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ShareThe rise in global sugar prices is set to benefit domestic sugar companies for the next 1-1.5 years. Dhampur Sugar Mills Ltd (DSML), one of the biggest integrated sugar players in the country, is also poised to show robust growth next year.
Business: Delhi-based DSML has interests in sugar, power, ethanol and chemical segments.
Sugar: This segment contributes 85-90% to DSML's annual revenues. With installed capacity of 39,500 tonnes crushed per day, the company offers double refined white sulphurless sugar, plantation white sugar, and raw sugar.
Power: DSML engages in the cogeneration and supply of power using bagasse, a by-product generated during manufacturing sugar. Its combined cogeneration capacity stands at 145 mw with 85 mw of grid interactive power. DSML is the first in the world to install 105 kg.cm2 boiler and turbine in its sugar division, which has increased efficiencies in bagasse usage. It has installed coal feeding and handling systems to its boilers due to which company expects to run its coal running plant for 300 days in FY10 as compared with 160 days last year. This would prove to be additional source of income going forward.
Ethanol & chemicals:DSML also provides ethanol and chemicals, such as acetic acid, acetic anhydride, ethyl acetate, acetaldehyde, etc. It has an installed capacity to produce 270 kilolitres per day of ethanol which is a by-product of sugarcane molasses and juice, prepared by fermentation and distillation processes. When blended, as an additive with fuel for motor vehicles, it is known as motor fuel grade alcohol. In India E5 -- 5% ethanol blend with gasoline -- is used, and a government order for 10% blend is expected in the near future. This will help to increase revenues from this segment.
Investment rationale:
Sugar prices have reached historic highs due to supply related problems. Two of the largest sugarcane producing nations -- Brazil and India -- have been grappling with unfavourable climatic conditions. Heavy rains in Brazil have led to lower yields, while in India, poor monsoon in cane producing regions has led to almost 9% expected fall in sugarcane output to 250 million tonnes (mt) for FY10 (sugar industry follows October-September fiscal).
The lower cane acreage due to diversion of production from sugarcane to other more lucrative crops, related fall in yields and recovery rates have led to situation where expected sugar production in FY10 would be around 16mt. Further diversion of cane to users like jaggery and alcohol manufacturers have also reduced domestic sugar supply. This would lead to shortage of estimated 7 mt in domestic market.Sugar prices are expected to remain firm for next 1-1.5 years on account of this huge demand supply mismatch.
To reduce this deficit, the government had allowed duty-free import of raw sugar. DSML has contracted for around 0.25 mt of raw sugar at far lower cost of $400/mt out of which it has sold 0.6 mt and remaining raw sugar would be reprocessed and sold in FY10. DSML is waiting for global prices to reduce before importing more and benefiting from this price difference.
Also sugar companies may be able sell their part of their power to outside companies at revised upward tariffs in coming years.DSML's recent upgradation of its boilers to handle coal will ensure raw sugar processing during off season and additional cogeneration capacity leading to higher revenues from power segment.
On account of higher profits and better cash flow, DSML is expected to reduce its debt burden significantly and pare interest burden. This will help better its balance sheet and lift net profit margins.
Concerns: The government often monitors and controls the price of sugarcane and sugar. Any unfavorable ruling may affect the profits of the sugar industry players. Lower cane acreage and adverse climatic conditions may impact the volumes of crushed sugarcane.
The availability of by-products such as molasses and bagasse which are used in manufacturing of ethanol and chemicals and power generation will also be adversely
affected, thereby affecting DSML's earnings from its by-products dependent segments.
Valuations: At the current price of Rs 129.6, the stock is trading at 4.42x & 7.42x its FY10E & FY11E earnings respectively.
Given DSML's large contracted raw material imports and substantial inventory holding, the company is well set to benefit from the higher sugar prices over next 1-1.5 years. In view of the favourable demand-supply scenario for sugar industry, better realisations and additional power sales contribution, DMSL's revenues are expected to grow by 65% in FY10E over FY09. Net profits expected to go up by 275% next year due to low-cost imports and lower interest outgo on its debt. DSML can be looked at current levels for medium-term perspective.
Disclaimer: The writer does not hold any shares in the company.
