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Showing posts with label Dalmia Bharat Sugar. Show all posts
Showing posts with label Dalmia Bharat Sugar. Show all posts

Friday, July 30, 2021

Dalmia Bharat Sugar - Our 2.5 Bagger Stock in 4 Months

Dear Reader,

We released our Value Pick report on Dalmia Bharat Sugar and Industries on 31st March 2021. We recommended the stock at price of Rs. 187 for target of Rs 300, we are glad to inform you that Dalmia Bharat Sugar has already achieved its target price within period of 45 days, stock made all time high of Rs. 499 recently delivering maximum returns of 166.8% and closed at Rs 484.25 yesterday delivering as on date returns of 159%. Dalmia Bharat Sugar & Industries is a 2.5 Bagger stock for our Value Picks members in period of 4 months.

Net profit of Dalmia Bharat Sugar & Industries declined 16.29% to Rs 51.86 crore in the quarter ended March 2021 as against Rs 61.95 crore during the previous quarter ended March 2020. Sales declined 11.26% to Rs 488.80 crore in the quarter ended March 2021 as against Rs 550.85 crore during the previous quarter ended March 2020.

For FY2020-21, net profit rose 39.93% to Rs 270.34 crore in the year ended March 2021 as against Rs 193.19 crore during the previous year ended March 2020. Sales rose 27.24% to Rs 2685.77 crore in the year ended March 2021 as against Rs 2110.80 crore during the previous year ended March 2020.

Below is the summary of Dalmia Bharat Sugar & Industries Ltd Report released by our team as Value Pick Stock on 31st March 2021.

1. Company Background

Dalmia Bharat Sugar & Industries forayed into the sugar business in the mid-90s and the first unit of 2500 TCD was setup at Ramgarh, a village in the Sitapur district of Uttar Pradesh in 1994. During 2006-2007, the company embarked on a major growth path by setting up two greenfield plants at Jawaharpur (Dist. Sitapur, U.P.) and Nigohi (Dist. Shahjahanpur, U.P.) and expanding existing facilities at the Ramgarh unit.

The total can crushing capacity of the company is 35500 TCD which makes it one of the leading sugar producers in the country. Dalmia Bharat Sugar is a fully integrated player with 120 MW of co-generation capacity and a distillery of 255 KLPD along with incineration boilers. It also has facilities for processing of raw sugar.

The company produces high quality sugar which found wide acceptance in markets in U.P. and Eastern India. The company is a preferred sugar supplier to brand-enhancing institutional giants such as Coca-Cola, PepsiCo, Mondelez, Perfetti, Britannia, Wal-Mart India, Dabur, D-Mart, India Glycols, Allied Blenders & Distillers, United Breweries, Carlsberg, SABMiller and many others in the alcohol segment.

Dalmia Bharat Sugar also exports to various countries like Indonesia, Malaysia, Bangladesh, Sri Lanka, Nepal, Bhutan, Middle East, Mediterranean countries, East Africa etc.

The company’s management has taken up various initiatives to drive sustainable growth through water conservation and alternative energy solutions. This has led to lasting competitive advantage and efficiencies in all aspects of operations.

2. Recent Developments (31 March 2021)

i) Government allows OMCs to sell ethanol as standalone fuel – March 2021

At a time when the petrol and diesel price hike is hurting the common man, the ministry of petroleum and natural gas has allowed the direct sale of ethanol as a standalone fuel for compatible automobiles.


Through a notification dated March 22, the government has amended the Motor Spirit and High-Speed Diesel Order 2005. The new notification will allow oil marketing companies i.e. Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation to sell bioethanol (E100).


The Central Government permits the direct sale of bioethanol (E100) by an oil company for use as standalone fuel or blending with motor spirit, for compatible automobiles to all consumers, in accordance with the standards specified by the Bureau of Indian Standards. According to the notification, E100 or bioethanol means anhydrous alcohol recognised by BIS.


As per the National Policy on Biofuels - 2018 under the Ethanol Blended Petrol (EBP) Programme, OMCs were given a target of blending 20 percent of ethanol in petrol by 2030. Though the companies had a mandate of blending it up to 10 percent, the programme was moving at a slow pace. In 2013-14, the percentage of ethanol-blended petrol was 1.53 percent, which increased to 5 percent in the ethanol supply year (ESY-December to November) 2019-20. This has further increased to 6.9 percent in 2020-21. For ESY 2020-21, the OMCs have allocated 325.5 crore litres of ethanol up to March 1 against a requirement of 457 crore litres for ESY 2020-21.


