Hold Oudh Sugar for target of Rs 195: Brics PCG

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Broking house, Brics PCG is confident about Oudh Sugar Mills . It has recommended a 'hold rating' on the company with a target price of Rs 195.

The Brics PCG report on Oudh Sugar Mills:

Q2FY06 results review

"Net sales for Q2FY06 were up 90% YoY to Rs 1.26 billion on account of higher realisations and better volumes of sugar sold. Sales for H1FY06 rose by 50% to Rs 2.35 billion.

"The realisation for H1FY06 was around Rs 17 per kg, an increase of roughly Rs 1.80 per kg from a year ago. The total volume of sales during the half-year was up 40.5% and the sale of sugar in the open market increased by 45.1%."

"The H1FY06 results reflect an increase in capacity to 17,500 TCD (tonnes crushed per day) as compared to 15,000 TCD a year ago. Crushing began on October 24, 2005 at the company's Rosa unit, on November 12, 2005 at the Hargoan unit, and on November 14, 2005 at the Narkatiaganj unit. Oudh Sugar had crushed approximately 8.5 million tonnes of cane till the end of December 2005, up 34% compared to last year."

"The average recovery rate was down 35 basis points on account of unfavourable climatic conditions."

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"Inventory as at the end of December 2005 stood at 0.56 million tonnes."

"During the half-year, the distillery unit at Hargoan was operational for 109 days whereas that at Narkatiaganj was working for 159 days. Total sales of the distillery division were Rs 171.6 million for H1FY06, with a PBIT of Rs 48.9 million. The average realisation of the distillery division stood at Rs 20.8 per ltr."

"The canning division continued to make losses. In H1FY06, net sales were down 17% to Rs 59.6 million, and the division suffered a loss of Rs 1.3 million."

"The operating margin for H1FY06 declined to 17.4% compared to 19.9% last year. The main reasons for the decline were a lower recovery rate and an increase in cane prices compared to last year. Also, there was a dip in realisations from the sale of molasses and bagasse."

"Interest expenses reduced by 45% to Rs 71 million in the half-year. This was basically on account of a revision of interest rates. The management expects interest expenses to be substantially lower for the full year as compared to last year."

"Net profit for the quarter thus more than doubled to Rs 127.2 million."

Outlook for FY06

"The current installed capacity for Oudh Sugar is 17,500 TCD, which the management expects to increase to 20,000 TCD by the beginning of the next crushing season. The company will also be commissioning a 6-MW power plant, the total capex for which is estimated at Rs 1 billion."

"Oudh Sugar expects the total crushing to increase by 30% to 2.35 million tonnes."

Valuation

"The current price of the stock is Rs 168, at which it is trading at P/E multiples of 9.1x and 7.3x its FY06E and FY07E earnings respectively. We have assumed a realisation of Rs 17.1 per kg and Rs 17.5 per kg for the sale of sugar in these periods. However, on a sensitivity basis (altering the realisation by 50 paise per kg), the stock is still trading at P/E multiples of 7.4x and 6x its FY06E and FY07E earnings."

"On the basis of the sensitivity study, we are revising the target price for Oudh Sugar to Rs 195. We recommend that investors Hold the stock."

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