Hold Dhampur Sugar; target of Rs 67: FinQuest

“In 2QFY10, Dhampur Sugar Mills (DSML) reported healthy topline growth of 165.4% YoY to INR 2901.4 million led by growth in sales of Sugar division and Cogen division by 165.7% YoY and 106.4% YoY respectively. EBITDA for 2QFY10 decline by 17.7% YoY to 462.2 million mainly due to substantial increase in raw material cost (up 207.1% YoY) led by high cane cost. EBITDA margin decline to 15.9% from 51.9% in 2QFY09 mainly due to increase in raw material cost (incl stock in trade) as % of sales to 61.2% from 10.6% in 2QFY09. Overall, net profit declined by 29.3% YoY to INR 123.9 million. Taking into account the management guidance and current scenario in sugar industry, we have fine tuned our estimates.”

“At CMP, DSML is trading at 3.8x and 7.0x FY10E and FY11E earnings and 3.2x and 3.4x FY10E and FY11E EV/EBITDA respectively. Due to sudden downturn in sugar cycle, going forward, we believe profitability of sugar business will decline but will be offset by stable profitability of byproducts business. We downgrade the stock to HOLD rating with revised price target of INR 67/share (average of 4.0x FY11E EV/EBITDA and 0.5x FY11E P/BV).”

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