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Balrampur Chini Mills' announcement that it plans to buyback shares from the open market is not very surprising in the current context.
The stock, along with sugar peers, has been an underperformer on the bourses over the past one year, declining by 15 per cent even as the Sensex rose over 13 per cent. With the company's market value hovering well below the replacement cost of its assets, it may be keen to send an undervaluation signal to investors through a buyback programme.
The high cane prices and depressed realisations of last season have taken a toll on the profits of most sugar companies in the past four quarters and Balrampur Chini too has seen a decline in its earnings. Lower profits, taken with the de-rating in PE multiples for sugar stocks have led to the stock trading at quite depressed valuations.
Balrampur Chini's market capitalisation of about Rs 1,950 crore today is well below the replacement cost of its units and does not do justice to its status as a leading sugar producer with 76,500 tcd (tonnes crushed per day) of cane crushing capacity, 320 kilolitre distillery and 223 MW of power cogeneration facilities.
The maximum buyback price of Rs 85 may be a signal that the company ought to trade at a better valuation.
However, having said this, the buyback routed through the open market is unlikely to instantly catalyse the stock price. Only an improving outlook on sugar prices or policy triggers on exports or decontrol may do that.
It can be argued that the company could have utilised the Rs 110 crore being set aside for this buyback to repay part of its long-term debt (Rs 786 crore as of September 2010).
However, with its capex plans concluded and the expected improvement in cash flows this fiscal from better crushing volumes and improved realisations on ethanol and power, shelling out this sum may not pose any severe strain on the company.
Having said this, the buyback, if successful, may also help the promoters to consolidate and increase their holdings in the company.
Balrampur Chini's Indian promoters held only a 37.7 per cent stake in the company, according to its latest shareholding pattern (December 2010), even as institutions held as much as 40.7 per cent.
It should be noted that the company has, on and off, been the subject of takeover speculation for some time now, though nothing has fructified so far.
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