ICICI Direct has set a buy call on the stock of Dhampur Sugar with a target price of Rs 430. The stock is currently trading at a market price of Rs 308 and the brokerage estimates a potential upside of 39% in 12 months. Dhampur Sugar Mills (Dhampur) is among India's largest integrated sugarcane processing companies, with a daily crushing output of 45,500 metric tonnes.
Q2FY22 results of Dhampur Sugar Mills
According to ICICI Direct "Consolidated revenue witnessed de-growth of 18.1% to Rs 762.5 crore on account of 27.4% dip in sugar sales due to 33.6% decline in sugar volumes. The company sold 1.44 lakh tonnes (lt) of sugar during the quarter. However, sugar prices started moving up from August 2021 onwards, which resulted in 3.9% increase in sugar realisation to Rs 34.6/kg. The current prevailing prices are Rs 36/kg."
The brokerage has said that the company's "Distillery (ethanol, chemical, country liquor) sales witnessed growth of 41.7% on account of higher 5.5% increase in ethanol volumes, 10% increase in ethanol realisation with higher proportion B-heavy ethanol. Out of the total 3.09 crore litre of ethanol, B-heavy ethanol was 2.93 crore litre (95%) & 0.16 crore litre was C-heavy ethanol. Chemical business volumes have also increased by 7% to 66.6 lakh kg with 70.8% increase in average realisation."
"The company is holding 1.88 lakh tonnes of sugar valued at 29.47 / kg. With prevailing sugar prices at Rs 36 / kg, DSL would be able to make Rs 6.5/kg margin in Q3FY22. We believe the company would be able to exhaust 2020- 21 sugar inventory by January 2022" says the brokerage.
"Operating profit witnessed de-growth of 8.4% to Rs 66 crore impacted by lower sugar sales volumes. However, operating margins improved 100 bps to 8.7% aided by improvement in sugar prices, higher distillery volumes & uptick in distillery realisation. Interest cost was down 15.6% to Rs 17.8 crore with reduction in debt & lower interest rates. PAT dipped 4% to Rs 26.7 crore and EBITDA was at Rs 66 crore, dip of 8.4% YoY, with margins at 8.7%" says ICICI Direct.
Key triggers for future price performance of Dhampur Sugar Mills according to ICICI Direct
- DSL is increasing its ethanol capacity by 2x to 22 crore litre by FY24, which would result in distillery sales CAGR of 24% to Rs 1535.4 crore in FY21-24E. The company generates 35% of its revenues from the distillery business.
- The company would be increasing its sugarcane crushing by 5-10% in the next one year. This would help it utilise the additional sugarcane for the production of ethanol through sugarcane juice.
- We expect cumulative free cash flow of Rs 656 crore in the next three years, which would reduce the debt levels and drive earnings growth.
Buy Dhampur Sugar Mills with a target price of Rs 430 / share
ICICI Direct has reported that "The sugar industry is going through a transformation from a cyclical industry to a structural growth sector by increasing distillery capacities over the next three years. The industry has been able to reduce the sugar inventories from 14.5 million tonnes in September 2019 to 8.2 million tonnes in September 2021 through aggressive exports & diversion of sugarcane towards ethanol production. This has resulted in uptick in domestic sugar prices from Rs 32-33/kg levels to Rs 37/ kg in last four months."
"DSL's share price has gone up 2.7x in the last five years (from Rs 113 in November 2016 to Rs 308 in November 2021). We expect 2x increase in distillery volumes to boost earnings with a CAGR of 18% during FY21-24E. We believe firm sugar prices & increasing ethanol capacities would result in strong earnings growth over the next three years. Dhampur Sugar would be demerged into two separate entities with equal assets. The resultant company 'Dhampur Bio Organics' would list on exchanges with mirror shareholding. We maintain our BUY recommendation on the stock with a target price of Rs 430 / share (earlier Rs 500)" said ICICI Direct in its research report.
This stock is picked from the brokerage report of ICICI Direct. 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.