The new rule will be a huge boost for the sugar manufacturers in the country. Due to the push by the government on blending, the ethanol procurement by OMCs increased from 38 crore litres in ESY 2013-14 to 173.03 crore litre in ESY 2019-20. The major sources of ethanol in India include sugarcane Juice, B-Heavy Molasses, C-Heavy Molasses, damaged food grains or maize and surplus rice. It was in April 2020 that the government allowed the conversion of surplus rice, available with the Food Corporation of India (FCI), to ethanol.


In October 2020, the Cabinet Committee on Economic Affairs (CCEA) had raised the price of ethanol extracted from sugarcane juice to Rs 62.65 a litre from the current Rs 59.48 a litre. If used as a standalone fuel for compatible vehicles, it will be advantageous for consumers, who shift to such vehicles. The price of petrol in Delhi on March 25 was seen at Rs 90.78 a litre, while that of diesel was Rs 81.10 a litre.

ii) Dalmia Bharat Sugar forays into B2C segment – March 2021

Dalmia Bharat Sugar has forayed into business-to-consumer segment and announced the launch of its packaged sugar under the brand name Dalmia Utsav.

In the initial phase of the transition to B2C (business-to-consumer) segment, the company plans to launch sulphur-free white crystal sugar and natural brown sugar in branded packets and sachets in 12 states and Union territories. These include Delhi/NCR, Uttar Pradesh, Haryana, Uttarakhand, Punjab, Himachal Pradesh, Jammu & Kashmir, Rajasthan, Madhya Pradesh, Chandigarh, Bihar and West Bengal.

The products will be available on top e-commerce platforms like Amazon, Big Basket and Flipkart, and in offline stores as well. Going forward, the company plans to have a pan-India presence and introduce new sugar variants such as icing sugar along with other core FMCG products.

According to the company, the production of sulphur-free white crystal sugar and natural brown sugar is being done at its Nigohi unit in Uttar Pradesh. The company plans to produce and dispatch the projected quantity of about 250-300 tonne of sugar by March-end. To support production, the company’s unit has undergone a few up-gradations such as setting up of latest Ion exchange facility for better quality/ sulphur-free sugar grain. The company has also commissioned a state-of-the-art integrated production line for branded/specialised sugar. This transition will accelerate the company’s evolution from commodity to brand space

iii) Global Sugar Market may see supply deficit in 2020-21 – Jan 2021


Sugar prices were expected to surge in 2019/20 due to substantially reduced output from India, the EU and Thailand. However, prices fell more than 30 percent between February and April 2020 due to Covid-led disruptions and lockdowns.


With unfavourable weather in Brazil and Thailand, and a decline in Europe’s output, the focus is now on India which is likely to deliver a bumper output in the sugar season 2020/21. In a global deficit output scenario, sugar prices in India are expected to remain steady to strong, but massive carry-over stocks may cap the gains in prices.


The International Sugar Organization (ISO)estimates the global sugar output at 171.1 mt against the consumption of 174.6 mt for the current year. The projected increase in sugar deficits is due to lower production estimates (compared to forecasts) in the EU, Brazil and Thailand.


Brazil (contributing closer to one-fifth of the world’s total sugar output) might see a dip in production in 2020/21 due to a drier weather condition and relatively firmer outlook for crude oil.


Thailand (accounting for roughly 9 per cent of the world’s sugar output) may also plant less crops this year due to dry weather. European Union is set to witness a fall in its sugar production for the third consecutive year due to reduced acreage and high incidence of viral disease. With easing of lockdown restrictions, the sugar demand from major Asian countries, especially Indonesia and China, the top two importing countries, are likely to be higher. Indonesia will be importing 10 per cent more sugar to a record 3.3 mt in 2021. China has already imported 4.36 mt of sugar in January-November 2020, up 37 per cent from last year’s same period and is further expected to add to its sweetener stockpiles.


Even after accounting for reduction in its sugar output due to ethanol diversion of 1.5 mt or so, India is likely to produce 30.5 mt of sugar mainly due to increased output in Maharashtra and Karnataka, according to sugar body ISMA. With a carryover stock of 10.64 mt at the beginning of the current season and domestic demand stuck at 26 mt, India will have 15 mt extra sugar.


