Buy Dalmia Bharat Sugar at CMP and add on declines

HDFC Sec | Jan. 14, 2015, midnight

Investment Rationale

- Two deficit years of monsoon is likely to put pressure on sugar production (especially in Maharashtra and Karnataka) and reduce the excess supply, thereby supporting sugar prices. Further even in Sugar season 2016-17, production from these two states could be impacted due to low reservoir levels.

- Global sugar consumption at 173 mn tonnes is expected to be higher than the production at 172 mn tonnes in 2015-16 bringing end-season stock down by 4 mn tones to 40 mn tonnes.

- Multiple initiatives have been taken by the government to help sugar mills and sugarcane farmers viz; (i) soft loans to the tune of Rs 6000 cr (ii) Compulsory sugar exports of 4 mn tonnes (iii) Waiver of 12.5% excise duty on ethanol (iv) increasing ethanol blending with petrol from 5% to 10% (v) announced FRP of Rs 230 per quintal for SY2015-16. These initiatives would help the mills to clear farmer dues and the industry to come out of trough.

- The government is considering linking sugarcane prices with sugar prices across India which would further aid the profitability of companies especially in north based companies including DBSIL.

- Recovery rate of sugar from cane has risen in UP based mill sin SS15-16. This could contribute to margin improvement.


- Though the government has increased the ethanol blending requirement with petrol from 5% to 10% ethanol manufacturing capacity is not enough to meet the requirement.

-  High SAP (State Advised Price) declared by the states as compared to FRP (Fair & Remunerative Price) could again result in higher arrears and higher borrowings for the industry. Non revision of SAP for the last four years by the UP Govt increases the risks of a substantial upward revision in cane prices in the next sugar year, particularly given the buoyancy in sugar prices at present.

- Government subsidy might not be available going forward if the sugar prices remain high.

- Limitation of the command area for private sugar mills and compulsion to buy all the sugarcane offered to the mills.

View and Valuation

Among sugar companies, we like DBSIL due to its promoter background and the fact that it has reasonable downstream integration and despite three bad years faced by the industry, it has low debt, no accumulated losses and has declared 30% interim dividend for FY16. Apart from this, in order to meet the increased demand for sugar consequent upon the liberalization of the Export policy by the Government of India, the Company proposes to raise equity/quasi equity funds for increase in its manufacturing capacity by undertaking further modifications to its existing projects or by incurring expenditure on new projects. For this purpose it proposes to raise funds by issue of securities to the extent of around Rs.400 cr.

Dalmia Bharat Sugar (DBSIL) is engaged in sugar manufacturing and other related downstream businesses - Co-generation and Distillery. The Company has fully integrated facilities with a sugar crushing capacity of 29,250 TCD, 102 MW of cogeneration and 150 KLPD of distillery with presence in sugarcane rich regions of Ramgarh, Jawaharpur and Nigohi of Uttar Pradesh (7,500 TCD each) and Kolhapur and Sangli of Maharashtra (6,700 TCD). It has presence in other renewable sources of energy possessing wind farm capacity of 16.5 MW at Muppandal in Tamil Nadu.

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