Buy Mawana Sugars with a target of Rs 165: Brics PCG

Broking house, Brics PCG is bullish on Mawana Sugars . It has maintained a buy rating on the stock with a target price of Rs 165.

The Brics PCG report on Mawana Sugars:

Q2FY06 result highlights

"Net sales for the quarter were up 31% YoY to Rs 1.2 billion, sweetened by higher sugar realisations. Free sales realisation for the quarter rose to Rs 18.97 per kg compared to Rs 17.28 a year ago. Sales volume, however, was up a mere 1,000 tonnes to 47,000 tonnes during Q2FY06.  Rising cane costs coupled with a drop in average recoveries served to shrink the operating margin by 10% in Q2FY06 to 17.9%. The procurement price for cane on a like-to-like basis was higher by 14% at Rs 130/qtl (the state advised price, SAP, for the ongoing season is Rs 115/qtl)."

"Moreover, the average recovery rate was down by almost 50 bps thereby inflating costs.  The company's sugar production was depressed by a delay in commercial production at the Nanglamal factory, as well as miniscule increases in crushing at the existing units and the non-availability of imported raw sugar. The existing units operated at roughly around 75% capacity, whereas the Nanglamal factory worked for just 90 days and at a low utilisation rate."

"Total cane crushed during the season was 2.7 million tonnes, almost flat compared to last year, with sugar production estimated at 243,000 tonnes. The installed crushing capacity has increased to 21,000 TCD with the recent commissioning of the Nanglamal unit, which is a 3000-TCD rise over last year. After sales of 141,000 tonnes of sugar in H1FY06, the closing inventory at the end of March '06 was 105,000 tonnes valued at Rs 14.5/kg."

Capacity expansion to result in substantial benefits

"Mawana Sugars is in the process of augmenting its crushing capacity by 40% to 29,500 TCD. It is also integrating downstream with the installation of an additional 41-MW co-generation capacity, and a 180-KLPD distillery by sugar season 2006-07."

"The total capex for this expansion programme along with expenditure already incurred on the Nanglamal unit and cogen plant would be Rs 5.9 billion."

Installed capacity

"Mawana Sugars' total financial commitment would make it eligible for concessions under the UP state government's 10-year incentive scheme. The management has guided that the capital subsidy (one-time) for FY07 is likely to be around Rs 500 million whereas the revenue subsidy would be to the tune of Rs 13/qtl of incremental sugarcane crushed (for 10 years)."

"To be eligible for these incentives, the total funds must be expended before the end of March '07. Any delay in the capex programme would thus impact the company's performance significantly. Until March '06 Mawana Sugars has incurred 60% of its total capex."

Guidance for FY07

"The management has guided that it would produce 500,000 tonnes of sugar in FY07, which implies a capacity utilisation of over 90%."

"The distillery and co-gen divisions are scheduled for commissioning before the end of March '07. At full operational capacity, the power division is expected to generate revenues of over Rs 600 million. Together with the distillery operations, it would constitute more than 10% of total sales."

"Further, once approved, the cogen division would be entitled to carbon credits worth Rs 100 million annually.  Mawana Sugars has decided against further equity dilution to fund its expansion. Instead, it would resort to a mix of debt and internal accruals, and perhaps look at dilution only after a year or so."

"The company is virtually debt-free (D/E ratio of 0x times at the end of September'05), which gives it substantial room to fund the capex via debt. The management expects the D/E ratio to touch around 1.3-1.4x at the end of September '06, which in our opinion is comparable with other players."

Outlook

"In our view, the guidance of 90% capacity utilisation seems rather stretched. We estimate that sugar production will grow a little over 50% to around 390,000 tonnes (as against the guided 500,000 tonnes), as we are concerned about the sustainable availability of cane at a reasonable price. The substantial fresh capacity additions slated to come on stream in the state of Uttar Pradesh  (particularly in the western region) by the beginning of sugar season 2006-07 will serve to elevate cane demand."

"The downstream integration into distillery and power co-generation, however, would cushion the company's operational performance. Mawana Sugars has already begun selling 6 MW of power to the Uttar Pradesh Power Corporation from March 22 this year, and this together with the added 41-MW capacity will yield benefits in FY07. The sale of distillery products and power units is a higher margin business as compared to that of molasses and bagasse. Also, the revenue subsidy would further expand margins, though we have not accounted for the same in our estimates."

"Based on the assumption that the company will not raise funds via equity dilution, we estimate an EPS of around Rs 23.5 at the end of FY07. At the current price, the stock is trading at a P/E multiple of 5.3. We still believe that the equity overhang would continue as the management has stated they would look at dilution after a year or so."

"We maintain our Buy recommendation on the stock with a target price of Rs 165, an appreciation of 33% from the current levels."