| Summary of Contents STOCK IDEAS Dhampur Sugar Mills
Cluster: Cannonball
Recommendation: Buy
Price target: Rs180
Current market price: Rs120
Sweeter than its peers
Key points - Profits to triple in FY2010: Dhampur Sugar Ltd (DSL) is one of the key beneficiaries of the current upturn in the sugar cycle. In the sugar year (SY) SY2009, higher sugar prices had led to a jump of ~46% in the realisation of the sugar mills and sugar prices are already higher by ~40% compared with the likely average realisation for SY2009. While SY2009 was a year when most sugar companies had turned profitable after a couple of years of subdued realisation due to a bumper production, SY2010 is likely to bring windfall profits to the sugar companies on the back of a much higher realisation. We expect DSL?s profits to grow 2.9x in FY2010 due to higher profits from its sugar business led by a higher sugar realisation, and refining and sale of low-cost raw sugar.
- Low-cost raw sugar imports to make hefty profit contribution: DSL owns one of the largest refining capacities among sugar mills with an optimum capacity to refine ~4.5 lakh tonne of sugar a year. Sensing the strong upmove in the sugar prices DSL has made smart imports of raw sugar for refining and sale in the domestic market. As against the current price of $510 for a tonne of raw sugar DSL has contracted imports of 2.13 lakh tonne of raw sugar in FY2009 at an average cost of $398 per tonne. Thus, we expect the company to make a substantial profit of Rs124 crore (before interest and tax) from its refining operations alone in FY2010.
- Steep discount to peers: The hefty cash flow generation in FY2009-11 due to a rampant increase in its sugar business? profits will help DSL to bring down its debt-equity ratio to 1.2x in FY2010 and further to 1x in FY2011. Even though DSL is the fifth largest among the listed domestic sugar companies in terms of sugar capacity and the distinctive advantage that is going to accrue to the company from refining of raw sugar in the near term, its stock trades at a substantial discount to its peers. Though we believe the company would trade at a discount to the larger sugar companies that have much bigger capacities, the current low valuation of its stock is unjustified. We, thus, believe the DSL stock is a good Buy at the current levels.
- Valuation and view: We believe the low valuations of DSL (compared with its peers) at the current market price are not justified, given the growth expected in the company?s profits in the next couple of years, the considerable reduction in the company?s debt-equity ratio, its hefty cash flow generation and its much improved return ratios. Thus, we ascribe a price target of Rs180 at a PE ratio of 6x and EV/EBIDTA of 4.9x FY2010E. Our price target implies an upside of 50% over the current market price of Rs119.7. We initiate coverage on DSL with a Buy recommendation.
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