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Aarati Krishnan

RIDING piggyback on favourable policy-related developments and a buyback announcement, the stock price of Balrampur Chini Mills has appreciated 40 per cent since the end of January to Rs 120 now.

Investors may use this opportunity to book profits in the stock as returns of this order are unlikely to be replicated in the near term.

Operations: With substantial economies of scale, from crushing capacities of 25,000 tonnes per day under its fold, Balrampur Chini Mills is undoubtedly one of the players better placed to handle the imminent decontrol of the sugar industry.

However, decontrol of the industry, even if it does materialise over the next year as promised, is unlikely to bring any immediate boost to the earnings of sugar companies. For now, sugar prices, and thus realisations of the manufacturers are likely to remain under pressure from the large carry-forward stocks from the surplus production of the past two years. The sharp fall in global sugar prices may also limit exports, which have in past year proved to be an outlet for surpluses.

At the company level, after building up capacities through a spate of acquisitions, Balrampur Chini Mills has recently announced plans to integrate forwards into processing of by-products such as bagasse to generate power. This is likely to require significant infusion of capital, which could suppress Balrampur's return ratios in the near term. It may be some time before the returns from the forward integration projects reflect in the bottomline.

Financials: After a sharp jump in its operating profitability in 2000-01, Balrampur Chini Mills has reported a marginal decline in its sales and net profits for the first nine months of 2001-02.

This is not unduly disturbing, as the company's financials in 2000-01 were magnified by liquidation of accumulated inventories. However, given the pressure on realisations, Balrampur's financial performance may continue to be sedate in the near term.

The company has recently announced a buyback programme. However, given that the buyback is to be routed through the open market, this may not have any significant bearing on the stock valuation during the course of the programme.

Further, at the current price of Rs 120 the stock already hovers well above the indicated maximum price of Rs 100 per share for the buyback. Investors can thus use this opportunity to trim exposures in the stock. Since the company continues to be one of the best plays in the sugar sector, re-entry can be contemplated if the stock declines to Rs 90 levels.

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