Sharekhan Research has suggested BUY Call for Balrampur Chini Mills (BCML) with a revised price target of Rs. 673, reflecting a robust medium-term growth outlook. Despite a weak Q2 FY2025 due to regulatory and operational challenges, BCML remains a strong contender in the sugar and distillery sector. The stock currently trades at Rs. 548, implying an upside potential of approximately 22.8%. The investment thesis is rooted in strong fundamentals, progressive government policies, and diversification initiatives, including the development of a Polylactic Acid (PLA) plant.

Summary

BCML’s second quarter FY2025 results revealed headwinds from regulatory restrictions and subdued crushing volumes, leading to a 16% revenue decline and a steep 70% fall in EBITDA. Despite short-term challenges, the company’s strategic initiatives in ethanol production, sugar exports, and bioplastics signal long-term growth potential. Sharekhan underscores BCML’s ability to weather near-term volatility, supported by a robust balance sheet, improved yields, and diversification into value-added businesses.

Q2 FY2025 Performance: A Mixed Bag

1. Revenue and Profitability Decline:
BCML reported a 15.7% YoY drop in revenues, amounting to Rs. 1,298 crore, primarily driven by a sharp 52.7% reduction in distillery revenue. EBITDA margins shrank significantly to 3.8%, from 10.7% in Q2 FY2024, leading to a 70% YoY decline in EBITDA to Rs. 49 crore.

2. Sugar Realizations and Volumes:
Sugar realizations rose marginally by 2.2% YoY to Rs. 38.5/kg. However, lower crushing volumes constrained profitability due to unabsorbed fixed costs.

3. Adjusted PAT:
Adjusted profit after tax (PAT) fell 24% YoY to Rs. 59 crore, partially cushioned by higher other income of Rs. 65 crore.

Growth Catalysts

1. Ethanol Production Resilience:
BCML projects ethanol output of 25 crore liters for the 2024-25 sugar year, with contributions from sugar juice (9 crore liters) and molasses-based streams. Ethanol remains a cornerstone of the company’s revenue diversification strategy, aided by favorable government policies.

2. Sugar Export Opportunities:
With an inventory of 5.5 million tonnes at the end of the current sugar season, BCML is well-positioned to meet domestic demand and export up to 2 million tonnes. This aligns with industry advocacy for higher sugar MSP and revised export policies.

3. PLA Plant Development:
The Polylactic Acid (PLA) project, supported by the UP government’s subsidies, marks BCML’s foray into bioplastics. Set to commence operations by October 2026, the project will leverage the company’s expertise in sugar-based derivatives, enhancing margins and reducing revenue cyclicality.

Valuation and Outlook

1. Valuation Multiples:
The stock trades at 24x, 19x, and 17x FY2025E, FY2026E, and FY2027E earnings, respectively, reflecting consistent margin recovery and improved cash flows. This is supported by a projected CAGR of 9% in revenue and 14% in PAT over FY2024-FY2027E.

2. Revised Price Target:
Sharekhan maintains a "BUY" rating with a price target of Rs. 673, implying a 22.8% upside. The valuation considers recovery in distillery margins by FY2026 and the incremental contributions from the PLA plant.

3. Strategic Strengths:
BCML’s robust balance sheet and operational efficiencies place it among the top performers in the sugar industry. Its diversification strategy mitigates the inherent cyclicality of the sugar business.

Key Risks to Monitor

1. Regulatory Changes:
Any adverse government policy affecting sugar exports, ethanol pricing, or MSP revisions could impact profitability.

2. Agricultural Challenges:
Weather variability and lower sugarcane yields could affect crushing volumes and sugar production.

3. Competitive Pressures:
Aggressive capacity expansion by competitors may challenge BCML’s market position.

Conclusion

BCML’s short-term challenges are overshadowed by its strategic initiatives and robust financial health. With diversification into high-growth segments like bioplastics and ethanol, coupled with supportive government policies, BCML offers a compelling investment case. Investors seeking long-term gains in the sugar and allied sectors should consider accumulating BCML at current levels.