Buy Dalmia Bharat Sugar\, target price Rs 150: ICICI Direct

ICICI Direct has given a buy rating to Dalmia Bharat Sugar and Industries with a 12-month target price of Rs 150. The share price moved up by 1.86% from its previous close of Rs 112.65. The stock’s last traded price is Rs 114.75.

Dalmia Bharat Sugar reported Q4FY20 results with a 3.3% decline in sales on account of 11.2% de-growth in sugar volumes. The company sold 1.27 lakh tonnes (lt) of sugar. The brokerage says since It was allocated 0.98 lt of domestic quota, it implies that the company has exported 0.27 lt of sugar. This is significantly lower considering it is expected to export 1.49 lt in the current crushing season. A significant quantity of this would be exported in the first half of FY21, which would result in liquidation of the excess sugar inventory.

Investment Rationale

The brokerage says despite a 40% production drop in Maharashtra, Dalmia has crushed the highest ever sugarcane in the state mainly due to fewer other mills operating in its catchment area. Though the company has seen steady earnings growth, high inventory levels stay a concern. The brokerage believes Dalmia would export significant quantities in H1FY21.

Moreover, the government is likely to continue the policy of export subsidy, helping the company to liquidate excess inventory. Further, the brokerage believes a likely increase in minimum selling price (MSP) by Rs 2/kg would also aid earnings, cash flows. It expects Rs 178, Rs 278 crore of operating cash flow generation in FY21E, FY22E, respectively.

With almost Rs 450 crore of cash flow generation and no capex in the near term, the company is likely to reduce its working capital debt by around Rs 300 crore in the next two years. Dalmia also has investments (current & non-current) of Rs 400 crore in the books. Given stable earnings, reducing working capital debt & investments, the stock is trading at attractive FY21E earnings multiple of 4.5 times. The brokerage values the stock at 6 times FY21 earnings with a target price of Rs 150/share and with a buy recommendation on the stock.

Financials

For the quarter ended March 31, 2020, the company has reported consolidated sales of Rs 550.09 Crore, up 9.05 % from last quarter Sales of Rs 504.44 Crore and down -3.31 % from last year's same quarter Sales of Rs 568.94 Crore. The company reported net profit after tax of Rs 61.95 Crore in the latest quarter.

Promoter/FII Holdings

Promoters held 74.91 per cent stake in the company as of March 31, 2020, while DIIs held 2.02 per cent and public and others22.68 per cent.