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Avadh Sugar profitability jumps three times, distillery sees strong growth

News: Avadh Sugar's consolidated revenues were flat at Rs. 619.6 crore. Sugar sales saw dip of 4.7% due to lower domestic sales quota (1.36 lakh tonnes) & increasing sugar realisation. Distillery segment sales grew 74.1% on account of jump in ethanol volumes & higher realisation. Operating profit rose 38.8% to Rs. 74.8 crore led by higher sugar realisation & increased proportion of B-heavy ethanol to fetch better realisation. Sugar prices increased from Rs. 32.5 / kg in June to Rs.37 / kg in November. Operating margins improved  338 bps to 12.1%. Interest cost dropped from Rs.33 crore in Q2FY21 to Rs.24.1 crore in Q2FY22. Net profit grew a splendid 3x to Rs. 25.2 crore. Debt came down from Rs.495.4 crore to Rs.467.4 crore & inventory liquidation led to Rs. 260 crore dip in working capital debt to Rs 614 crore.

View: Sugar industry is transforming into a structural growth sector, increasing distillery capacities over the next three years. In last three years, industry sugar inventories reduced from 14.5 million to 8.2 million tonnes (September 2021) through aggressive exports & sugarcane diversion towards ethanol. Avadh is also increasing its ethanol capacities & exporting additional sugar to reduce the sugar inventories levels. However, the company has high sugar inventory relative to the industry & increasing sugar prices would benefit the company in terms of liquidating this inventory at elevated sugar prices. This would also aid in reducing debt quickly & boosting profitability. Completion of company's distillery capex by June 2022, would also help it increase the distillery volumes. We remain positive on the sector & the company for long run.