India should be able to offload as much as 6 mt of its excess sugar in overseas markets especially to Indonesia. This is a big positive but won’t be sufficient to clear unsold inventories. Steadily rising crude oil prices and lower global output will provide the much-needed support to sugar prices. However, huge inventories and robust output in the ongoing season and near stagnant domestic demand, will cap the price gains.


iv) Board of Dalmia Bharat Sugar & Industries approves scheme of amalgamation – Dec 2020


The Board of Dalmia Bharat Sugar & Industries at its meeting held on 31 December 2020 has approved the Scheme of Amalgamation between Himshikhar Investment (a wholly owned subsidiary of the Company) and Dalmia Bharat Sugar and Industries and their respective shareholders and creditors. The Scheme would be subject to the requisite statutory / regulatory approvals including the approval of jurisdictional National Company Law Tribunal and the respective shareholders and creditors of the Company and Himshikhar Investment (as may be directed by the NCLT).

3. Financial Performance (31 March 2021)

Dalmia Bharat Sugar net profit rises 39.06% in the Dec 2020 quarter

Net profit of Dalmia Bharat Sugar & Industries rose 39.06% to Rs 37.10 crore in the quarter ended December 2020 as against Rs 26.68 crore during the previous quarter ended December 2019. Sales rose 20.09% to Rs 605.78 crore in the quarter ended December 2020 as against Rs 504.44 crore during the previous quarter ended December 2019

Dalmia Bharat Sugar net profit rises 10.81% in the Sept 2020 quarter

Net profit of Dalmia Bharat Sugar & Industries rose 10.81% to Rs 55.55 crore in the quarter ended September 2020 as against Rs 50.13 crore during the previous quarter ended September 2019. Sales rose 52.54% to Rs 719.53 crore in the quarter ended September 2020 as against Rs 471.71 crore during the previous quarter ended September 2019

4. Investment Rationale (31 March 2021)

i) The government of India has taken a slew of measures in the past couple of years that have changed the dynamics of the sugar industry. The introduction of minimum selling price of sugar in 2018 addressed one of the key issues of fixed raw material price and market-linked finished product price, making spreads less volatile to sugar cycles. The government has been promoting ethanol production through an increase in prices and the providing of soft loans for expansion. Furthermore, the demand for ethanol from oil marketing companies increased 2.5x over FY14-FY20, with the ethanol blending rate reaching 5.9% in 2018-19 from 1-1.5% in 2014. Prices have been increased by 4%-7%yoy for all categories of sugarcane-based ethanol for the current season. The move is likely to not only improve distillery profits for the season but also spur capex in the segment, as it is a clear indication of the government’s strong focus on the segment with prices remaining delinked to petrol prices. Furthermore, the government has proposed to advance the timeline for 20% ethanol blending in petrol to 2025 from the earlier target of 2030 (2019-20: 5%).


ii) The Government plans to create an enabling environment that more than doubles ethanol production and increases blending of ethanol with petrol to reduce oil imports. The government expects that ethanol production capacity could increase from 3.55 billion litres to 4.66 billion litres over next few years. Ethanol is produced directly from cane juice, B-grade and C-grade molasses. The price of ethanol from sugarcane juice which was fixed at Rs. 59.48 per litre last year was increased to Rs. 62.65 per litre beginning Dec 2020. Similarly, price for ethanol extracted from C-grade molasses was increased from Rs.  43.75 per litre to Rs. 45.69 per litre and that from B-grade molasses was increased from Rs. 54.27 per litre to Rs. 57.61 per litre. The government targets to divert around 8,00,000 tonnes of surplus sugar per annum across the next two years towards ethanol production to maximise sectorial profitability.


iii) Dalmia Bharat Sugar is among the top 10 sugar manufacturers in India and has a healthy business profile, given the integrated nature of its operations and a track record of over 25 years. The company had a well-integrated mix, comprising cane crushing capacity of 35,500 tonnes per day, a molasses-based distillery capacity of 240 kilo litres per day (klpd) and a cogeneration capacity of 107MW. The company’s strong presence in relatively stable allied streams such as distillery and cogeneration power protects it from the inherent volatility and cyclicality in the sugar business.


