KCP Sugar & Inds. Corp. :: CENTRUM WEALTH: Top 10 Diwali Picks

KCP Sugar & Industries (KCPS), the most efficient producer of sugar in the country, made profits and paid dividends almost consistently over the last 14 years despite the industry going through severe cyclical downturn several times. Only in FY2003, it posted some loss and skipped dividend as the sugar realization touched a 14-year low at Rs.12.9 per kg. It is also the least leveraged sugar company with debt being just 35% of total capital employed;
Over the last 3 months, domestic sugar prices have seen a sharp increase of ~20% to Rs.34.7/kg currently, after touching a peak of Rs.37.70/kg. Also, global sugar prices are up ~3% over the last 3 months to $19.5/lb. The sugar prices are expected to remain firm for next 2 years as the domestic production is expected to fall to 23 million tonne (MT) in CY2013 as compared to around 24.5 MT in CY2012;
KCPS reported 27% YoY growth in net profit while Net sales grew by 12% YoY in Q1FY2013 as EBITDA margin improved by 400 bps to 17% as against 13% in Q1FY2012. Company closed the year FY2012 with a record high sugar inventory of over Rs.200 crore which was valued at cost price – since March 2012, the domestic sugar prices have gone up by 23%, hence, we expect over 60% YoY growth in net profit in the current fiscal;
We believe that the company holds surplus land bank worth over Rs.350 crore in Chennai which is alone more than its enterprise value of Rs.329 crore In addition, it has major manufacturing assets like sugar plants, acetic acid plant and co-generation of power. The value of its land bank and plants are worth about Rs.1000 crore, which is about 3 times its current enterprise value. Considering the huge gap between its enterprise value and value of its assets, and also promoters’ lacking majority control (holding of about 39%), we believe that there exist a possibility of its takeover. For the last few years, the promoters have also been regularly buying the stock from the market, which enhances our conviction;
KCPS declared a 70% dividend for FY2012 and we expect the company to declare a dividend of Rs.0.85 for FY2013 which at the current market price would offer an yield of 4.3%. The stock trades at an attractive valuation of 5x FY2014E EPS of Rs.4. We believe the stock could be a multi-bagger in 1 to 2 years considering recent turnaround in the sugar cycle and acquisition possibility. Hence, we recommend a BUY on the stock with a fair value of Rs.32 to investors with a medium to long term investment horizon

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