Buy Avadh Sugar Ltd For Target Rs.680 - ICICI Direct
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Firm sugar prices, de-leveraging to drive profits…
About the stock: Avadh Sugar has 31800 TCD sugarcane crushing capacity 240 KLD distillery capacity & 74 MW saleable power capacity. The company produces 6.2 lakh tonnes of sugar, 6 crore litre of ethanol & 15 crore units of saleable power.
* Avadh is increasing its distillery capacity from 240 KLD to 320 KLD with a capex of | 135 crore. This would help it to increase its annual ethanol production to 11 crore litre
Q2FY22 Results: Avadh reported strong results with 3.5x jump in profits
* Sales were flat at | 619.6 crore, impacted by lower domestic sugar sales
* EBITDA was at | 74.8 crore, up 38.8% YoY, with margins at 12.1%
* Consequent PAT was at | 25.2 crore (up from | 7.2 crore in base quarter)
What should investors do? Avadh’s share price has gone up 2.1x in the last five years (from | 220 in November 2016 to | 455 in November 2021).
* We expect 2x increase in distillery volumes to boost earnings at a CAGR of 41.3% during FY21-24E
* We maintain our BUY rating on the stock
Target Price and Valuation: We value the stock at | 680, valuing the business at 1.4x FY23 BV.
Key triggers for future price performance:
* The company is undertaking distillery expansion of 80 KLD with a capex of | 135 crore, which would increase its distillery volumes to 11 crore. Avadh would be maximising B-heavy & sugarcane juice ethanol production
* With the industry wide inventory reduction, sugar prices have moved up from | 32.5/kg in June 2021 to | 37/kg in November and are likely to remain firm above | 35/kg. This would boost earnings over the next three years
* With the inventory liquidation in the next one year and boost in profitability, the company would be able to de-leverage its balance sheet. We expect debt reduction of | 540 core between FY21 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 and abundant sugarcane availability. It is increasing its distillery capacity to 3x in the next three years
* We value the stock at | 110/share with a BUY recommendation
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