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Elara Capital
Dhampur Sugar Mills (Buy)
CMP: ₹184.05
Target: ₹260
Key takeaways: a) Dhampur Sugar Mills (DSM IN) expanded its ethanol capacity from 300 KLPD to 400KLPD in FY19 ahead of the industry and is one of the first companies to produce ethanol using B-heavy molasses. Higher realisation in B-Heavy would drive ethanol segment EBIT CAGR to 18 per cent and offset weakness in the sugar segment.
b) With rising awareness about hygienic food, the company intends to increase the sale of packaged sugar to 80 per cent in next 5 years from <1 per cent currently, which should aid in margin expansion as realisation is higher by ₹3-4/kg than loose sugar. c) With no major capex planned in the near term, the company is expected to generate about ₹1,200 crore in free cash flow by FY21E, which would help reduce gross debt from ₹1,600 crore in FY19 to ₹700 crore in FY21E and lower net debt-to-equity to 0.4x by FY21E.
Valuation: We value sugar business at 0.9x replacement cost, distillery at 6.0x FY21E EV/EBIT and co-generation at 4.0x FY21E EV/EBIT. We expect an EBITDA CAGR of 12 per cent and a PBT CAGR of 20 per cent over FY19-21E.
Key risks to our call and estimates low sugar prices and higher cane cost can keep margin under pressure.
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