Stock Buy : Balrampur Chini Mills

Buy Balrampur Chini Mills : Target Price lowered to Rs.85

# Buy call on Balrampur Chini Mills is retained with a reduced target price of Rs.85, for
1QFY12.

# Company missed EBITDA and net income estimates of the market for 1QFY12 because of lower than expected distillery income as well as lower sugar realization.

# EBITDA margin declined to 7.7% in 1QFY12 as against 11.6% for 1QFY11.

# Distillery realization declined to Rs.23.8/ kg, 9% lower qoq due to onetime disruption in supplies. Now, it has recovered to Rs.26/kg.

# Sugar realization was lower at Rs.27.2/kg as against the market expectation of Rs.27.7/kg.

# On the positive side, profit from co-generation segment increased 36% yoy due to increase in volume. Realisation from this segment has increased 3% yoy.

# On a medium term perspective, the outlook on the stock will be impacted by regulatory decisions such as regulated sugar cane prices, deregulation of the sector etc. For the near term, sugar cane prices may continue to remain high in view of upcoming Uttar Pradesh election. On the other side, any news on deregulation of the sector would be a positive catalyst on the stock and the management expects that some of the regulations like levy quota and release mechanism would be done away with.

# Company expects sugar cane price de-regulation by the next crushing season.

# Production for FY12 is expected at 26 million tons versus 24.3 million tons in FY11. Sugar production in FY11 increased 30% yoy and it is likely to increase 10 -12% in FY12. Company expects that FY12 would be another volume driven year.

# As on June 30, 2011, long term loans are at Rs. 720 crore and working capital loans are at Rs.680 crore.

# Balrampur Chini is preferred due to its strong balance sheet, low capex and high contribution from power division.

# Considering the earnings miss in 1QFY12, the target price is lowered to Rs.85 from Rs.100 earlier. The target price is at 1.5 multiple of its long term average price/ book value ratio.