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Company Background

Established in 1933, Dhampur Sugar Mills Limited (Dhampur) of Delhi based Goel family, is one of India’s largest integrated sugar business engaged in the manufacturing of sugar, ethanol and power. It has five sugar factories located in Uttar Pradesh (UP) having an aggregate sugar crushing capacity of 45,500 tonnes/day, refined sugar capacity of 1,700 tonnes/day, distillery capacity of 400 KLPD and cogeneration capacity of ~220.5 MW (saleable ~125 MW).

Investment Rationale

Stable quarter led by higher sugar volume

* During Q3FY21, Dhampur net sales improved by ~36% y-o-y to ~Rs 10,893 mn, mainly on account of higher sugar and distillery volumes. Sugar sales volume improved by ~33.9% yo-y to 245 mn kg while average domestic realisation was marginally down by ~0.5% y-o-y to Rs 32.6/kg. Sugar segment reported an EBIT profit of Rs 134.6 mn against Rs 270.3 mn reported in Q3FY20 owing to muted realisations and sugar inventory drawdown. Sugar inventory as on December 30, 2020 was 187 mn kg valued at an average rate of Rs 31.58/kg. For SS20-21, the Company has been allocated with export quota of sugar 156 mn kg and the same has been contracted for export.

Distillery segment steering profitability

* Distillery segment revenue increased by whopping ~60.9% y-o-y to ~Rs 2,337 mn during the quarter, led by higher contribution from B-heavy ethanol. Ethanol volume was up by ~70.4% y-o-y to 32 mn litres while average realisations were up by 15.6% to Rs 51.2/litre. Segment EBIT margin improved by 1,609 bps y-o-y to 26.7% or Rs 622.7 mn against Rs 153.4 mn reported in Q3FY20.

GoI initiatives supporting sugar industry (SI), sustaining sugar prices

* Indian SI has been known for its cyclical nature and volatility. With an intention to change the fortunes of SI, the GoI announced a slew of positive measures in 2018/19, which has started reaping benefits. To stabilize sugar prices, GoI introduced Minimum Selling Price (MSP), reintroduced sugar selling quota to control supply, provided export incentives to reduce inventory levels, created buffer stocks, provided soft loans etc. and re-introduced new National Biofuel Policy and new Ethanol Blended Petrol Program with an aim to reach 10% and 20% ethanol blending by 2022 and 2030 respectively. The 20% blending target is preponed by five years to 2025. Hence, sugar companies are making positive profit margins even with high sugar inventory levels.

* Continuing the Policy, with increase in FRP and sugar selling price, the Government has increased ethanol prices for EY20-21 and to balance surplus sugar announced exports policy for SS20-21. The Group of Minister (GoM) has proposed to increase sugar MSP from Rs 31/kg to Rs 33/kg, which is yet to get a Cabinet approval. Any positive development on sugar MSP hike will result in upward revision in domestic sugar prices and Dhampur’s profitability. SAP prices for SS20-21 are awaited.

* With higher ethanol blending and procurement prices, the ethanol business has proved to be a boon for the sugar producers especially in a period of surplus sugarcane production. To have a greater participation in the ethanol blending programme, the Company enhanced its distillery capacity by 100 KLPD to 400 KLPD in FY19. Thus, Dhampur has been able to sell ~98 mn litre in FY20 against ~67 mn in FY18. The Company has tendered for ~105 mn litre of B-heavy ethanol to OMC’s for EY20-21 and further 20 mn litres would be utilised for ENA sale under mandatory molasses levy quota, post which, Dhampur expects to produce ~105 mn litres and ~155 mn litres of ethanol from B-heavy and a mix of B-heavy and direct sugarcane juice respectively, for FY21E and FY22E.

* Dhampur is laying the foundation for next level of growth by increasing its ethanol capacity by 100 KLPD to 500 KLPD, with a capex of ~Rs 1.3 bn, funded through mix of debt/equity of 3:1. The new distillery will be utilised for sacrificing excess sugarcane for ethanol production through B-heavy and sugarcane juice and is expected to start commercial production by November 2021. Thus, for FY21E and FY22E, we expect the Company to divert ~80 mn kg and ~136 mn kg of sugar towards ethanol, resulting in lower sugar production at ~772 mn kg and ~709 mn kg.

* Given the current scenario, we expect Dhampur to report net sales of ~Rs 39 bn each in FY21E and FY22E, with strong operating cash flow generation of ~7 bn and ~6 bn during FY21E and FY22E respectively. This will be used to repay debt of ~4.75 bn and ~3.25 bn during FY21E and FY22E. During Q3FY21, the Company has announced an interim dividend of Rs 6/- for FY22.

Valuation

Presently, the sugar industry is recovering from its recent troughs, through timely and game changing policy intervention related to sugar MSP, higher ethanol pricing, blending mandates, favourable export policy etc., thereby, moderating sector cyclicality and improving profitability, leading to structural re-rating of the sector. We have valued the stock on the basis of consolidated P/E and P/BV valuation method, assigning equal weights to P/E multiple of 5x FY22E EPS of Rs 45.8/share and P/BV multiple of 1xFY22E BV of Rs 273/share and maintain BUY on the stock with a target price of Rs 251/- in 12 months (48% upside).

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