Stable Quarter - Sugar vertical steering profitability
During Q2FY18, BCML reported net sales of Rs 12,368.4 mn, registering growth of ~39.4% y-o-y basis whereas sales grew by ~38% during H1FY18, supported by better recoveries of ~12.1% (due to robust climatic conditions and variety of cane) and improving sugar realizations. Sugar segment grew by ~39% y-o-y to Rs 11,783 mn, contributing ~93% to revenues backed by ~3% y-o-y improvement in realizations to Rs 37.3/kg. BCML is carrying a sugar inventory of 12.6 lakh quintals as on Sept. 2017 (valued at Rs 33.7/kg; currently selling at Rs 37.1/kg). Sugar segment reported a profit of Rs 1,201 mn at EBIT level vis-à-vis profit of Rs 1198.4 mn in Q2FY17 due to high cost sugar inventory on the books.
Going forward, we expect BCML sales to grow at a CAGR of ~20% during FY17- 19E resulting into better recovery rate and higher sales volume. Sugar recovery rate is expected to improve from 10.7% in FY17 to ~11.2% by FY19E and sugar sales to grow at ~22% CAGR over FY17-19E.
A mixed bag performance in the distillery & cogeneration segment
Distillery segment contracted by ~45% y-o-y to Rs 575 mn, contributing ~5% to revenues backed by ~11% y-o-y decline in realizations to Rs 38.6/bl. Distillery segment reported declined in profit by ~66% to Rs 141 mn at EBIT level vis-à-vis profit of Rs 418 mn in Q2FY17 on account of withdrawal of excise duty relief (negatively impacted distillery margin) coupled with downward supply price revision of Ethanol. Management has indicated that the volumes are expected to recover from coming quarters and expects distillery segment to registered a ~16- 18% growth in volumes (expected production ~85 mn liters) owing to higher availability of bagasse. Cogeneration division grew by ~43% y-o-y to Rs 249 mn led by ~50.9% y-o-y growth in volumes to 25.5 mn units. Realizations remained flat a t Rs 4.6/ unit.
Margins to stabilize at ~21%+ with better operating efficiencies & sugar recoveries
EBITDA margins have improved significantly from ~4.2% in FY15 to ~15.1% in H1FY18 on account of 1) cyclical upturn in sugar prices (2) improvement in sugar realisations and (3) uptick in the distillery business. Furthermore, BCML enjoys robust cane output and recoveries, resulting in cost optimization and operational synergies. Going forward, EBITDA margin likely to stabilize at ~21%+ backed by impro vement in recovery rate, moderation in operating cost.
Deleveraging balance sheet and focus on rewarding shareholders
The management indicated that it will continue to reduce debt and will reward shareholders on strong cash flow generation. In FY17, the company completed buy-back of 10 mn equity shares (representing 4.08% of total equity shares) at Rs 175/share (total outflow of Rs 1.75 bn). Furthermore, management is committed towards optimal utilisation of cash; hence, they are also open to consider attractive opportunities coming their way to expand capacities.
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BCML is well positioned to capitalize on the positive structural changes witnessed by the industry led by improving sugar prices and recovery rates coupled with strong relationship with farmers, close proximity to raw materials and favourable government policies. We have valued the stock on the basis of P/B of 1.8x of FY19E BV and recommend BUY on the stock with a target price of Rs 204/- (~28% upside) in 15 months.