Anand Rathi - Balrampur Chini Mills - Result Analysis

Balrampur Chini Mills (BCML), one of the largest integrated sugar manufacturing company in India, reported 35% increase in net sales for the quarter ended September’06 to Rs 388.22 crore mainly due to growth in sugar and co-generation segment revenue. However decrease in stock value to Rs 287.30 crore burdened the cost side and margins, which led to decline in operating margins to 15.2%. The bottom-line of the company declined by 7% on Y-o-Y basis to Rs 32.21 crore primarily due to sharp fall in PBIT margins of sugar division.

Commenting on the performance Viivek Saraogi, MD BCML said, "We have always believed that the sugar business is cyclical in nature and after three good years, going forward we foresee real challenges that will affect profits from sugar operations. While we expect realizations to remain subdued, increase in cane price will add to cost. With higher capacities and well spread out earnings drivers we are optimistic of posting a reasonable performance in the future."

During the reported quarter the average realizations were at Rs 1764 per quintal against Rs 1701 per quintal in corresponding previous quarter. The distillery operations delivered 5,616 KL in quarter ended September’06 with average realization at Rs 20.97 per litre compared to Rs 21.51 in corresponding previous quarter. During the quarter, co-generation segment presented 48 salable million units as compared 18 million units in corresponding previous quarter. The realization per unit for the quarter was Rs 2.89 per unit.

Performance for the quarter ended September’06

The sales of the company for the quarter ended September 2006, rose by 35% to Rs 388.22 crore. The growth in sales was mainly from sugar and co-generation segment while the alcohol segment witnessed fall in sales. During the quarter the average realization from sugar was Rs 1764 per quintal. The operating margins of the company declined during the quarter by 430 bps to 15.2% mainly due to sharp increase in other expenditure and staff costs. In fact, decrease in stock at the end of quarter by Rs 287.30 crore burdened the cost side and margins, which led to decline in operating margin.

As a percentage of net sales (net of stock), raw material cost declined by 90 bps to 7% while staff and other costs increased by 300 bps to 13% and 310 bps to 21.5% respectively. As a result of which the operating profit of the company could record a rise of only 5% to Rs 59.01 crore. The other income for the quarter was Rs 2.04 crore (Rs 0.36 crore in corresponding previous quarter).

The interest cost of the company for the quarter was Rs 7 crore (up 88%) and depreciation cost was Rs 14.38 crore (up 67% on Y-o-Y). The increase in interest and depreciation cost resulted in to decline in PBT by 10% to Rs 39.67 crore. The provision for tax for the quarter was Rs 7.46 crore (21% lower on Y-o-Y) and the effective tax rate for the quarter also declined to 18.8% from 21.3% in corresponding previous quarter. The decrease in provision for tax restricted the decrease in PAT only by 7% to Rs 32.21 crore.

Performance for the year ending (18 months period) September’06

The topline for the period was Rs 18.98 crore and the OPM for the period was 24.2%. With Rs 34.51 crore as interest cost and Rs 67.09 crore as depreciation cost, the profit before tax for the period stood at Rs 364.89 crore. After providing Rs 73.30 crore for tax the net profit of the company for the period stood at Rs 291.59 crore.

Segmental performance for the quarter ended September’06

Sugar

The revenue from sugar (91% of total revenue) increased by 38% to Rs 381.53 crore while the PBIT from sugar segment declined by 8% to Rs 39.93 crore (constituting 78% of the total PBIT). The PBIT margin of the segment declined to 10.4% against 15.7% in corresponding previous quarter. The capital employed in sugar segment increased by 63% on Y-o-Y to Rs 1092.55 crore.

The company expects that higher sugar volumes owing to augmented capacities in the sugar division will drive revenues going forward.

Distillery

Distillery operations witnessed a marginal reduction in production owing to lower off-take of distillery products. The segment revenue declined by 15% to Rs 21.50 crore and the PBIT declined by 15% to Rs 5.71 crore. The PBIT margin from this segment was 26.5% (almost same in corresponding previous quarter).

The Govt of India has recently issued directives to the oil marketing companies to blend ethanol with petrol to the extent of 5 percent. The Oil marketing companies have revised the ethanol rate to Rs 21.50 per litre from 18.75 per litre. This will enhance viability of distillery business in long run.

Cogeneration

Revenues from the co-generation segment expanded significantly as the Company’s facilities were operated for additional number of days owing to better availability of bagasse. This was on account of higher cane crushed in the 2005-06 sugar season and intra-plant transfer of bagasse. BCML demonstrated robust performance from the co-generation business resultant to higher production of power leading to improved sales to Uttar Pradesh Power Corporation (UPPCL).

The revenue from this segment increased by 194% to Rs 18.17 crore and PBIT from this business increased significantly to Rs 6.07 crore (Rs 0.74 crore in corresponding previous quarter). The PBIT margin from this segment was 33.4%.

An anticipated increase in sugarcane crushing in the coming 2006-07 sugar season should lead to further improvement in bagasse availability which combined with augmented capacities will help the company noticeable growth from this business.

Key Developments

BCML is in the process of acquiring a 3,000 TCD sugar unit from Indo-Gulf Industries located at Maizapur in eastern Uttar Pradesh in accordance with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

Cogeneration Power and Sugar plants at Mankapur greenfield integrated sugar complex were commissioned on 19th September and 16th November 2006 respectively and distillery would be commissioned by March 2007.

Work at the greenfield integrated sugar complexes at Kumbhi and Gularia in District Lakhimpur Kheri in Uttar Pradesh is progressing as per schedule.

The Board of Directors has recommended a final dividend of Rs 1.50 per equity share (150%) for the 18 months ended 30th September 2006.

The shares of Balrampur Chini Mills are trading at around Rs 91 (LTP on 17th November 2006) at BSE.