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Increasing distillery volumes to boost earnings

Dalmia Bharat Sugar (DBSL) reported strong Q4FY21 results with 32.7% growth in operating profit led by increase in distillery volumes and higher proportion of B-heavy ethanol. Consolidated sales declined 11.1% on account of absence of export volumes given the delay in announcement of export subsidy. However, most sugar exports would be shipped & booked in Q1FY22.

Sugar sales were down 18% whereas distillery sales were up 23.2%. The company sold 1.0 lakh tonnes (lt) of sugar largely comprising domestic sales. Distillery volumes were up 10% to 2.1 crore litre. The company changed its depreciation charging method from SLM to WDV for sugar & distillery segment, which resulted in additional depreciation provisioning by | 35 crore. PAT fell 16% to | 51.9 crore mainly on account of higher depreciation & income tax provisioning.

Aggressive distillery capacity addition

The government is aiming at ethanol blending with petrol to the tune of 10% by 2022, 20% by 2025. Moreover, it is also providing interest subvention for debt taken for distillery capacity expansion. This has encouraged sugar millers to raise distillery capacities. DBSL has increased its Nigohi distillery capacity from 60 KLD to 100 KLD in Q4 taking total capacity to 300 KLD.

The company is doubling its annual distillery capacity from 8.6 crore litre in FY21 to ~15 crore litre in FY23E along with sugar crushing capacity of 5000 TCD with capex of | 412 crore. We believe DBSL is best placed to utilise B-Heavy & sugarcane juice route to produce ethanol. We expect distillery volume of 10.8 crore, 15.2 crore litre for FY22E, FY23E, respectively. We estimate distillery revenue CAGR of 38.4% to | 856.9 crore in FY21-23E.

Higher global sugar prices to drive exports

The company has a locational advantage given two of its plants are in Maharashtra and freight cost till port is | 1/ kg lower compared to UP mills. Further, Maharashtra millers have been able to export higher white sugar quantity (which sell at a premium to raw sugar). We believe a sharp increase in global sugar prices would result in increase in white sugar export from Maharashtra under OGL. This would result in liquidation of excess sugar inventories and, in turn, push domestic sugar prices northwards.

Valuation & Outlook

With high global sugar prices, the industry would be able to export 5-6 million tonnes (MT) of sugar in the next sugar season as well. We believe aggressive sugar exports & 3-4 MT of sugar diversion towards ethanol would bring down sugar inventories to ~7 MT by September 2022, which would in turn push domestic sugar prices upwards. We believe now market recognises structural earning growth trajectory for sugar companies. Hence, we value the stock at 10x FY23E earnings with a target price of | 450/share (earlier | 225). We maintain our BUY rating.

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