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Distillery volumes to grow 3x by 2024…

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. DSL is undertaking a distillery capacity addition of 175 KLD with investment of | 230 crore. The distillery will be commissioned by October 2022.

* The company would be able to increase distillery volumes to 10 crore litre in FY24 from 3.2 crore litre in FY21

Q1FY22 Results: DSL reported strong profit growth in Q1FY22.

* Sales were down 10.9 % YoY, due to lack of exports during the quarter

* EBITDA was at | 58.5 crore, up 16.7% YoY, with margins at 14.9%

* Consequent PAT was at | 27.1 crore (up 49.7 % YoY)

What should investors do?

DSL’s share price has gone up 140% in the last five years (from | 32 in July 2016 to | 77 in July 2021).

* We expect 3x increase in distillery volumes to boost earnings with a CAGR of 38.9% 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 53.1% CAGR in FY21-24E with 3x increase in ethanol volumes & 14% increase in distillery realisation led by better realisation from B-heavy & sugarcane juice ethanol

* Higher exports aided by rising global sugar prices & industry wide sugarcane diversion towards ethanol would lead to lower sugar inventory in the country & higher domestic sugar prices

* With increasing profitability & reduction in sugar inventory, the company would be able to generate cumulative | 450 crore free cash flows in the next three years. It would de-leverage the balance sheet.

Alternate Stock Idea: We like Balrampur Chini in our Sugar coverage.

* The company is the 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 a BUY recommendation

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