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Cyclical Investing

Stock Analysis

After we have learned how to conduct a sectoral analysis of the sugar industry, let us learn how to analyze Balrampur Chini, which is a stock from the sugar industry. 


Quick Snapshot: (Data as of Closing Prices on 28th January 2021)



The Kolkata headquartered company generates revenue primarily from three sources: sugar, power cogeneration & distillery operations. 


  • The company has 10 sugar mills in Uttar Pradesh with an aggregate cane crushing capacity of 76,500 tonnes per day. 
  • The distillery segment houses 4 units with an aggregate capacity of 520 kilolitres per day.
  • The cogeneration business has 8 power units with a total saleable capacity of 165.2 MW after addressing captive needs 


Sugar forms the bulk of the revenue pie followed by the distillery & power cogeneration business. The integrated operating profile provides some cushion against the inherent cyclicality in the business.


General discussion: 

Balrampur Chini Mills is one of the rare financially sound sugar companies in India. The company is rated AA by Crisil, the highest accorded to any sugar company in the country. The debt equity ratio stands at a comfortable 0.13. 


The company has conducted four buybacks in the past five years which provides a lot of assurance about the management integrity. The company has returned more than 1000 crore to shareholders through the medium of buybacks, highest in India's agri sector. The payout ratio is at a healthy 40% on account of consistent dividends & regular buybacks. Promoters own 41.21% in the company as of Q3FY21 & have been gradually increasing their stake.


Let's look at the financial performance of the company in the past 10 years:


Profit & Loss (Consolidated Figures ₹ Crores)


The windfall gains of SS 2016-17


SS 2016-17 was a golden year for sugar stocks, moresofor U.P based companies.  


Balrampur Chini Mills reported a record profitability of ₹593 crore during the period. Revenues have risen since then but the company has not yet been able to beat that number. Perhaps all the sugar stocks gave multibagger returns in that bull run going up anywhere between 3-6 times. Balrampur stock was up around 5 times from the trough of the bear cycle.  


Here is how things shaped up. There was a drought situation in Maharashtra & Karnataka which forced sugar mills to stop crushing early. As explained in the previous module, sugarcane crop thrives in tropical & subtropical areas with adequate rainfall. Maharashtra cane production halved to 4.5mn tons. Overall production of sugarcane fell 12% to 30.67mn tonnes from 34.84mn tonnes in a year ago period.


At the same time, UP based sugar mills were able to take full advantage of a bumper harvest in the region. Realizations increased and margins jumped exponentially. The same can be seen in the financials of some other names. 



The Segmental Breakup: 



Look at the impressive growth posted by the company in the distillery segment. It has contributed 62% to the company's H1FY21 EBIT despite being just 16% of the total revenue. Revenues from this segment increased by a mammoth 78% on a YoY basis. This makes it very clear that the ethanol story should be tracked very closely. Any news related to this segment will have a significant bearing on the fundamentals of the stock. According to the management, the next 10 years will be a transition phase to a  ' predominantly green energy company '


P.S. - Expect huge capex by the company in this segment going forward. The faster the ramp-up, the better it is.


What impresses us:


We will try to analyze the fundamentals of the company in greater detail.


Despite being in a cyclical industry, the company has reported profits in 18 out of the last 20 years. The company reported profits in all the last 5 years. It is certainly a commendable feat and something to boast about. The company has diversified its revenue streams and aims at further reducing the variability in profits. Robust free cash flow generations are a further icing on the cake.It becomes very important to note that the industry is highly stressed & reeling under ever-burgeoning cane arrears. BCM however paints a completely different picture.


The return ratios are strong, 5-year average ROE stands at 26%, whereas the ROCE stood at 19% as of March 2020. The ROCE is expected to trend upwards given the reduction in Working Capital debt to zero.


The company is in continuous efforts to increase the recovery rates. Growing adoption of high-yielding varieties of cane amongst farmers is pushing up yields for the company. The company reported recovery rates at 11.90% in H1FY21, amongst the highest in the industry.  Higher recovery rates lower the cost of production & make the company less susceptible to increase in cane prices or fall in sugar prices.


With 3.14 lakh tonnes of sugar exports in SS 2019-20 and considerable sacrifice of sugar by diverting sugarcane for B heavy ethanol, BCML was able to reduce its sugar inventory by 2.5 lakh tonnes in the past year. The company is sitting on light inventory and can make do without exports in SS 2020-21. As a matter of fact,The Government of India has approved subsidies for the export of 6mn tonnes of sugar for this fiscal against 5mn tonnes in the previous year.


Ethanol prices have been on an upward slope for a long time now. Ethanol prices are announced annually by the The Government of India based on a formula taking sugar & sugarcane prices into consideration. The Government has delinked the price of ethanol from crude oil or petrol prices. Ethanol prices were recently hiked to 62.65/45.69/57.61 from 59.48/43.75/54.27 for Direct Cane Juice/ C-Heavy molasses and B-Heavy Molasses respectively.


The company has been ramping up its distillery capacity at a brisk pace.  


  • Increased usage of agri-input
  • Increased farm mechanization 
  • Ratoon Management
  • More diversified early variety seed usage
  • Training field staff
  • Management of insects, pests, and disease

The company expects to boost operational efficiencies & scale output at its newly commissioned Gularia facility. Also, BCML has announced a capex of ₹320 crore for setting up an additional 320kl distillery at itsMaizapur Plant. The new capex will be margin accretive & will be operational around November 2022. This will take the total ethanol capacity to 860kl per day. In the longer term horizon, we can expect distillery business with a stable & higher profitability to contribute around 25-30% of the total revenues on a sustained basis. 



The fundamentals of Balrampur Chini Mills reaffirm our belief in the sugar story. The integrated nature of the company coupled with strong free cash flow generation make it an excellent portfolio pick. 



Summing it all at the end of this module, we have learned all the things that we should keep in mind while investing in cyclical stocks. There are several other modules on ELM School that we have designed for you so that you can learn more about investing, trading, stock markets and more. Be sure to check them out. 

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Units 11/11