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Dhampur Sugars - LKP Sec - 30 11 09
Dhampur Sugars - LKP Sec - 30 11 09
Dhampur Sugars - LKP Sec - 30 11 09
Investment Argument
• Raw Sugar To Help Heal The Fall In Cane Sugar Sales
Dhampur has imported raw sugar to bridge the gap due to lower availability of cane sugar. The company has
contracted to import a total of 2,50,000 tons of raw sugar at an extremely competitive rate of ~USD 400 per
ton. Of the total raw sugar contracted, the company has already sold 60,000 tons & has refined 18,000 tons.
The company intends to refine & sell the balance sugar in FY10E. We believe that refining & selling raw sugar
would compensate the loss of revenue due to lower cane sugar.
• New Power Policy By UP Government To Help Boost Power Profitability
The new UP power policy allows sugar mills to produce power from other alternative fuel in absence of
availability of bagasse. Thus, the sugar companies now will be able to produce even during the off-season. The
UP govt. has further allowed the sugar mills to sell 50 % of the power generated during the off-season outside
the state and further 10 % power to a third party within 50 km radius of the sugar mill. The UP govt has upward
revised tariffs for purchase of electricity from sugar mills to Rs 4 a unit from 2009-10 to 2013-14. This has
enabled Dhampur Sugar to implement the installation of Multi-Fuel Boilers and hence there would be an
increased contribution from the power biz from FY'10E onwards.
• Low Cost Loans To Help Improve Profitability this fiscal
Dhampur is replacing its expensive loans with low cost loans. The company has close to Rs.7bn debt as on 30th
September 2009, of which nearly Rs. 1390mn (Rs. 750mn in FY'08) is loan from Sugar Development Fund (SDF)
at an attractive rate of interest of just 4%. The company has Rs.810mn of '0' cost loans. This will help Dhampur
to significantly cut down on its interest cost by ~ Rs.200mn in FY'10E. Dhampur would repay ~ Rs.1200mn of
loans in the current fiscal, resulting in the favorable debt:equity position of 1x v/s 2x in FY08.
Sensitivity Analysis
Sensitivity 1: Change In EPS With Respect To Sensitivity 2: Change In Target Price With Respect To
Change In Sugar Sold & Sugar Price Change In Sugar Sold & Sugar Price
0.418 0.422 0.425 0.428 0.432 0.418 0.422 0.425 0.428 0.432
32 7 9 11 13 15 32 63 84 100 116 132
33 14 16 18 20 22 33 129 146 162 179 195
34 21 23 25 27 29 34 191 208 225 242 259
35 28 30 32 34 36 35 252 270 288 305 322
36 35 37 39 41 43 36 313 332 350 368 386
Note: The shaded portion is our base case assumptions
1. We have assumed the sugarcane price constant at Rs 210 per quintal.
2. With every Re 1 change in the sugar price per kg, the EPS changes by Rs 7 & the target price changes by Rs
62 per share.
3. With every 0.8 % change in the sugar sold, the EPS changes by Rs 2 & the target price changes by Rs 16 -
Rs 17 per share.
Valuation
India started the current crushing season with a decade low closing stock. Further, we expect the sugarcane
production to remain muted for another year, continuing the upward movement in the sugar cycle. We maintain our
BULLISH OUTLOOK on the sector. Dhampur Sugars Ltd being an integrated sugar mill is expected to post a growth
of ~73% YoY on the back of ~33% increase in realization & ~14% growth in the sales volume due to better yield
& better recovery vis-à-vis the previous year. Dhampur's power business is expected to report ~25% growth YoY, on
account of new power policy announced by UP government. At the CMP of Rs 132, the stock trades at 7.4x its FY'10E
EPS of Rs 18. We re-iterate our BUY call on the stock with a PRICE TARGET OF RS 162 providing a potential upside
of 22%. At our price target the stock would be trading at 9x its FY'10E earnings.
Sector Outlook
Sugar Sector - "Continues To Remain Sweet Amidst Shortage In Supply"
Demand & Supply in India
Million Tons FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Opening Stock 9.3 10.7 11.3 11.6 8.5 4.0 3.6 9.2 8.1 2.3 1.5 1.2
% Growth 3% -27% -53% -10% 156% -12% -72% -35% -18%
Production 18.5 18.5 20.1 14.0 12.5 19.3 28.3 26.3 14.7 16.2 21.87 27
% Growth -30% -11% 54% 47% -7% -44% 10% 35% 23%
Imports 0 0 0.4 2 2 6 2
% Growth 400% 200% -67%
Total Avaibality 31.4 25.6 21.0 23.3 31.9 35.5 22.8 18.5 23.4 28.2
% Growth -18% -18% 11% 37% 11% -36% -19% 26% 21%
Domestic Consump 16.2 16.8 18.4 17.3 18.5 18.5 21 22.5 22.5 23.25 23.25 24
% Growth -6% 7% 0% 14% 7% 0% 3% 0% 3%
Exports 1 1.1 1.5 0.2 1.2 1.7 4.9
-87% 42% 188%
Total Consumption 17.2 17.9 19.9 17.5 18.5 19.7 22.7 27.4 22.5 23.0 23.0 23.0
% Growth -12% 6% 6% 15% 21% -18% 2% 0%
Closing Stock 10.7 11.3 11.5 8.5 4.5 3.6 9.2 8.1 2.3 1.5 2.4 5.2
% Growth -26% -47% -20% 156% -12% -72% -35% 58% 120%
Closing Stock/
Consumption 66% 67% 63% 49% 24% 24% 41% 30% 10% 7% 10% 23%
Closing Stock
(No. of Months) 7.9 8.1 7.5 5.9 2.9 2.3 5.3 4.3 1.2 0.8 1.2 2.6
Sugar Prices
(Rs./Kg) 13.0 15.5 18.2 19.0 16.0 16.0 24.0 38.0 38.0 35.0
The closing stock for the season ended on 1st October 2009 was the lowest in a decade. This was mainly due to
low area under sugarcane cultivation, lowest yield, & lowest recovery rates in the past. Historically, the domestic
demand has been growing at a CAGR of 5%, while production has been growing at a comparatively slower pace.
Thus, with the opening stock of merely 2.3 MT, expected production of 16.2 MT & a growing demand of ~ 23.3 MT,
there would be shortage of ~5-6 MT which would be filled in by the way of imports. We therefore believe that there
would be a tremendous pressure in maintaining sugar stocks not only by the end of season 2009-10E but also the
season after that, thus sugar prices making new highs would be inevitable. We maintain our BULLISH stance on the
sector.