Buy Mawana Sugar with target price of Rs 200

Broking house, IDBI Capital is bullish on Mawana Sugar , MSL. It has recommended a 'buy rating' on the company with a one year target price of Rs 200.

The report lists out some investment rationales, these are below: -

Upbeat sugar cycle in the domestic market

"The demand-supply situation in sugar is expected to remain tightly balanced across the world for another couple of years, with sugar consumption estimated to rise without a corresponding increase in sugar production. In India, we estimate sugar consumption to increase by at least 4% annually, the per capita consumption of sugar in India still well below the world average. We expect indirect consumption of sugar to drive demand, as it accounts for only 60% total domestic consumption versus 90% in the US and Europe."

"For FY06 we estimate a decline in sugar closing stock. The opening stock for the current season is only 4.5 million tonnes against 8.5 million tonnes in the previous year. Consumption is estimated at 18 million tones, there-by resulting in a yoy decline in closing stock. We expect this scenario to keep domestic sugar prices buoyant."

Abundant cane to crush in north

"In India, presently only around 50% of the cane produced is crushed, with most of the facilities drawing only 50-60% of the sugarcane in their command area. Thus there is abundant raw material to cater to the upcoming capacities in northern India."

Global sugar prices to strengthen

"We believe Global sugar prices will also remain firm on back of lower stocks. Sugar closing stock in 2004-05 is estimated at 66 million metric tonne raw value (mtrv), which is 1.8 million mtrv lower than the closing stock of last year. The stocks amount to 45.5% of the estimated consumption against 47.4% last year, indicating firm sugar prices worldwide. There is a lot of pressure building up on EU to reduce agricultural subsidy. Any development on this front will create a 5 million tonne export possibility for the Indian sugar industry."

Mawana: Evolution into a large integrated producer

"In order to take advantage of the upward sugar cycle MSL has chalked out aggressive expansion plans. This will entail a capex of Rs 6,250 million, the funding of which is partly to be made through a USD 110 million issue of securities."

Expansion at Mawana and Titawai

"Mawana and Titawai expansion will bring up the total crushing capacity from 17,000 TCD to 22,000 TCD with a capex of Rs 1,550 million. Commercial operations are scheduled for November 05, catapulting the output up by 30%."

Green field expansion

"MSL is also setting up a green field project of 5,000 TCD at Bajherakalan, western UP, with a capital outlay of Rs 2,500 million. Bajherakalan is a well-irrigated sugar cane area characterizing good sugar recovery. Assuming a sugar recovery of 10.5% and 180 days gross season the facility may return up to 90,000 MT of sugar a year, subject to capacity utilization."

Nanglamal Sugars Ltd

"The 100% subsidiary, with a capacity of 3,000 TCD is expected to start contributing in FY06. By November 06, the capacity is to be further ramped up to 5,000 TCD by incurring a capex of Rs 1000 million. The investment-capacity ratio is a bit high because the existing facility requires replacement of some old equipment in order to accommodate additional capacities. The capex also includes a small cogeneration facility of around 7 MW."

Ethanol : Story to still unfold

"We see ethanol becoming an important revenue stream going forward, with the potential to put the entire sugar cycle in a higher orbit. In a world, where non-renewable energy source is reducing fast, ethanol is going to be one of the major sources of energy along with other bio-fuels. Brazil, as an example, has been using ethanol as a substitute of petrol (gasoline) for 3 decades now. The country is also set to export ethanol across the world."

"The energy deficit countries like India with burgeoning oil import bill have no other options but to go the bio-fuel way in near future. Initiation has already been done worldwide including India as a measure to reduce pollution, where ethanol is blended in small quantity with petrol (gasoline). But we foresee the world going the Brazil way rather sooner than later."

"MSL is to add 160 KL per day Ethanol capacity. 80 KL per day capacity planned at two sites Mawana and Titawi. The capital cost earmarked for this project is Rs 600 million. The ethanol capacities are scheduled for completion in November 06, estimated to contribute Rs 420 million to FY07 revenues. In context of the increasing energy scarcity and increasing importance on alternate fuels, we are bullish on long term prospect of ethanol."

Carbon credit and lower fuel cost

"MSL is setting up a 30 MW cogeneration power plant, with an investment of Rs 600 million, estimated to earn carbon credits to the tune of 90,000 a year besides reducing the fuel costs. We estimate a revenue of Rs 24 million per year from ale of CER."

Strong earnings growth

"The entire exercise over next two years is expected to drive a 19% annualized revenue growth over the next three years, profits estimated to grow at a faster rate on account of improved economies of scale and reduced interest outgo. MSL has already acquired the status of a zero-debt company."

About the company's valuations, the report says, "going forward, assuming an average sugar price of Rs 17,000 a ton, 180 days crushing season for MSL and around 10.5% recovery we expect a revenue of around Rs 5,500 for FY05, which is expected to touch Rs 8,800 million in FY07 and Rs 9,200 million in FY08. Owing to the huge interest burden in FY08 we expect the net profit to come down sharp in that year to Rs 950 million from Rs 1,260 million in FY07. For FY06 we expect a net profit of Rs 850 million."

"The company has recently diluted its equity from Rs 340 million to Rs 425 million through a rights issue. The current price of the stock is around 5.2x, 3.5x and 4.7x the diluted earnings of FY06E, FY07E and FY08E respectively. We rate a Buy with two-year target price of Rs 200."

About the company's itself, the report says,

"MSL is a leading sugar producer in northern India with its facilities in Mawana (11,000 TCD) and Titawi (6,000) TCD. The company came into existence only in 2003 as a result of a scheme of arrangement of erstwhile Siel Sugar Ltd. Its plants are located in western UP, which is a well-irrigated sugar cane reach area. Sugar recovery for MSL is one of the highest in the northern India with fairly long sugar season."

"MSL's 'Mawana' brand is one of the largest selling sugar brands in the country. The company also plans to launch a premium range of refined sugar under the brand name Mawana Select. The Mawana brand has registered impressive growth over last couple of years, thanks to its well-established distribution channel reaching 10,000 retailers across Northern India. The branded sales have grown from 53 million Kg in September 03 to 118 million Kg in September 05 along with increase in price realization. The MRP has shot up from Rs19 in 2003 to Rs 26.70 in 2005."

"Around 22% of MSL's revenue comes from institutional sales. Its customers' list includes companies like Coca Cola, Pepsi, Heinz, Nestle, Ranbaxy, Dabur, and others. Better quality and branded sales earn the company better price for its products in the market place. The average realization of the company for FY05 is expected to remain at Rs17,200."