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Aarati Krishnan

Mr Vivek Saraogi, MD, Balrampur Chini Mills... Cane availability, prices may be the key risks.

RISING sugar prices and contributions from new facilities have helped Balrampur Chini Mills (BCML) turn in impressive numbers for 2003-04. After a sharp fall from Rs 440 levels, the BCML stock price has now edged up to Rs 302 and trades at a price-earnings multiple of about 10 times its 2003-04 earnings.

The sharp drop in sugar output for the coming season points to firm sugar prices in the current year and this could result in robust profitability for players such as BCML, as they liquidate accumulated inventories of sugar at lucrative prices.

But the possibility of a spike in cane prices after the recent Supreme Court order and the likely drop in cane availability, are the key risks to the company's earnings performance over the medium term. Investors with an appetite for risk can hold on to the stock for the present. Fresh exposures may be avoided until there is clarity on the cane pricing issue.

Prices, by-products drive profits: BCML's sales for 2003-04 rose about 28 per cent, to Rs 853.8 crore, driven both by higher crushing volumes and better realisations. BCML commissioned a new 4,000 tonne per day (tcd) sugar unit at Haidergarh in November 2003. This, along with its power cogeneration facilities, had a significant role in ramping up revenues this year.

While sales spurted 28 per cent, BCML's profits nearly doubled in 2003-04, from Rs 29.5 crore to Rs 60.5 crore, on account of two factors.

First, over the past four months, sugar prices have ruled about 20 per cent higher than last year, on expectations that a sharp drop in cane and sugar output for the next two seasons will draw down the surplus stocks of sugar accumulated over the past three years. This is likely to have filtered straight down to BCML's bottomline.

Second, by-products from sugar processing, such as ethanol and cogeneration, contributed Rs 35.5 crore to BCML's profits in 2003-04, against just Rs 12.2 crore last year. This was a third of BCML's profits before tax.

Risks from Court order: Going forward, BCML may continue its strong sales and profit growth at least over the next two quarters, as it liquidates its accumulated sugar inventories into a market where prices are quite lucrative. This could help BCML tide over the sharp drop in cane availability this fiscal. Higher sugar prices may also offset a drop in profit contribution from by-products such as co-generated power and ethanol, which is likely if cane availability is a problem.

A more material risk for BCML, as for other mills located in Uttar Pradesh, arises from the recent Supreme Court ruling, which upholds the State government's right to fix cane prices, at a premium to the Centre-announced Statutory Minimum Price.

Even if this move is not applied with retrospective effect, it could have a bearing on future procurement costs for mills such as BCML and contribute to pressure on profitability. At present, with a review petition against this decision filed before the Court, it is not clear if BCML will indeed have to contend with State-determined cane prices in future. Investors will need to watch for developments on this front, and review their investment decision based on it.

Another factor, though less important, which could have a bearing on BCML's profit growth at the per share level, is the equity dilution likely from its proposed rights offer.

The rights offer, which is being made to finance working capital requirements, is likely to take BCML's equity base from Rs 18.9 crore to Rs 21.2 crore and will prevent profit growth from percolating directly to earnings per share. But this is not a significant expansion given the company's earnings growth prospects, so it need not weigh against an investment decision.

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