Dhampur Sugar Mills is a major integrated sugarcane processing company in India. Dhampur has a daily cane crushing capacity of 45,500 metric tonnes. The company also generates 1700 metric tonnes of refined sugar per day. The company's business portfolio includes renewable energy, fuel ethanol, alcohol, extra neutral alcohol, alcohol-based chemicals, and bio-fertilisers, in addition to sugar. On the NSE, the company's shares have risen from Rs 185.35 on March 25, 2021 to Rs 544.05 on March 24, 2022, 3:30 pm IST, representing a multibagger return of 193.53 percent in a year. The stock has risen 77.04 percent on a year-to-date (YTD) basis, and it has climbed by 83.58 percent in the previous six months. The stock has returned 47.04 percent in the last month and is gained 2.65 percent in the last five days. Sharekhan, a brokerage company, has a buy call on the stock with a target price of Rs. 692.
Investment rationale for Dhampur Sugar Mills Limited (DSML)
According to Sharekhan "DSML is focusing on increasing investment in ethanol capacity with strong support from the government's prudent blending policies, strengthening the non-sugar portfolio of the business, and enhancing overall profitability in the medium to long term. The company will be enhancing its distillery facility to 650 KLPD by FY2024 from 400 KLPD in FY2021 (enhanced to 500 KLPD in January 2022). Expansion in distillery capacity would help business revenue to post a 29% CAGR over FY2021-FY2024 to Rs. 1,245.2 crore. Contribution of the ethanol segment's revenue will go up to 27% by FY2024 from 14% in FY2021."
"DSML's EBITDA margin stood lower at 11% in FY2021 compared to peers at around 14-16%. Increased ethanol sales contribution to 25%+ in FY2024, driving efficiencies through TPM, and sweating of existing assets will help DSML's EBITDA margin to improve to 15% by FY2024. Further, the company is focusing on enhancing value of its existing produce by producing country liquor (in response to the government's mandate to supply 18% of the molasses produced by the company to liquor manufacturers), manufacturing high-margin specialty chemicals, and increasing the manufacturing of refined and packaged sugar. This will help EBITDA margin to consistently improve in the medium to long term," the brokerage has noted.
The brokerage also claims that "Strong earnings growth and improved working capital would help cumulative FCF to grow by Rs. 450 crore over FY2022-FY2024 (despite ~Rs. 500-600 crore of capex for expansion of ethanol capacity). The company can utilise higher cash flows to reduce debt on books and reward shareholders with higher dividend payout in the coming years. Improved profitability and sustained reduction in debt on books would help the return profile (RoE/RoCE) to improve substantially to 18.6%/19.8% in FY2024 from 15.7%/14.0% in FY2021."
Buy for a target price of Rs. 692
"DSML is focusing on creating value for shareholders by strengthening the non-commodities business to achieve consistent earnings growth with higher EBITDA margins. The stock is currently trading at valuation of 10.5x/8.4x its FY2023E/ FY2024E EPS, which is at a discount to some of its close peers. Strong earnings visibility, improving margin profile, and strengthening of the balance sheet would help the valuation gap with close peers to reduce in the coming years. Hence, we are re-initiating coverage on the stock with a Buy recommendation, assigning a price target (PT) of Rs. 692 (valuing the stock at 11x its FY2024E EPS, which is at 27% discount to the target multiple of Balrampur Chini Mills [BCML])," claims Sharekhan.
The stock has been picked from the brokerage report of Sharekhan Ltd. 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.