Expect annualized returns of 25 per cent, for the next two years from this stock

Balrampur Chini

The big sugar mills have bright future ahead. The increased production of ethanol and power shall also improve the company's performance.

Opportunities and Strengths :-

# Due to state elections, approaching in U.P. in February 2007, we expect an increase in SAP (State Advisory Price) of Sugarcane by about Rs.5 per quintal from Rs.115 per quintal to Rs.120 per quintal.

# During season 06-07, we expect ample availability of cane in UP at SAP. This situation is likely to remain better in eastern UP where the mills of the company are located. This will result in higher capacity utilization of mills, as also keeping lower cost of production. Cost of materials were higher due to higher price paid by mills in season 05-06.

# Sugar prices may remain lower in season 06-07 due to estimated production of 23 millions MT in India. We have estimated realization at Rs.17.90 per kg, a drop of about Re. 1 per kg.

# Ethanol prices are likely to get revised from Rs.18.75 per litre to around Rs.23 per litre. This improved realization shall offset the expected lower margin in sugar, due to lower prices.

# The Sugar export is likely to be allowed by the Government of India in January 2007 after reviewing the production of first two months of season of 06-07. This shall improve the Sugar Price in domestic market.

# The company is logistically better placed to export sugar to neighbouring countries, where the demand is likely to remain robust in the next year.

# The global market for Ethanol is likely to remain robust in the coming year with an expected realiasation of Rs.26 per litre and above.

# The UP State Subsidy benefits and carbon credit (Co-generation projects) shall add extra to the bottomline of the company

Concern and Risks :-

# Any extra increase beyond Rs.10 per quintal in SAP may sharply increase the cost of production.

# Any delay in ethanol price revision can be a dampner

Conclusion :-

Due to commencement of Mankapur unit, as also due to expected ample availability of cane in season 06-07, the company is likely to produce 11 lacs plus MT of Sugar. The increased production of ethanol and power shall also improve the company's performance. We have factored in UP State subsidy revenue of about Rs.42 crore in FY07 working. Considering an estimated production of 11.26 lakh MT of Sugar, 85000 KL of Rectified Spirit / Ethanol and 65 crore units of power, we expect company to report a bottomline of Rs.340 crores resulting in an
EPS of Rs.13.70 per share.

Due to strong cash flows of the company, from its working (Rs.320 Crores, net off dividend in 18 months ending 30.09.06) in FY06 and FY07, the company may not be required to go for any equity dilution or to leverage its balance sheet by huge borrowing.

Hence, the share at levels of around Rs.100 appears to be a safe bet which can give an annualized return of 25 per cent, for the next two years. The big sugar mills have bright future ahead and company falls in that category.