ICICI Direct Maintains "Buy" On This Small Cap Stock, Sees 57% Potential Upside In 12 Months

ICICI Direct has placed a "buy" call on Avadh Sugar & Energy Limited (Avadh Sugar) for a decent return of up to 57% in 12 months with an estimated target price of Rs 750 per share. Avadh Sugar is a small-cap sugar sector company having a market capitalisation of Rs 956.78 crore.

Avadh Sugar has 31800 TCD sugarcane crushing capacity 325 KLD distillery capacity & 74 MW saleable power capacity. The company produces 6.0 lakh tonnes (lt) of sugar, ~9 crore litre of ethanol & 15 crore units of saleable power. The company has increased its distillery capacity from 240 KLD to 325 KLD with a capex of Rs 135 crore. This would help it to increase its annual ethanol production to 11 crore litre.

Stock Outlook & Returns

The stock today opened at Rs 477.50 per share, currently trading at Rs 478.85 per share. The stock at the time of writing is trading 0.19% above the previous close of Rs 477.95 per share on NSE.

The stock in a week has moved down by 4.71%, whereas, in 1 month it fell by 8.39%. The stock in 3 months has given 7.12% negative returns. Over the past 1 year, it grew 2.75%, giving a positive return. In the past 3 years, it gave a massive 85.19% positive returns. While in the past 5 years, the stock fell, giving a negative return of 20.48%.

The stock recorded its 52 week high level at Rs 885 on 22 April 2022, whereas, 52 week low level was recorded at Rs 396 on 20 December 2021.

Q2FY23 Results

Avadh posted 4.9% sales dip due to muted sugar, ethanol sales. Sales down 4.9% to Rs 589.2 crore impacted by lower sugar volumes. EBITDA was at Rs 0.5 crore due to higher cost of production & wage arrears. Consequently, the company posted a net loss of Rs 16.2 crore.

Buy stock for a target price of Rs 750 per share

Avadh's share price has underperformed in last five years with 21% decline (from Rs 602 in November 2017 to Rs 476 in November 2022). "We expect 15.7% CAGR in distillery volumes to boost overall earnings with CAGR of 26.8% during FY22-24E. We maintain our BUY rating on the stock. We value the stock at Rs 750, valuing the business at 8x FY24 PE," the brokerage has said.

 

Key triggers for future price performance

According to the brokerage, the key triggers for future price performance are as follows:

The company has commissioned 80 KLD with a capex of Rs 135 crore, which has increased its distillery volumes to 11 crore. Avadh would be maximising B-heavy & sugarcane juice ethanol production.

Avadh is also completed de-bottlenecking operations, which would increase its operational efficiency and improve profitability.

The government has allowed 6 million tonnes (MT) of sugar exports in the first trench & it is likely to further allow 3 MT in second trench in Jan-Feb 2023. This would keep sugar inventory at ~6 MT on September-2023 & domestic sugar prices stable at ~Rs 35/kg.

With inventory liquidation in the next one year and boost in profitability, Avadh would be able to de-leverage its balance sheet. We expect debt reduction of more than Rs 600 crore between FY22 and FY24E.

 

Disclaimer

The stock has been picked from the brokerage report of ICICI Direct. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.