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Distillery commissioning to boost earnings growth
Dwarikesh Sugar reported 33.5% YoY decline in Q2FY20 numbers on account of lower sugar volumes and decline in power segment tariffs. Sugar sales volume declined 35.1% to 52,160 tonnes during the quarter impacted by lower monthly sales quota. However, average sugar realisation was up by 4.3% to | 32.9/kg while sugar EBIT increased 60% YoY from | 9.5 crore to | 15.2 crore. Distillery volumes declined 65% from 29 lakh litre to 10 lakh litre due to lower tendering by the company given expected integration of new capacity in November 2019. However, distillery realisation was up 14.5% to | 43.5/litre led by increased prices of C heavy ethanol. Power sales remained muted given Q2 is seasonally weak quarter for the segment due to low availability of bagasse. Generally, sugar mills largely exhaust bagasse (feedstock for power generation) by June-July.
Expansion of distillery capacity in H2FY20 to augment topline
Though distillery volumes declined 30% YoY to 38 lakh litre in H1FY20, we believe commissioning of new 100 kilo litre per day (KLD) capacity at an investment of Rs146 crore in November 2019 would result in multi-fold increase in volumes coupled by higher realisation. We expect its distillery volume to increase from 90 lakh in FY19 to 3.5 crore by FY21E. Increase in B heavy and C heavy ethanol prices would benefit the company in terms of higher distillery revenue from Rs 36 crore in FY19 to Rs 67 crore in FY20E and Rs 185 crore in FY21E along with reduction in sugar inventories.
Healthy cash flow generation in next two years
Dwarikesh Sugar has availed concessional soft loan for the capacity expansion. Working capital debt has declined from | 496 crore in March 2019 to Rs 210 crore in September 2019 with cost of debt at less than 8%. Low cost long term debt has increased by Rs 45 crore as the company has invested Rs 146 crore for new 100 KLD distillery capacity. Though most cash flows in FY19 have been converted in higher sugar inventories, we expect the company to generate Rs 164 crore and Rs 237 crore of cash flows from operations in FY20E and FY21E, respectively.
Valuation & Outlook
Commissioning of 100 KLD distillery unit in November 2019 would increase the company’s distillery volume from 90 lakh in FY19 to 3.9 crore by FY21E. We expect revenue & earnings CAGR of 20.4% & 24.3%, respectively, in FY19-21E on the back of commissioning of new distillery and improved sugar realisation to Rs 32.5/kg in FY20E. With the increase of sugarcane diversion towards B heavy ethanol and higher sugar exports, sugar inventories may decline next year. The highest sugar recovery rate in the industry at 12.3% due to the early adoption of high yielding sugarcane variety CO-0238 also makes it the lowest cost of producer in the industry. Given strong balance sheet and higher free cash flows in the next two years, we believe the stock is trading at a significant discount to its peers. We maintain our BUY recommendation with a target price of Rs 37/share.
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