Stock in Action - Balrampur Chini Mills Ltd

Movement of the Day

Analysis   

a) Positive Breakout Third Resistance (LTP > R3).
b) Stock is trading at 2.60 times its book value.
c) Good quarterly growth in the recent results

Concern/Threats

Over the last five years, the company's revenue growth has been a dismal 1.45%.

Probable Rationale Behind the Surge

1.Government Policy Reversal

a) The primary catalyst behind the surge in Balrampur Chini Mills Ltd stock is the recent reversal of the government's ban on using sugarcane juice for ethanol production.
b) The ban, initially imposed for the 2023-24 marketing year, was lifted on December 15, allowing sugar mills to divert up to 1.7 million metric tonnes of sugar for ethanol production.

2.Increased Flexibility for Ethanol Production   

a) The lifting of the ban provides Balrampur Chini Mills and other sugar companies greater flexibility in utilizing cane juice and B-heavy molasses for ethanol production.
b) This move is expected to enhance Balrampur Chini Mills' ethanol production capacity, aligning with the government's push towards a more robust biofuel program.

3.Positive Impact on Earnings   

a) The decision is anticipated to positively impact Balrampur Chini Mills' earnings in the current fiscal year (2023-24) and beyond.
b) With the ability to divert sugar for ethanol, the company can leverage the potentially higher profit margins associated with ethanol production.

4.Market Reaction and Stock Performance    

a) Balrampur Chini Mills witnessed a significant surge in its stock, rising over 7.15% to Rs 412.05 as of the latest available data.
b) This uptrend is consistent with the broader trend in the sugar sector, where multiple stocks experienced gains ranging from 4% to 10% on December 18.

4.Long-Term Growth Prospects    

a) Analysts view the government's decision as a positive development for the sugar sector, emphasizing that the earlier ban was a "temporary blip."
b) The long-term growth prospects for Balrampur Chini Mills and the sugar sector, in general, remain intact, according to industry experts.

5.Impact on Sugar Inventory and Prices    

a) The reversal of the ban is expected to help Balrampur Chini Mills and other sugar companies build up inventory for the coming year.
b) The government's goal is to ensure more sugar output and a buildup of inventory to control retail prices, contributing to Balrampur Chini's optimistic estimate of adding up to 2 million tonnes to the government's inventory.

6.Market Sentiment and Future Outlook   

a) The positive sentiment in the sugar sector is further fueled by the government's decision to review the diversion limit every month, providing ongoing flexibility for sugar mills.
b) Balrampur Chini Mills' Managing Director, Vivek Saraogi, sees the policy reversal as an opportunity to navigate the challenges posed by the earlier restrictions.

7.Ethanol Demand and Profitability   

a) The demand for ethanol, particularly from cane juice, is significant in the current market, as evidenced by the tender floated by major fuel retailers for 8.25 billion liters of ethanol.
b) Despite potential challenges, the overall profitability for sugar mills, including Balrampur Chini, is expected to improve with the easing of restrictions on ethanol production.