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Expanding sweetly

SPECIAL REPORT: Dwarikesh Sugar

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Atul Sathe Mumbai
Dwarikesh Sugar is likely to be on the fast growth track, led by expansion and firm sugar prices.
 
Expanding capacity is one sure way of growing business and earnings. Dwarikesh Sugar Industries, an Uttar Pradesh-based sugar producer, seems to have understood this.
 
The company is commencing production at its new 5500 tcd (tonnes crushed per day) plant - which can be expanded to 7500 tcd if required - in Bijnor district by November 2005.
 
Moreover, new revenue streams like sale of ethanol to oil companies and sale of surplus electricity from its captive power plant can emerge in due course.
 
The stock price has gone up 28 per cent to Rs 164.4 on July 15 from a 52-week low of Rs 128.3 on May 30, 2005. It was at its 52-week high level of Rs 202 in February 2005. 
 
Financials
(Rs crore)3 months12 months
 Mar 2005 Mar 2004%
chng
Sep 2004Sep 2003%
chng
Net sales40.4138.993.64153.1386.8376.36
Other income0.080.16-500.450.3145.16
Operating profit17.333.73364.6122.1415.0347.31
OPM (%)42.899.57333bps14.4617.31-285bps
Net profit11.62-1.6826.259.762.06373.79
NPM (%)28.7624.5442.2bps6.372.37400bps
EPS (Rs)9.25-2.52467.0612.131.75593.14
 
Sugar prices, expected to remain firm over next two-three years, and some liberalisation in the government's sugar policy will also benefit Dwarikesh and other sugar companies.
 
The new plant involved an investment of Rs 135 crore, which was raised via internal accruals (Rs 45 crore, including about Rs 10-11 crore from the IPO) and borrowings.
 
Dwarikesh tapped the primary markets in November last year, mainly to set up a distillery and initiate expansions in its existing plant.
 
The proximity of the new plant to its existing 6500 tcd plant will help the company reduce costs. According to an analyst with a bank lending to the agriculture sector, efficient sugar mills may benefit from cost savings that would shore up the margins.
 
This will come from economies of scale. Industry observers believe that companies having bigger plants (around 7000 tcd) stand to benefit more in this regard.
 
The company plans to set up another 7500 tcd plant - either greenfield or brownfield - in the next fiscal. It is also scouting for a possible acquisition in Uttar Pradesh.
 
It has completed restructuring of existing debt and expects a 20 per cent y-o-y fall in costs for the year ending September 2005.
 
Moreover, new loans have been borrowed at lower rates. The company will emerge healthier from this.
 
Dwarikesh is bullish on the potential of selling ethanol to government for blending with petroleum in the coming two-three years.
 
By then prices are expected to improve from Rs 18.75 per litre at present. This year it preferred to sell industrial alcohol due to the better pricing for the same.
 
It has a distillery functioning from February 2005, with a production of 30,000 litres per day. The prices that the government may offer for ethanol will also depend on crude prices.
 
According to a report by HDFC Securities, ethanol is set to become a stable revenue stream for the sugar industry because the global trend of using greater percentage of ethanol in petroleum will catch up in India.
 
Currently, the company earns Rs 3-3.5 crore per year through the sale of molasses, the main byproduct, while the sale of products like ethanol (processed byproducts), which involve value addition of Rs 2 per litre, is expected to yield Rs 9-10 crore, accounting for about 10 per cent of total revenues, according to chairman and managing director GR Morarka.
 
The HDFC Securities report seconds the fact that sugar companies will prefer selling ethanol over molasses, as a stable revenue stream.
 
Besides, Dwarikesh plans to increase capacity of its captive power plant from 17 mw to 35 mw in the coming year.
 
About 8 mw of power from the plant are available for sale to the state grid. The company, however, rules out entry into other parts of the country as well as any unrelated diversification, for the time being.
 
Government control is said to impede sugar companies' growth. But Dwarikesh expects the government to liberalise its sugar release mechanism.
 
For now, sugar mills are not allowed to sell at one go the part of the production which they can sell in the open market.
 
This is expected to change. Sugar mills can sell 90 per cent of their total production in the open market, compared with 60-70 per cent earlier.
 
The rest has to be sold to the government at the levy prices it decides. Prices of sugarcane, the main raw material, may go up by Rs 5 y-o-y in the coming season from Rs 112 per quintal at present.
 
Dwarikesh does not expect this to significantly impact its revenues as levy and end-product prices will also increase. It expects sugar prices to stay firm over the next two-three years because carry forward stocks have depleted and production may not keep pace.
 
An analyst with a Mumbai-based brokerage firm says the next one-two years should be good for the sugar sector. Prices are likely to stabilise at current levels, though they may slightly dip after the November crushing season if the crop is as per expectations.
 
It is difficult to predict long-term trend of agri commodities. However, with ethanol prices expected to go up, realisations of sugar sector, too, will increase.
 
Companies setting up co-generation plants may also see better growth.
 
Domestic demand for sugar is increasing. At present the consumption of sugar in India is 19 million tonne per annum and is expected to grow at 5 per cent per annum.
 
Per capita consumption of sugar in the country remains at 13 kg as compared to the global consumption of 35 kg.
 
The company finds export of sugar unviable due to the distance from ports.
 
Dwarikesh Sugar's 12-month trailing P/E is 4.05, compared with peers Bajaj Hindusthan (15.38 and 7.23 as per June 2005 results), Dhampur Sugar (5.63), EID Parry (1.59), Balrampur Chini (6.31) and Bannari Amman (8.32).
 
The stock looks cheaper than its peers at the current price of Rs 147.2.
 

June-quarter results
 
Dwarikesh posted a net profit of Rs 7.24 crore for the June 2005 quarter, a fall of 41 per cent compared to the June 2004 quarter.
 
This has been attributed to the lower sugar release allowed by the government in June 2005 quarter. Net sales for the quarter were Rs 44.57 crore against Rs 55.97 crore.
 
Net profit for the nine months ended June 30, 2005, stood at Rs 24.52 crore, an increase of 157 per cent y-o-y. The company attributes the increase to higher price realisation. Net sales for the nine months were 118.05 crore, compared with Rs 120.94 crore.
 
The company expects to achieve a turnover of Rs 500 crore and a net profit of Rs 100 crore for the year ending September 30, 2007.

 

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First Published: Jul 18 2005 | 12:00 AM IST

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