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Lower recoveries impact profitability…

Dwarikesh Sugar (DSL) reported disappointing results with 9.2% decline in operating profit mainly due to muted sugar realisation & rise in cost of production due to lower recoveries. Consolidated revenues saw growth of 19.3% to | 381.2 crore led by higher sugar & distillery sales during the quarter. Sugar volumes were up 12.7% given domestic sales quota was higher during festive months. The company sold 1.03 lakh tonnes (lt) of sugar in Q3. However, sugar realisation dipped 2.6% impacted by late announcement of export subsidy, early start of the crushing season & higher domestic sales quota. The company is holding 1.95 lt of sugar as on December 2020. Distillery volumes were up at 0.6 crore litre but still down QoQ impacted by lower offtake from OMCs due to capacity constraints at one of the depots. Distillery realisation was also down 14.4% due to lower proportion of B heavy molasses in the quarter. Despite lower operating profit, PAT rose from | 4.5 crore to | 7.5 crore due to reversal of tax liability.

Sugar exports, production decline to trim down inventory

The company was holding relatively high level of inventory from the last six to eight month. The announcement of export subsidy would help the company to significantly reduce its sugar inventory levels. It has already contracted for 79,000 tonnes of sugar and is likely to complete the exports in Q4FY21 itself. Further, with the lower yields & recoveries in UP, we estimate 14% decline in sugar production for DSL. We expect inventory reduction of 82000 tonnes by March 2022 for company. This would result in strong cash flow generation & reduction of working capital debt. We expect ~| 350 crore of debt reduction by March 2022.

Distillery volumes impacted; new capex under consideration

Distillery volumes during the quarter has been impacted by lower offtake by OMCs in one the depots in Delhi. Though the company is trying to resolve these issue, entire FY21 numbers have been impacted by hiccup in distillery operations. We estimate distillery volumes of 3.0 crore litre & 4.2 crore litre for FY21E & FY22E, respectively. The company would be supplying only BHeavy ethanol in during the current ethanol supply year (DecemberNovember 2021). DSL is also actively considering distillery capacity addition to take advantage of increased sugarcane juice ethanol & B heavy ethanol prices. Further, capacity addition would eliminate the risk of sugar inventory glut for the industry as well as company. The company is yet to announce exact modalities of this capex plan.

Valuation & Outlook

DSL is one of the efficient sugar companies with lowest cost of production given sugar recovery is beyond 12.0% in its region. However, it was facing challenges due to high sugar inventories & low distillery capacities. We believe sugar exports & capacity addition would aid revenues, earnings & cash flows going forwards. However, lower sugar recoveries remains a concern in current sugar season. We downgrade the stock from BUY to HOLD with the revised target price of | 31 /share (earlier | 34).

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