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Dalmia Bharat Sugar & Industries Ltd>
  • CMP : 367.8 Chg : 0.85 (0.23%)
  • Target : 490.0 (30.67%)
  • Target Period : 12 Month

02 Aug 2022

High cost of production & one-offs drags bottom-line

About The Stock

Dalmia Bharat sugar (DBS) is only sugar company present in UP as well as in Maharashtra. The company has sugar crushing capacity of 39000 TCD (5.5 lakh tonnes pa), distillery capacity of 600 KLD (18 crore litters pa) & co-generation capacity of 102 MW & Wind power of 16.5 MW (Total 30 crore units’ saleable power)

  • The company has expanded its distillery capacity from 8.5 crore litres to 18 crore litres. It would further increase its distillery capacity to 24 crore litres in next one year through one grain based & one molasses based distillery
Q1FY23 Results

DBS posted revenue growth of 14.6% led by high ethanol sales

  • Revenue growth was led by doubling of distillery volumes & improvement in ethanol realisation due to higher volumes of B-heavy /juice ethanol 
  • EBITDA was at Rs 101.5 crore, down 28.1% YoY, with margins at 10.8%
  • PAT was at Rs 49.3 crore (down 60.4%) due to tax reversal in base quarter
What should Investors do?

DBS’s share price has gone up 114% in last five years (from Rs 175 in August 2017 to 375 in July 2022)

  • We expect 38.4% CAGR in distillery revenues, led by ethanol volumes, to boost the company’s earnings by 16.2% CAGR during FY22-24E
  • We continue to maintain our Buy rating on the stock
Target Price Valuation

We value the stock at Rs 490, ascribing a multiple of 10x FY24 earnings

Key triggers for future price performance
  • DBS is fastest in utilising B-heavy, Sugarcane juice & grain route to produce ethanol. Distillery capacity to grow 2x to 24 crore litres by FY24
  • The company export high quality refined sugar & utilise higher global white sugar prices to its benefit. This improves its overall sugar realisation
  • The company has diverted 25% of its sugarcane towards ethanol & also aggressively exported high quality sugar. We believe company’s dependency on domestic sugar sales has come down significantly
Alternate Stock Idea

We also like Balrampur Chini in our Sugar coverage universe

  • The company is second largest & one of the most efficient sugar companies in India. Along with sugarcane juice, B-heavy, the company is also utilising grain based ethanol to leverage the ethanol opportunity in India
  • We value the stock at Rs 515 / share with Buy recommendation 

Key Financial Summary

Key Financials FY20 FY21 FY22 5 Year CAGR % (FY17-22E) FY23E FY24E (Blank) CAGR % (FY22-24E)
Total Operating Income 2,110.8 2,685.8 3,018.3 12.4 3,143.8 3,411.1 - 6.3
EBITDA 336.6 471.4 447.7 3.4 567.4 649.0 - 20.4
EBITDA Margin % 15.9 17.6 14.8 - 18.0 19.0 - -
Net Profit 193.2 270.3 297.3 9.8 344.4 401.1 - 16.2
EPS (Rs) 23.9 33.4 36.7 9.8 42.5 49.6 - 16.2
P/E 15.7 11.2 10.2 - 8.8 7.6 - -
RoNW % 9.0 12.6 12.6 - 14.9 15.2 - -
RoCE (%) 11.8 13.3 12.3 - 15.5 17.7 - -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter

Q1FY23 Results: High sugarcane prices, lower recovery and consumer business losses drags earnings

  • Consolidated revenue witnessed a growth of 14.6% to Rs 938.4 crore led by 138.9% growth in distillery sales & 7% growth in sugar sales. Sugar volume declined by 14% to 1.68 lakh tonnes mainly on account of lower exports during the quarter. The company exported majority of sugar for the season in base quarter (Q1FY22) whereas exports during the current season were spread throughout the year (Oct-Sep).
  • With the commission of new distillery in Feb-22, the company was able to increase distillery volumes by 113% to 4.36 crore litres. We believe distillery realisation would have also been higher given company started producing ethanol from syrup (sugarcane juice). Power volumes were lower by 12% to 6.08 crore units.
  • Operating profit declined by 28.9% to Rs 101.5 crore mainly on account of increase in sugarcane cost in 2021-22 season, lower sugar recovery in UP, reduction in power tariffs in Maharashtra & losses in consumer business. Net profit declined by 60.4% to Rs 49 crore on account of lower operating profit & tax reversal of Rs 29.6 crore in base quarter
  • We believe the company had produced ethanol from sugarcane juice during the quarter & this would have resulted in build-up of B-heavy molasses inventory. We believe utilisation of B-heavy ethanol inventory would result in higher distillery margins in next few quarters.
  • The company is holding 1.6 lakh tonnes of sugar inventory valued at Rs 32/kg. We believe this inventory would be exhausted by October-2022 before the next seasons crushing starts. It is likely to export 20,000 tonnes of additional quantity in 2021-22 season as government is likely to allow industry wide additional export of 1.2 million tonnes. We believe the company is likely to export total 1.3-1.4 lakh tonnes during 2021-22 sugar season  
  • The company produces 2.25 lakh tonnes of high quality refined sugar for export or domestic market, which is ~40% of its total sugar production. Refined sugar is produced in Nigohi & Jawaharpur Plant in UP.
  • DBS discontinued consumer businesses (except branded sugar). It incurred some operational & liquidation losses in consumer business. There would be some liquidation expense in Q2 as well. Its branded sugar sales for FY22 was 10,000 tonnes (~2% of its total sugar production)
  • Long term debt for the company is Rs 403 crore as on 30th June 2022. The entire debt is concession debt at very low interest rates. Short term debt (net of investments) is Zero. The company’s net debt to equity is 0.17x
  • Gross sugar production in 2021-22 season has been 39.5 million tonnes & after the diversion of 3.5 MT towards ethanol, net sugar production is 36 MT. With the consumption of 27.5 MT & exports of 11 MT, the closing inventory is likely to be ~5.5 MT on September 2022. We believe sugar prices should go up by Rs 1/kg for next 2-3 months. However, our average sugar realisation estimate is Rs 35.5 /kg.
  • Given sugar production in 2022-23 season is also likely to be very high of 35.5 MT (after diversion of 4.5 MT), the government is also likely to announce export policy for next year in September 2022.
  • Ethanol blending in the country has reached to 10.17%. OMCs have contracted for 445 crore litres out of the total requirement of 459 crore litres for 2020-21 (December – October). Out of this total, OMCs have lifted 283 crore litres of ethanol till 17th July 2022. The government has also declared incentives for ethanol supply from June 22 to Nov 22 to the tune of Rs 1-2 / litres depending on the feedstock (B-heavy, Sugarcane Juice)

Dalmia Bharat Sugar is one of the most efficient sugar companies with high distillery capacity compared to crushing operations. This gives a leeway to divert more sugarcane towards ethanol given sugar prices are unlikely to witness runaway surge in future. The company is also setting up 100 KLD grain based distillery to utilise high availability of broken rice / other grains in its catchment area in UP. With mere Rs 403 crore debt & Zero net working capital debt, DBS has one of the strongest balance sheet in sugar industry. We believe the company would be able to generate ~40% of its revenue from distillery segment in FY24 after the completion of its capex. Further, the company has the capacity to exports 2.25 lakh tonnes of high grade refined sugar, which is likely to improves its sugar realisation going forward. Foray & early exit in some of the categories in consumer business is disappointing. However, we remain positive on sugar industry as well as DBS. We maintain our Buy recommendation & revise our target price to Rs 490 / share

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