Recommendation From Sugar Sector
This section gives a recommendation of a stock having stock margin padding price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon
DALMIA BHARAT SUGAR AND INDUSTRIES
MAKE YOUR FESTIVE SEASON SWEETER
HERE IS WHY
Industry-supportive government policies
Well-diversified revenue stream
Better monsoon to lower input cost.
The festive season is now around the corner and that is what has prompted us to choose something sweet as our ‘choice scrip’. Yes, it is from the sugar industry, the sweetness of which has been enhanced by three key policy interventions made by the Government of India. These include an approval of a higher price for ethanol, permission for export of 60 lakh tonnes of surplus stocks of sugar, and sanction for the creation of a buffer stock of 40 lakh metric tonnes (LMT) of sugar for one year. These policy interventions will bring liquidity to sugar mills, reduce sugar inventory, and will facilitate timely clearance of cane price dues of farmers while reducing sugarcane price arrears of sugar mills.
These are the prime factors that have led us to choose the sugar industry and DBSI in particular, which is one of the leading players in this sector. DBSI operates its business with five sugar manufacturing plants, three in Uttar Pradesh and two in Maharashtra. Both these states are cane-rich, which implies minimum carriage inward. The total cane crushing capacity of the company is now 22,500 TCD which makes it one of the leading sugar producers in the country. The company has 79 MW of cogeneration capacity and a distillery of 80 KLPD. It also has facilities for processing of raw sugar. The company serves the regional market of Uttar Pradesh and eastern India as well as institutional buyers such as Pepsi, Coke, Britannia, Bharati Wal-Mart, Parle, etc. The company is also engaged in the business of power, distillery, etc.
On a consolidated basis, the total income from operations declined by 9.76 per cent to `589.51 crore in the Q1FY20. This decline in operational income was led by a delayed monsoon season and droughtlike conditions in previous years. The EBITDA grew by 13.51 per cent to `95.32 crore in the same period. Its EBITDA margin stood at 16.17 per cent in the June quarter of FY20 as against 12.85 per cent in the same quarter of FY19. The net profit declined 8 per cent to `54.39 crore in thesame period. Going ahead, the management expects FY20 to see better growth due to enhanced capacities and improved efficiencies.
The company produces ethanol, which is blended with petrol to enhance eco-friendliness qualities and it produced 33,515 kilo litres of ethanol this year. India aims to triple its ethanol production by 2022 and thereby reduce the country’s oil import bill by `12,000 crore. This demand of ethanol production and increased ethanol prices will help DBSI to grow its revenue in the coming quarter.
Sugarcane crops require huge amount of water for growth and since the monsoon has been exceedingly good this year – with flooding in many districts – the ground water level has increased. This will help increase the yield of sugarcane in states like Maharashtra and Uttar Pradesh, thereby benefitting the company. Given this scenario, it is expected that the cost of raw material i.e. sugarcane will reduce for this year. The return ratios of the company are also in a sound position with ROE of 12 per cent, available at PE ratio of below 4, which makes it an attractive valuation to BUY.
