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Await till excess sugar is exported…

Avadh Sugar reported Q4FY21 results with 7.5% revenue and 12.6% PBT growth. Revenue growth was led by 26.6% growth in distillery, 7.5% growth in sugar sales. Sugar volumes were up 6.2% on account of higher exports volume given the government announced export subsidy in December 2020. However, sugar prices stayed muted at | 31.3/kg due to dismal winter demand and peak crushing season. Distillery volumes increased 17.7% to 1.6 crore litre with the installation of insinuation boiler at one of its distilleries at the start of the crushing season.

Distillery realisation was up 7.1% to | 57.6/litre as the company is entirely producing B-heavy ethanol (realisation is up 25% compared to C-Heavy ethanol). Power sales is down 3.7% on the back of lower 16% decline in co-generation volumes & 2.4% increase in power realisation. Industry prefers to sell bagasse in open market rather than power due to lower tariffs. Operating profit increased 12.5% to | 107 crore led by higher distillery sales. PAT fell 6.4% to | 56.6 crore due to tax write back in the base quarter. The company announced a dividend of | 4/share.

Increasing global sugar prices likely to drive exports

With the 20% increase in global sugar prices, the sugar industry has been able to complete 90% of the 6 million tonnes (MT) exports in the current sugar season. We believe raw sugar prices above 19-20 cents/lb would further attract exports under OGL. The company is holding relatively high inventory of 3.8 lakh tonnes. We believe Avadh would be able to rationalise its inventories through exports, which would help reduce working capital debt and, in turn, lower the interest cost. We expect cash flow generation of ~| 840 crore and debt repayment of | 660 crore in the next two years.

Distillery capex to improve earnings trajectory

The company is increasing its distillery capacity from 200 KLD to 320 KLD with capex of | 135 crore. We believe this would increase the annual ethanol volume to 10 crore litre in the next two years from 6 crore currently. Avadh has diverted 60% of its sugarcane towards B-heavy ethanol, which would increase to ~80% in the next two years. We estimate distillery volume CAGR of 17.6% in FY21-23E with average realisation of | 56/litre considering higher proportion of B-heavy ethanol sales. This would boost distillery sales & rationalise sugar inventories. We expect 42.3% earnings CAGR in FY21-23E.

Valuation & Outlook

Avadh has sizable sugar and ethanol capacity and is also further increasing its distillery capacity to utilise B-heavy route for producing ethanol. However, due to higher sugar inventory levels, the working capital debt for the company still remains high. Though we believe increasing global sugar prices would help it to export excess inventories in the next one year, we will still watch whether global sugar prices move up and the company contracts additional sugar volumes. We maintain our HOLD rating with a revised target price of | 345 (earlier | 210) valuing it at 5x FY22E EV/EBITDA.

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