Buy Avadh Sugar Ltd For Target Rs.970 - ICICI Direct
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High sugar prices, B-heavy ethanol aid profit jump…
About the stock: Avadh Sugar has 31800 TCD sugarcane crushing capacity, 325 KLD distillery capacity and 74 MW saleable power capacity. The company produces 6.0 lakh tonnes (lt) of sugar, 8 crore litre of ethanol & 15 crore units of saleable power.
Avadh has increased its distillery capacity from 240 KLD to 325 KLD with a capex of | 135 crore. This would help it increase its annual ethanol production to 11 crore litre
Q3FY22 Results: Avadh reported a strong set of results with 70% EBITDA growth.
Sales up 7.2% to | 746.5 crore, driven by high sugar & ethanol realisation
EBITDA was at | 73.1 crore, up 70.2% YoY, with margins at 9.8%
Consequent PAT was at | 28.9 crore (up from | 3.7 crore in base quarter)
What should investors do? Avadh’s share price has gone up 3x in the last five years (from | 220 in July 2017 to | 660 in February 2021).
We expect 75% increase in distillery volumes to boost earnings with a CAGR of 42.5% during FY21-24E
We continue to maintain our BUY rating on the stock
Target Price and Valuation: We value the stock at | 970, valuing the business at 2x FY23 BV.
Key triggers for future price performance:
The company has commissioned 80 KLD with a capex of | 135 crore, which has increased its annual distillery capacity to 11 crore. Avadh would be maximising B-heavy & sugarcane juice ethanol production
Sugar inventory has come down from 14.5 MT in September 2019 to 8.2 MT in September 2021, which would further come down to below 7 MT by September 2022. This would move sugar prices to | 37/kg
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 & abundant sugarcane availability. It is increasing its distillery capacity to 3x in the next three years
We value the stock at | 135/share with a BUY recommendation
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