ICICI Direct is bullish on Dhampur Sugar has recommended buy rating on the stock with a target price of Rs 155 in its research report dated May 05, 2020.
ICICI Direct's research report on Dhampur Sugar
Dhampur Sugar (DSL) reported strong sales growth of 20% led by 22% growth in sugar sales and 30% growth in distillery sales. However, power revenues were down 74% due to lower volumes, impacted by cut in power tariff by Uttar Pradesh Electricity Regulatory Commission (UPERC) earlier this year. Sugar volumes increased 36% to 2.59 lakh tonnes (lt) on account of 0.8 lt of raw sugar exports during the quarter. Further, DSL was allocated additional 0.58 lt of sugar in Q4, which it subsequently contracted. Distillery volumes were down 4.4% to 2.4 crore litre due to lower offtake by OMCs impacted by lockdown situation at the end of March. Ethanol realisation was up 9.4% with increased proportion of B heavy ethanol sales. DSL sold 16.3 crore power unit with average realisation of Rs 3.2/unit. Volumes, realisation were down 17%, 40%, respectively, impacted by power tariff reduction.
With the steady reduction in sugar inventory through exports and increased diversion towards B heavy ethanol, we expect the company to generate ~Rs 280 crore of cash flows in FY21E, which would help it reduce debt. Though the lockdown has not significantly impacted earnings of sugar companies, it has resulted in increase in sugar inventory in system, which is likely to impact DSL’s ability to reduce debt aggressively. The stock is trading at extremely attractive multiples of 3x FY21 earnings. We value the stock at 4x FY21 earning with a revised target price of Rs 155/share.
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