The sugar division of Balrampur Chini Mills (BRCM) is unlikely to make money at the current realisations after a steep hike in the cane price.
We downgrade BRCM to ‘underweight’ , driven by a rude shock to profit expectations. While we expect BRCM to trade weak with support emerging at R54 (1x P/B), lack of positive catalysts adds to the selling pressure.
The UP government’s announcement on cane price for the current sugar season of ~R2,920/MT landed cost is much higher than expectations (higher end of expectations was R2,820/MT). Cane price for the last season was R2,520/MT. The profitability of north Indian millers is likely to be dented. In other words, sugar cost of production (ex-sales of by-products for ethanol and co-gen) is likely to be 35,000/MT, which is comparable to the current spot sugar prices, implying no profits for the sugar division at the operating level, with additional interest burden to deal with.
Expect earnings cuts, as 85% of analysts are positive and had expected a reasonable cane price hike. We expect BRCM to generate RoE of 12% and 7% in F13 and F14, respectively. The stock currently trades at P/B of 1.15x for F13 and 1.1x for F14 and at PER of 10x and 17x, respectively. At this stage of the sugar cycle, we do not think such multiples are sustainable, and the stock is likely to correct, in our view.
Contrary to expectations, during festive season, sugar prices have fallen by R3,000/MT since October 1. However, we expect prices to stabilise at the current levels, given a delay in crushing and higher divergence of cane to alternate sweeteners. We continue to expect inventory balance to be reasonable at 6.5 million MT, or ~3.4 months of consumption. Our production estimate for September 2013 is revised downwards marginally (by 0.5mn MT), to ~23.5mn MT, primarily driven by a delay in crushing and marginally higher divergence to alternate sweeteners.
Our new production estimate is higher than the government estimate of 23 million MT, but below the Indian Sugar Mills Association’s 24 million MT. If the production estimates remain in this band, we do not see any change in our outlook for the cycle, as India would be carrying reasonable inventory, implying lack of actionable catalysts from a supply-demand perspective. Morgan Stanley