iv) The company forayed into distillery business in FY2016-17 with the commencement of the distillery operations at Maharashtra. The company has leveraged the increasing focus of the Government on ethanol blending to strengthen its distillery business. Further, the sourcing of molasses from its sugar manufacturing unit helped the company moderate procurement costs and de-risk from material non-availability. This business segment has come to the integrated sugar manufacturers as an opportunity, which is driven by the Ethanol Blending Program (EBP) of the Government. The Company saw an opportunity in the B-Heavy ethanol production owing to its superior realisations and started production of ethanol through the B-Heavy route.


v) Dalmia Bharat Sugar set about doubling its ethanol output from around 3.3 crore litres in FY2017-18 to capitalise effectively on the National Biofuel Policy announced in 2018. In line with the sectoral optimism, the company invested in a 60 KLPD distillery in Nigohi (commissioned in 2019) and increased its Jawaharpur ethanol plant capacity from 80 KLPD to 120 KLPD. The company produced 6.80 crore litres of ethanol in FY2019-20, more than 100% higher than the output a few years ago. Revenues from ethanol increased from 10% of the company’s revenues in FY2017-18 to 17% in FY2019-20. The increase in ethanol manufactured through the B-Heavy molasses route generated superior realisations with a lower working capital outlay, strengthening the company’s profitability.


vi) Following the outbreak of COVID-19, Dalmia Bharat Sugar capitalised on the opportunity to manufacture sanitisers. The product, derived from extra neutral alcohol, was well received by the markets. The product not only enjoys realisations higher than ethanol but also a higher demand than available supply, a scenario that is expected to last for the next couple of years. Besides, with hygiene becoming an integral part of people’s lives, the company expects its sanitisers business to play a growing role in its business mix in coming quarters.


vii) With the introduction of the MSP in FY2019, the downside in the operating profits has been arrested compared to the previous surplus years of sugar production. Over the medium term, Dalmia Bharat Sugar operating profits and debt metrics are expected to be less volatile than the historical levels, supported by the expected continuation of MSP and also the industry’s focus on diverting of excess cane towards ethanol production.


viii) As on Dec 2020, Promoters holding in the company is 74.91% without any shares being pledged. Institutions holding in the company is at 2.37% which includes LIC holding of 1.5% in the company. Dalmia Bharat Sugar paid interim dividend of Rs. 2 per share in Feb 2020, dividend yield at current price is 1.07%. The company has achieved sales CAGR of 12%, profit CAGR of 123% with ROE of 12% over the last 5 years.


ix) As per our estimates, Dalmia Bharat Sugar can deliver PAT of 374 crores for FY 2022-23 with estimated EPS of Rs. 46.20. At the current price of Rs. 186.70, stock is attractively valued at price to earnings multiple of 4.0x based on expected earnings of FY 2022-23. Assigning a reasonable P/E ratio of 6.5 on estimated EPS for FY22-23 considering gradual shift in revenue from cyclical sugar business to ethanol, capacity expansion in distillery segment and improvement in operating efficiencies with robust cash flows, we arrive at price target of Rs. 300.

5. Key Concerns & Risks (31 March 2021)

i) Sugar price increase can be restricted in case of delay in sugar export programme in the country which can impact earnings of the company.

ii) In case of any significant decline in sugar recoveries in UP in 2020-21 season, there would be an increase in cost of production which can impact profitability adversely.

6. Saral Gyan Recommendation (31 March 2021)

Dalmia Bharat Sugar is the only integrated sugar company with operations in the two largest sugarcane-producing states (Uttar Pradesh and Maharashtra-that account for more than half of India's sugar production), reducing the impact of region-specific agro-climatic conditions. Dalmia Bharat Sugar has witnessed an improvement in profitability in FY20 mainly on account of improving efficiencies. The gradual shift towards B-heavy and cane juice-based ethanol is likely to ensure healthy profitability over the medium term. Moreover, recent entry into B2C segment through launch of Dalmia Utsav Sulphur Free sugar is also expected to improve operating margins of sugar division in coming years.


Considering favourable outlook for Sugar Industry with slew of measures taken by the Govt towards production of ethanol, expected increase in sugar prices in coming years and attractive valuations of the company with comfortable debt to equity ratio, Saral Gyan Team recommends “Buy” on Dalmia Bharat Sugar & Industries Ltd at current market price of Rs 186.70, for a price target of Rs. 300 over a period of 12 - 24 months.

Buying Strategy:

  • 70% at current market price of 186.70
  • 30% at price range of 130 - 140 (in case of correction in price in the near term)

Portfolio Allocation: 3% of your equity portfolio

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