Summary

Upon a detailed equity research on the share of Dalmia Sugar and Industries conducted on 07/05/2022, I found that the share was underpriced and had a potential for growth owing to the huge demand of sugar in the domestic as well as the international market.

Dalmia sugar and industries Ltd. is one of the fastest growing companies in sugar industry in India. The company is in the business of sugar, distillery and co-generation (Power).

Key Highlights 

Govt. support in Ethanol production: The increased government support to companies for increasing ethanol production has opened up a lot of opportunity for the company. The company has been investing aggressively in the form of capital expenditure and has plans of investing around Rs. 425 Crore in a capital expenditure programme with the objective to enhance distillery capacity from 255 KLPD to 590 KLPD.

Focus on reducing Long term debt: The Company has been focusing on debt reduction for the past few years. As at 31st/March/2021, the company has reduced the long term debt to Rs.276 crore from Rs.424.39 crore last year. The debt to equity ratio of the company has improved from 0.32 in 2020 to .13 in 2021.

Financial overview: The Company’s Profit after tax has been increasing consistently for the past 2-3 years. You can check out page number__ for details. The Revenue from operations of the company has been showing negative or poor growth. Company’s EBITDA has been growing constantly.

Promoter’s Holdings: Currently, the Dalmia Sugar has good promoter holding of 74%. Also, the promoters holding isn’t pledged which is a positive sign.

Valuation outlook: As per Exit multiple method of share calculation, the company’ stock should be valued at Rs 558.59. It is currently trading at Rs.440.

Future Growth prospects: The Company has plans of expansion in the distillery segment of the business. We see an overall booming ethanol sector due to government’s constant incentivizing the companies. Dalmia sugar currently is planning for a expansion n the production capacity in its Uttar Pradesh and Maharashtra plants with an investment of up to Rs.250 crore in the segment.

Peer comparison:

Business overview

 Dalmia bharat sugar and industries ltd is a part of Dalmia bharat group. The parent company was founded in 1939 by Late Jaidayal Dalmia. The group’s core sectors are Cement, Refractory and Sugar. Dalmia sugar and Industries Ltd. is comparatively one of the youngest major sugar companies in India. It is headquartered at New Delhi. It was established in 1994 with its first plant in Ramgarh in Uttar Pradesh. The major businesses of Dalmia sugar and Industries Ltd. are Sugar (5 plants), Cogeneration (Power), Distilleries (Alcohol) and Sanitizers. It has 5 operational plants, 3 of them in Uttar Pradesh and 2 in Maharashtra. The company currently earns 76 percent of its revenue from sugar, 17 percent from distillery and 8 percent from power generation. The company has recorded has 12.07% sugar recovery from its 3 plants in Uttar Pradesh and 13.3% sugar recovery from its 2 plants in Maharashtra which are above the industrial average in the regions.

Company’s distillery outlook

In line with the Ethanol Blending Programme of the Government to increase ethanol blending to 20%, the Company is in the process to increase its distillery capacities substantially. Distillery contribution to revenue is 16% in FY 2020-21 in comparison to 14 percent in 2019-20. In the year 2019-20, the distillery capacity was at 240 KLPD. In financial year 2020-21, DBSIL is 3 operating plants, two in Uttar Pradesh and one in Maharashtra. Due to governments increasing focus on ethanol production, DBISIL announced around Rs.425 Crore in a capital expenditure programme to expand its distillery capacity from 305 KLPD to 590 KLPD. The following investment will help the company by increasing the profit from the distillery segment. The investment also has the potential to increase the distillery revenues in a year by a double proportion.

The outlook for the next year appears stable on the back of an increase in the diversion of sugar towards ethanol. This will not only result in lower pressure on stock levels but also better realizations and profitability.

Outlook of the Industry

India is the second largest sugar producing country in the world (after Brazil) and the largest sugar consuming country in the world. The Indian sugar production has increased from 26.79 million tonnes in 2019-20 to 30 million tonnes in 2020-21 with the growth of CAGR 13% year on year. Other major sugar producing economies have also shown a positive trend as shown in the figure.

Landmark policy contribution

At present, our country imports around 84 percent (around US 77 billion dollar of petroleum). There is a burden of excess dependency on imports for meeting our transportation needs. For this reason, the government has been focusing on alternative sources such as blending of ethanol with petrol to generate fuel. Ethanol blending is profitable both economically as it is cheaper source than petroleum and environmentally, since ethanol is a less polluting fuel. The National biofuel policy of 2018 has brought a directional shift to the industry. The government has plans of reaching a blending ethanol with petrol to the extent of 20% by 2030. The policy plan was subsequently brought forward to 2025 and represents stable medium-term sectorial clarity. Due to this policy, companies are incentivized to commission new or enhanced ethanol manufacturing capacities. Currently, India has an Ethanol production capacity of 426 crore liters from molasses based distilleries and 258 crore liters from grain based distilleries

The Company’s response to the policy introduction:

Currently, company has distillery capacity of 305 KLPD and three operating units. The company is planning to invest another Rs.250 crore to increase the distillery capacity in the next year. After the expansion, the company expects ethanol to contribute around 30% of our overall revenues with a corresponding increase in profitability. The revenue from the segment has increased the distillery revenue from 14% in FY 2019-20 to 16% in FY 2020-21.