Buy Mawana Sugars for target of Rs 163: Brics PCG

The Brics PCG report on Mawana Sugars:

“Mawana Sugars has emerged out of the erstwhile sugar business of SIEL. The company proposes to increase crushing capacities across its operations by 40% to 29,500 TCD (tonnes crushed per day) by the beginning of the next sugar season. It also plans to set up a 47-MW cogeneration plant across three units and install a 180-KLPD distillery capacity. These expansion plans would result in a total capital outlay of Rs 5.9 billion, for which MSL has announced an FCCB issue.”

Key investment rationales

“The increase in crushing capacity from 21,000 TCD to 29,500 TCD would enable MSL to take advantage of the buoyant sugar sector.”

“Diversification into cogen and distillery segments would ensure better margins and negate the cyclical effect of the sugar sector.”

“MSL has a 44% stake (8 million shares) in SIEL and the unrealised gain on this holding is worth Rs 8.8 per share.”

“A higher proportion of sales in the form of consumer packs as well as sales to the institutional segment results in better average realisation for MSL.”

Key risks and concerns

“There is uncertainty about the sustainable availability of cane to ensure optimum capacity utilisation. Higher procurement cost could affect operating margins.”

“The existence of larger players in the vicinity of MSL’s units could pose a substantial threat to the company’s operational performance.”

“The overhang of a possible equity dilution on conversion of FCCBs to equity may impact valuations.”

Valuation

“A drop in sales volume and lower realisation on the sale of molasses and bagasse could lead to a marginal drop in net sales for FY06. The sales would improve in FY07 on the back of an increase in crushing capacity by 8,500 TCD and improved realisation at Rs 18.5 per kg. We have assumed 75% capacity utilisation levels for FY07. The EPS for FY06 and FY07 is estimated at Rs 14.1 and Rs 22.4 respectively.”

“MSL is in the process of issuing FCCBs to fund its expansion plans. We have undertaken a sensitivity analysis on the basis of both, an increase in realisation on the sale of sugar by 50 paise per kg and Re 1 per kg from our base assumption, and the conversion of the FCCBs into equity.”

“We initiate coverage on MSL with a Buy recommendation and a target price of Rs 163, an appreciation of 26%.”