ICICI Direct, a brokerage firm has set a buy call on the stock of Avadh Sugar & Energy Limited with a target price of Rs 680 resulting in a gain of 50% in 12 months. The brokerage has set a buy call for the stock with a market price of Rs 455. According to ICICI Direct Avadh Sugar has a 31800 TCD sugarcane crushing capacity 240 KLD distillery capacity & 74 MW saleable power capacity. The company produces 6.2 lakh tonnes of sugar, 6 crore litre of ethanol & 15 crore units of saleable power.
Q2FY22 results of the company according to ICICI Direct
Avadh reported strong results with a 3.5x jump in profits, and the sales were flat at Rs 619.6 crore, impacted by lower domestic sugar sales. According to the research report of ICICI Direct, the company's EBITDA was at Rs 74.8 crore, up 38.8% YoY, with margins of 12.1% and consequent PAT was at Rs 25.2 crore (up from Rs 7.2 crore in the base quarter).
Key triggers for future price performance of Avadh Sugar according to ICICI Direct
- The company is undertaking distillery expansion of 80 KLD with a CAPEX of Rs 135 crore, which would increase its distillery volumes to 11 crore. Avadh would be maximising B-heavy & sugarcane juice ethanol production.
- With the industry wide inventory reduction, sugar prices have moved up from Rs 32.5/kg in June 2021 to Rs 37/kg in November and are likely to remain firm above Rs 35/kg. This would boost earnings over the next three years.
- With the inventory liquidation in the next one year and boost in profitability, the company would be able to de-leverage its balance sheet. We expect debt reduction of Rs 540 crore between FY21 and FY24E.
Buy Avadh Sugar with a target price of Rs 680 says ICICI Direct
According to the research report of the brokerage "Avadh is increasing its distillery capacity from 240 KLD to 320 KLD with a CAPEX of Rs 135 crore. This would help it to increase its annual ethanol production to 11 crore litre."
"Avadh's share price has gone up 2.1x in the last five years (from Rs 220 in November 2016 to Rs 455 in November 2021). We expect 2x increase in distillery volumes to boost earnings at a CAGR of 41.3% during FY21-24E" said ICICI Direct in its research report.
The brokerage has further clarified for the investors that "Avadh is also increasing its ethanol capacities & exporting additional sugar to reduce the sugar inventory level. However, the company still has a high sugar inventory relative to the industry & increasing domestic sugar prices would benefit the company in terms of liquidating this inventory at elevated sugar prices. Moreover, inventory liquidation would help it reduce debt at a faster pace, which, in turn, would boost profitability. The company would also complete its distillery CAPEX by June 2022, which would help it increase the distillery volumes to 11 crore litre. We remain positive on the sector and the company from a longer-term perspective. We maintain our BUY recommendation on the stock with a target price of Rs 680/share, valuing the business at 1.4x FY23 BV."
The above stock has been picked from the brokerage report of ICICI 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.