Buy Dalmia Bharat Sugar Ltd : Leveraging all opportunities in ethanol blending - ICICI Direct
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Buy Dalmia Bharat Sugar Ltd For Target Rs.650
Leveraging all opportunities in ethanol blending…
About the stock: Dalmia Bharat Sugar (DBS) is the only sugar company present in both UP and Maharashtra. The company has sugar crushing capacity of 35500 TCD (6 lakh tonnes pa), distillery capacity of 300 KLD (8.5 crore litre pa) & co-generation capacity of 102 MW & wind power of 16.5 MW (total 30 crore units saleable power).
* The company is expanding its sugarcane & molasses based annual distillery capacity from current 8.5 crore litre to 15 crore litre. Moreover, it has announced capex for grain based distillery of 6 crore litre).
Q1FY22 Results: DBS reported muted Q1FY22 numbers due to high base quarter.
* Sales were down 7.1 % YoY, due to lack of exports, lower ethanol offtake
* EBITDA was at | 141.1 crore, down 28.4% YoY, with margins at 17.2%
* PAT was at | 124.4 crore (down 1.2% YoY) backed by tax reversal.
What should investors do?
DBS’s share price has gone up 3x in the last five years (from | 160 in August 2016 to | 479 in August 2021).
* We expect 2.5x increase in distillery volumes to boost earnings with CAGR of 18.4% during FY21-24E.
* We continue to maintain our BUY rating on the stock.
Target Price and Valuation: We value the stock at | 650, ascribing a multiple of 14x FY23 earnings.
Key triggers for future price performance:
* DBS is fastest in utilising B-heavy, sugarcane juice & grain route to produce ethanol. Distillery volumes are likely to grow 2.5x to 21 crore litre by FY24
* The company been aggressive in exporting sugar & utilising higher global white sugar prices. Freight cost is much lower given its proximity to ports
* With the increasing profitability & reduction in sugar inventories, DBS would be generating cumulative free cash flow of | 570 crore in the next two years despite ~| 700 crore capex
Alternate Stock Idea: We also like Balrampur Chini in our sugar coverage universe
* The company is the second largest and one of the most efficient sugar companies in India. Along with sugarcane juice, B-heavy, it is also utilising grain based ethanol to leverage the ethanol opportunity in India
* We value the stock at | 515/share with BUY recommendation
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