Why should you avoid buying stocks of Balrampur Chini Mills ltd. even though the stock has corrected a lot in recent stock market correction? Checkout...
Balrampur Chini Mills (BCL) is one of the largest sugar producing mills India. It has cane crushing capacity of 73,500 tonnes per day and will be producing 63 lakh quintals by Sept 2011.
As stated, Balrampur Chini mills is an integrated sugar player. It has distillery capacity of 320 kilolitres per day and can generate power capacity of 179 megawatt (MW). The company has recently expanded capacities for ethanol and power businesses. This would help it increasing its volumes and margins.
Sugar Industry Scenario
Sugar industry as a whole is expected to produce 25 million tonnes for the seasonal end in September 2011. This is more than expected 23 million tonnes which will make a surplus season after two deficit sugar seasons. This is going to put pressure on sugar prices and so the margins of sugar manufacturers. With this fact in consideration, sugar prices have fallen sharply after observing all-time high prices in January 2011.
But at the same time, Brazil, the world's largest sugarcane producer, has observed a dry weather and low production of sugarcane. So the sugar prices would not trade below Rs 28-30/kg (cost of production is at Rs 26/kg).
This should confirm sustainable operating margin of Rs 2-3/kg for sugar sales for Balrampur Chini. And since BCL is an integrated player with ethanol and power businesses, it should be in comfortable position with these margins and revenues from ethanol/power businesses.
Stock Financials
Net sales of Balrampur Chini has grown at compounded annual growth rate (CAGR) of 12% from 2006-07 onwards and has reach to Rs 1,950 crore in September 2010. Net profit was Rs.36 crores in the last fiscal, which is a lot lesser than Rs.226 crores in previous year. This was mainly due to fall in commodity prices and higher cost of sourcing cane which is basic raw material for sugar. Sugar price is trading at Rs.30/kg due to increased supply in the markets.
Concerns
Balrampur Chini earns half of the operational profits from the sugar business. Declining sugar prices due to upward revision in sugar production could result in lower earnings. If government decides to revise sugarcane price in upward direction, which is fixed at Rs 20/kg as on today, would certainly put pressure on operating margins of company.
Stock Valuations
Sugar prices are at very low levels compared to the prices for same period last year. Sugar prices are a lot volatile and company has posted average earnings with EPS of Rs.0.90 for December 2010 quarter. Annualized EPS could not be more than 3. At the current stock price of Rs.69, the stock trades 23 times this EPS. At this P/E, Balrampur chini stock looks very expensive especially due to average/NIL growth prospects. It is advisable to not to buy stocks of Balrampur chini for medium term unless sugar/cane scenario changes majorly.
More mid cap stocks discussed:
Power sector stock to buy – Kalpataru Power Transmissions
Mid cap stock analysis - Deepak fertiliser
Balrampur Chini Mills (BCL) is one of the largest sugar producing mills India. It has cane crushing capacity of 73,500 tonnes per day and will be producing 63 lakh quintals by Sept 2011.
As stated, Balrampur Chini mills is an integrated sugar player. It has distillery capacity of 320 kilolitres per day and can generate power capacity of 179 megawatt (MW). The company has recently expanded capacities for ethanol and power businesses. This would help it increasing its volumes and margins.
Sugar Industry Scenario
Sugar industry as a whole is expected to produce 25 million tonnes for the seasonal end in September 2011. This is more than expected 23 million tonnes which will make a surplus season after two deficit sugar seasons. This is going to put pressure on sugar prices and so the margins of sugar manufacturers. With this fact in consideration, sugar prices have fallen sharply after observing all-time high prices in January 2011.
But at the same time, Brazil, the world's largest sugarcane producer, has observed a dry weather and low production of sugarcane. So the sugar prices would not trade below Rs 28-30/kg (cost of production is at Rs 26/kg).
This should confirm sustainable operating margin of Rs 2-3/kg for sugar sales for Balrampur Chini. And since BCL is an integrated player with ethanol and power businesses, it should be in comfortable position with these margins and revenues from ethanol/power businesses.
Stock Financials
Net sales of Balrampur Chini has grown at compounded annual growth rate (CAGR) of 12% from 2006-07 onwards and has reach to Rs 1,950 crore in September 2010. Net profit was Rs.36 crores in the last fiscal, which is a lot lesser than Rs.226 crores in previous year. This was mainly due to fall in commodity prices and higher cost of sourcing cane which is basic raw material for sugar. Sugar price is trading at Rs.30/kg due to increased supply in the markets.
Concerns
Balrampur Chini earns half of the operational profits from the sugar business. Declining sugar prices due to upward revision in sugar production could result in lower earnings. If government decides to revise sugarcane price in upward direction, which is fixed at Rs 20/kg as on today, would certainly put pressure on operating margins of company.
Stock Valuations
Sugar prices are at very low levels compared to the prices for same period last year. Sugar prices are a lot volatile and company has posted average earnings with EPS of Rs.0.90 for December 2010 quarter. Annualized EPS could not be more than 3. At the current stock price of Rs.69, the stock trades 23 times this EPS. At this P/E, Balrampur chini stock looks very expensive especially due to average/NIL growth prospects. It is advisable to not to buy stocks of Balrampur chini for medium term unless sugar/cane scenario changes majorly.
More mid cap stocks discussed:
Power sector stock to buy – Kalpataru Power Transmissions
Mid cap stock analysis - Deepak fertiliser
