About The Stock
Dwarikesh Sugar (DSL) is a UP based sugar company with sugar crushing capacity of 21500 TCD, distillery capacity of 163 KLD & co-generation capacity of 91 MW. It is undertaking a distillery capacity addition of 170 KLD with investment of Rs 230 crore. The distillery will be commissioned by June-2022.
- The company would be able to increase distillery volumes to 11 crore litre in FY24 from 5.6 crore litre in FY22
DSL reported strong profit growth in Q4FY22.
- Sales were down 20.8% YoY on account of absence of exports
- EBITDA was at Rs 102.4 crore, up 24.3% YoY, with margins at 21.6%
- Consequent PAT was at Rs 59.6 crore (up 23.6% YoY)
What should Investors do?
DSL’s share price has gone up 154% in the last five years (from Rs 47 in May 2017 to Rs 118 in May 2022).
- We expect 2x increase in distillery volumes to boost earnings with CAGR of 30.7% during FY22-24E
- We maintain our BUY rating on the stock
Target price valuation
We value the stock at Rs 145, valuing the business at 10x FY24 PE.
Key triggers for future price performance
- Distillery revenue to grow at 42.7% CAGR in FY22-24E with 2x increase in ethanol volumes and 6.4% increase in distillery realisation led by better realisation from B-heavy & sugarcane juice ethanol
- Higher exports aided by rising global sugar prices. Sugarcane diversion towards ethanol has led to Industry wide 6 MT inventory reduction since 2019 (likely to further fall by 1.5 MT by Sept-22), leading to firm sugar prices
- With increasing profitability & reduction in sugar inventory, the company would be able to generate cumulative Rs 407 crore free cash flows in the next two years. It would completely de-leverage the balance sheet
Alternate stock idea
We like Dalmia Bharat Sugar in our sugar coverage.
- It is fastest in utilising B-heavy & Sugarcane juice to produce ethanol. Distillery volumes to grow 2.5x to 21 crore litre by FY24. The company is aggressively exporting sugar & utilising higher global white sugar prices.
- We value the stock at Rs 660/share with a BUY recommendation