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Sturdy sugar prices boost profitability…

About the stock: Dwarikesh Sugar (DSL) is a UP based sugar company with sugar crushing capacity of 21500 TCD, distillery capacity of 163 KLD & co-generation capacity of 91 MW. The company is undertaking a distillery capacity addition of 170 KLD with investment of | 230 crore. The distillery will be commissioned by July 2022

* The company would be able to increase distillery volumes to 11 crore litre in FY24 from 3.2 crore litre in FY21

Q2FY22 Results: DSL reported strong revenue & profit growth in Q2FY22.

* Sales were up 21.1 % YoY, on high domestic quota, increasing sugar prices

* EBITDA was at | 74.7 crore, up 64.1% YoY, with margins at 14.8%

* Consequent PAT was at | 39.6 crore (up 123.6 % YoY)

What should investors do? DSL’s share price has gone up 180% in the last five years (from | 26 in October 2016 to 75 in October 2021)

* We expect 3x increase in distillery volumes to boost earnings with CAGR of 39.5% during FY21-24E

* We continue to maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 110, valuing the business at 2.5x FY23 BV

Key triggers for future price performance:

* Distillery revenue to grow at 58% CAGR in FY21-24E with 3x increase in ethanol volumes & 4.5% increase in distillery realisation led by better realisation from B-heavy & sugarcane juice ethanol

* Higher exports aided by rising global sugar prices & sugarcane diversion towards ethanol has led to lower sugar inventory & higher domestic sugar prices, which is boosting operating margins & profits

* With increasing profitability & reduction in sugar inventory, the company would be able to generate cumulative | 530 crore free cash flows in the next three years. It would completely de-leverage the balance sheet

Alternate Stock Idea: We like Balrampur Chini in our sugar coverage

* The company is second largest & one of the most efficient sugar companies in India. Along with sugarcane juice, B-heavy, the company 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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