Five times returns in three years! Should you invest in this sugar company?
One lakh rupee invested in this company in 2018 has now turned into Rs 4,86,999
India’s second-largest sugar producer Balrampur Chini Mills has galloped investor’s wealth five times in the past three years. Shares of the company, quoting at Rs 72 apiece on June 12, 2018, have surged to Rs 352 on June 11, 2021, implying a return of 387%. This means, Rs 1 lakh invested in this stock just three years back has now turned into Rs 4,86,999.
Structural shift
India’s sugar sector has undergone a structural shift by drifting away from cyclicality (in terms of sugar prices) as well as from partial deregulation. This has been driven by structural oversupply in terms of sugar production, the government’s efforts on the ethanol blending programme (EBP; from 0.8% to almost 8% now and 20% target in 2025) through robust ethanol prices and the government’s objective to ensure sugarcane farmers are paid without significant arrears.
The ethanol blending programme was the game-changer for Balrampur Chini Mills as its revenues from the distillery division grew at compounded annual growth rate (CAGR) of 36% while EBIDTA (earnings before interest depreciation taxation and amortisation) grew at 46% between FY2018- 21. This kept companies cash register ringing as revenue grew from Rs 4,343 crore in FY18 to Rs 4,812 crore while its operating profit grew from Rs 451 crore to Rs 713 crore during the same period.
That apart, Balrampur Chini also reduced its working capital cycle to 146 days in FY2021 from 173 days in FY2019. Operating cash flows (OCF) for FY2021 were Rs 600 crore primarily due to an improvement in the cash conversion cycle. Further, the company has managed to reduce its debt by approximately Rs 500 crore in the last two years bringing its debt down to Rs 1,295 crore and now has on its books with debt: equity ratio of 0.5x.
In a sweet spot
Balrampur Chini Mills is in a sweet spot as the management said that the 320 kilolitres per day (KLPD ) current distillery expansion at the Maizapur plant would require a capex of Rs 425 crore. Out of the total capex, the company would take Rs 220 crore of debt available at 50% interest subvention. Even brokerages are buoyant on the stock
Sharekhan | Price target: Rs 425 | Upside: 21%
Balrampur Chini Mills one of the key beneficiaries of reducing cyclicality in the sugar industry. A higher contribution from the distillery division will help margins and PAT (profit after tax) clock a CAGR of 19% over FY2021-24. Further, the company is focusing on improving the growth prospects by playing on its strategy of maximising value accrual from every tonne of cane crushed. Reducing the cyclicality of the sugar industry, strong growth prospects and leaning balance sheet makes the company the best play in the sugar industry.
Elara Capital | Price target: Rs 396 | Upside: 12%
International sugar markets are likely to remain tight, owing to lower production in Brazil and will keep global prices firm, aiding in exports from India. The government’s continued push to increase ethanol blending augurs well for Balrampur Chini Mills as it continues to divert higher cane toward ethanol and is also setting up a new 320KLPD distillery by Q4FY23.
(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)