable sugar prices (on existing tight inventories). Nevertheless, they maintain ‘hold’ rating on the stock and says the upside looks capped due to an increase in acreage in Maharashtra.