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Earnings impacted by one-offs; ethanol story intact…

About the stock: Avadh Sugar has 31800 TCD sugarcane crushing capacity 325 KLD distillery capacity & 74 MW saleable power capacity. The company produces 6.0 lakh tonnes (lt) of sugar, ~9 crore litre of ethanol & 15 crore units of saleable power

* The company has increased its distillery capacity from 240 KLD to 325 KLD with a capex of | 135 crore. This would help it to increase its annual ethanol production to 11 crore litre

Q2FY23 Results: Avadh posted 4.9% sales dip due to muted sugar, ethanol sales

* Sales down 4.9% to | 589.2 crore impacted by lower sugar volumes

* EBITDA was at | 0.5 crore due to higher cost of production & wage arrears

* Consequently, the company posted a net loss of | 16.2 crore

What should investors do? Avadh’s share price has underperformed in last five years with 21% decline (from | 602 in November 2017 to | 476 in November 2022).

* We expect 15.7% CAGR in distillery volumes to boost overall earnings with CAGR of 26.8% during FY22-24E

* We maintain our BUY rating on the stock

Target Price & Valuation: We value the stock at | 750, valuing the business at 8x FY24 PE

Key triggers for future price performance:

* The company has commissioned 80 KLD with a capex of | 135 crore, which has increased its distillery volumes to 11 crore. Avadh would be maximising B-heavy & sugarcane juice ethanol production

* Avadh is also completed de-bottlenecking operations, which would increase its operational efficiency and improve profitability

* The government has allowed 6 million tonnes (MT) of sugar exports in the first trench & it is likely to further allow 3 MT in second trench in Jan-Feb 2023. This would keep sugar inventory at ~6 MT on September-2023 & domestic sugar prices stable at ~| 35/kg

* With inventory liquidation in the next one year and boost in profitability, Avadh would be able to de-leverage its balance sheet. We expect debt reduction of more than | 600 crore between FY22 and FY24E

Alternate Stock Idea: We also like Dwarikesh Sugar in our sugar coverage.

* The company is one of the most efficient companies with highest sugar recovery & abundant sugarcane availability. It has increased its distillery capacity by 2x to 11 crore litres

* We value the stock at | 135/share with BUY recommendation

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