Buy This Multibagger Sugar Stock For A Target Price of Rs. 156: HDFC Securities

Dwarikesh Sugar Industries Limited (DSIL) is a leading company in the Indian sugar sector, specialising in the production of high quality sugar grains and associated products. On the NSE, the stock has risen from Rs 31.60 on March 22, 2021 to Rs 129.75 on March 21, 2022, 3:18 pm IST, showing a multibagger return of 310.60 percent in one year. The stock has gained by 77.98 percent on a year-to-date (YTD) basis. The stock has risen by 89.14 percent in the last six months and 52.65 percent in the previous month. On the NSE, the stock has gained 2.17 percent in the previous five days. The brokerage firm HDFC Securities sees more upside on the stock and has assigned a buy call rating for a target price of Rs. 156 which shows a potential upside of 19% from the current market price. The brokerage has set a target period of two quarters for the stock to achieve its target price.

Q3FY22 Result

HDFC Securities has said "Consolidated revenue witnessed growth of 58% to Rs 601 Cr led by 52.8% growth in sugar segment sales & 157% growth in distillery segment sales. Sugar segment sales growth was led by higher domestic sales quota and increase in sugar realization. Sugar sold during Q3FY22 is 14.17 lakhs quintals (including export of 2.50 lakh quintals) as compared to 10.38 lakh quintals sale of sugar (all domestic) during corresponding quarter last year. Sugar sold during 9MFY22 is 35.88 lakhs quintals (including export of 2.50 lakh quintals) as compared to 34.26 lakh quintals (including 8.05 lakh quintals of sugar exported during corresponding period last year. Sugar stock as on 31st December 2021 was 11.07 lakh quintals as compared to stock of 19.49 lakh quintal as on 31st December 2020."

According to the brokerage "Distillery volumes grew to 2x to 1.13 Cr litre with the ramping up of capacity utilisation. Further, distillery realisation increased 26% to Rs 58.6/litre on account of increasing proportion of B-heavy ethanol. The company is entirely producing B-Heavy ethanol given higher prices (B-heavy prices prevailing at Rs 59/litre compared to Rs 46.6/litre for C-Heavy ethanol). Co-generation sales remain flat at Rs 15.6 Cr. Power sales were 4.9 Cr units against 5.0 Cr units whereas power tariff was Rs3.2/ unit vs. Rs 3.1/unit EBITDA grew 138% to Rs 55 Cr on the back of increase in sugar volumes, sugar realisation & higher proportion of B-heavy ethanol. With liquidation of excess inventories & reduction in working capital debt, interest cost has come down from Rs 9.6 Cr to Rs 3.9 Cr. PAT jumped up 4x to Rs 29 Cr led by higher operating profit & lower interest costs."

The brokerage has also highlighted that "The company would be commissioning 170 KLPD distillery by June-2022. Currently the company is storing B-heavy molasses in Dwarikesh Nagar Factory, which would be utilised for the production of B-heavy ethanol after the commissioning of new distillery. On an annualised basis, DSIL would be diverting 25-30% sugarcane towards ethanol from FY24 onwards. Total debt as on December 2021 is Rs 190 Cr, which includes Rs 30 Cr debt for new distillery. It will take further Rs 150 Cr debt for the new distillery in the next three months. However, working capital debt requirement for peak crushing would come down considerably."

Buy for a target price of Rs. 156

The brokerage has claimed that "DSIL is one of the most efficient sugar companies with abundant sugarcane availability, best sugar recoveries in UP and aggressive distillery expansion. Riding on the ethanol wave, the company is on the path to increase its capacity by 10X from 30 KLPD in FY19 to 338 KLPD by FY24. We expect DSIL's revenues to grow by 10% CAGR over FY21-24E, with higher revenues from the distillery division, led by enhanced capacities and improved realisations, despite some moderation due to the likely reduction in sugar volumes. EBITDA margins are likely to expand 516 bps driven by firmed-up domestic and international sugar prices, supported by increased ethanol volumes and improved blended distillery realisations with favourable change in feedstock mix for ethanol production."

As per HDFC Securities "Further, higher sucrose diversion towards B-heavy molasses/juice-based ethanol would moderate the inventory levels and lower the working capital debt and hence the total debt levels (despite increase in debt for distillery capex) going forward. Higher operating profit and lower interest cost is likely to drive PAT CAGR of 39%. Improving profitability coupled with reduced working capital requirements to drive robust cashflow generation (cumulative FCF of ~Rs 613 Cr over FY21-24E) to be utilised for debt reduction or further expansion. Consequently, DSIL could witness a massive jump in return ratios. We think the base case fair value of the stock is Rs 136 (10.5x FY24E EPS) and the bull case fair value of is Rs 156 (12x FY24E EPS). Investors can buy the in stock Rs 120-126 band (9.5x FY24E EPS) and add more on dips to Rs 108-112 band."

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.