The story so far ………..
Dharani Sugars & Chemicals – DSC belonging to the Chennai based PGP Group of companies is a fully integrated sugar producer and is a Rs6bn company with a sugar capacity of 10,000TCD, Distillery capacity of 160klpd and a 37mw co-generation power plant spread across its 3 units in Dharani Nagar, Polur & Villupuram all in Tamil Nadu. DSC derives 80% of its revenues from sugar and 20% from distillery and co-generation.
DSC undertook a massive capacity expansion in all its 3 business verticals last fiscal and this was funded entirely by debt as a result of which every penny earned last fiscal was eaten up by the interest cost and its long-term debt equity ballooned to 2.7x while its total debt equity rose to 4x and at 1x EV to sales the market capitalization now stands at just Rs1.2bn.
The story ahead ………..
We expect DSC to post a 230% rise in net profits this fiscal to Rs330mn driven primarily by the sugar business as we expect the average realization to be Rs32 per kg as against Rs28 per kg in the last two years. DSC pays a substantially lower price for the cane as compared to its peers in the western and northern parts of India. During H1 this fiscal the gross margins from the sugar business improved 4 times as compared to the same period last fiscal. Higher than average crushing days in line with mills based in southern India along with a recovery of more than 9% would in our view ensure that the sugar division performs to its potential this fiscal.
With the 100klpd distillery going on stream in October 2012 we believe that the 5% mandatory ethanol blending program augurs well for DSC next fiscal and this segment along with co-generation would contribute well for the first time next fiscal. The 22mw co-generation at its new unit fetched a realization of Rs4.4 per unit which is higher than the rate at its old unit and we expect DSC to post a net profit of Rs500mn next fiscal as the integrated sugar model plays out well in FY’13-14.
DSC trading at 2.5xFY13-14E earnings of Rs17 is in our view the best available small cap integrated sugar play and we recommend a BUY with a one-year price target of Rs120.
Thanks and Regards
LKP Advisory
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