Balrampur Chini share price closed at Rs 353.3 on Thursday. Balrampur Chini share price is trading near life highs of Rs 357.7. The 52-week low on the Balrampur Chini share price is Rs 122.4. Balrampur Chini market cap is over 7400 cr. Sharekhan  re-initiates coverage on Balrampur Chini Mills with a Buy recommendation and a price target of Rs 465.

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Sharekhan highlights that the government of India prepared its target of achieving 20% ethanol blending in petrol by 2025 (from 2030 earlier) under its biofuel policy. Higher ethanol blending is one of the key measures undertaken by the government to reduce sugar inventories in the country. To achieve the target, India will need to produce 1000 crore litres of Ethanol for blending. Around 50% of the requirement will be generated through ethanol production from sugar molasses. Sensing this as an opportunity, large sugar companies are expanding their respective distillery capacity over the next 2-3 years. An increase in the share of ethanol in the overall revenue mix will drive the profitability due to lower conversion cost and a steady increase in realisations coupled with an improvement in the cash conversion cycle due to lower inventory and better payment days Balrampur Chini Mini is largest sugar company in India with average cane crushing capacity of 76,500 Tonnes of cane per day (TCD) and distillery capacity of 520KLPD.

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Balrampur Chini Mills is coming up with another Greenfield distillery facility of 320KLPD by end of FY2023 to gain a big opportunity from the government revamp ethanol policy. At increased ethanol capacity of 840KLPD, Balrampur Chini Mills is likely to generate revenues of Rs 1600 cr (25% of revenues) with production of close to 30 cr litre of ethanol and will achieve EBITDA of Rs 750-800 cr (69% of total operating profit from current 50%) by FY2024. This along with steady growth in the core sugar revenues (likely to grow by 5% over FY 2021-24) would result in consistent improvement in operating Margin to 17.3% by FY2024 from 14.8% in FY2021. Amongst the sugar universe Balrampur Chini Mills has one of the lean balance sheets with debt to equity ratio of 0.5x; debt of Rs 1295 cr on books (reduced by Rs 500 cr in last two years). Average cost of debt is lower as Rs 362 cr of long term debt has lower interest rate of 3.65-5%.

With a higher contribution from ethanol sales, Balrampur Chini Mills cash conversion cycle is expected to improve by 37-40 days over FY 2021-24 that would in turn boost cash flows. Cumulative OCF is expected to stand at Rs 1950 cr over FY2022-24. Capital expenditure of Rs 450 cr for ethanol capacity expansion will be funded through a mix of debt and internal accruals. Balrampur Chini Mills expects substantial debt reduction by FY2023/24. Further with higher cash flows dividend payout is expected to substantially improve in the coming years.

Balrampur Chini Mills Key Risks:

Any decline in sugar production or change in the government policies towards ethanol blending would act as a key risk to our earnings estimates