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Aarati Krishnan

SHAREHOLDERS can retain the Dwarikesh Sugar stock as there could be upside potential linked to sugar industry fundamentals and the commissioning of new capacities towards end-2005. However, at the current price levels, the stock is suitable only to investors with an appetite for high risk.

As a mid-sized player, the company would be much more vulnerable to enhanced competition for cane or a reversal in the sugar cycle than frontline companies such as Balrampur Chini or Bajaj Hindusthan. At a price-earnings multiple of about 13 times its trailing earnings, the valuation of Dwarikesh Sugars is on a par with that of frontline companies.

The Dwarikesh Sugars stock has more than doubled from the initial offer price of Rs 65. The appreciation has been underpinned by an increasing domestic supply shortfall in sugar and rising prices.

The company has ramped up the scale of operations sharply over the past year, with revenues showing 80 per cent rise in the year-ended September 2004; sustainable profits rose four-fold from Rs 2.1 to Rs 9.7 crore. An expansion of capacities to 6,500 tonnes per day appears to have taken effect from 2003-04.

Robust double-digit profit growth may be sustained this year. For one, the current crushing year, which closes in April/May, will continue to reflect a shortage in domestic sugar production vis-a-vis demand. With sugar output expected to be in the vicinity of about 120 lakh tonnes, and demand at 200 lakh tonnes, there is likely to be a substantial drawdown in sugar inventories this year. This indicates that firm trends in sugar prices could last at least until the advent of the next sugar season, in October 2005. Thereafter, with output expected to recover sharply, sugar prices could stabilise at the higher levels.

Dwarikesh proposes to commission a new sugar unit with a 5,500 tcd capacity by November 2005, which is to be funded by debt and internal accruals. The additional volumes from the new unit could help the company sustain its financial performance.

However, there are risks that need to be considered. Procurement prices fixed for cane by the States have risen sharply over the past year; prices for the current season are 10-12 per cent higher than the previous one. A recent court decision that upholds the States' right to fix prices could also support further increases.

Competition for cane, especially in Western UP where Dwarikesh's factories are located, is intense with substantial new capacities set to spring up over the next couple of years. If the cane area does not expand to accommodate the additional capacities, there is the risk of players facing inadequate cane availability to launch operations, especially in their new units.

Given the healthy growth prospects for the sector in the near term, shareholders in the Dwarikesh Sugar stock can remain invested. The stock would, however, need careful tracking in the light of the stiff valuation levels vis-à-vis the frontline companies and the external risks to the business.

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