Investment justification for Dhampur Sugar Mills Limited (DSML)
According to Sharekhan, “DSML is focused on increasing investment in ethanol capacity with the strong support of the government’s cautious blending policies, strengthening the company’s non-sugar portfolio and improving overall profitability at The company will upgrade its distillery facility to 650 KLPD by FY 2024 from 400 KLPD in FY 2021 (increased to 500 KLPD in January 2022). the distillery would help the company’s revenue to show a CAGR of 29% in FY 2021-2024 at Rs. fiscal year 2021 to 27% by fiscal year 2024.”
“DSML’s EBITDA margin was below 11% in fiscal 2021 compared to its peers, at around 14-16%. 15% by FY2024. In addition, the company is focused on enhancing the value of its existing products by producing country liquor (in response to the government’s mandate to provide 18% of the company-produced molasses to liquor manufacturers), manufacturing high-margin specialty chemicals, and increasing the manufacture of refined and packaged sugar. This will help the EBITDA margin to improve steadily over the medium to long term,” the brokerage noted.
The brokerage also claims that “strong earnings growth and improved working capital would help cumulative FCF grow by Rs. 450 crore in FY2022-FY2024 (despite ~Rs. for expanding ethanol capacity) The company can use higher cash flow to reduce book debt and reward shareholders with higher dividends in future years Improved profitability and sustainable reduction in book debt would help the return profile (RoE/RoCE) improve significantly to 18.6%/19.8% in FY24 from 15.7%/14.0% in FY2024. financial year 2021.”
Buy for a target price of Rs. 692
“DSML is focused on building shareholder value by strengthening the non-commodity business to achieve consistent earnings growth with higher EBITDA margins. The stock is currently trading at a valuation of 10.5x/8.4x its FY2023E/ FY2024E EPS, which is at a discount Strong earnings visibility, an improving margin profile and a stronger balance sheet would help reduce the valuation gap with close peers in the years to come Therefore, we reset the stock’s hedge with a buy recommendation, assigning a price target (PT) of Rs. 692 (valuing the stock at 11x its FY2024E EPS, which is 27% off at the multiple target of Balrampur Chini Mills [BCML]),” says Sharekhan.
The stock was featured in the Sharekhan Ltd brokerage report. Investing in stocks presents a risk of financial loss. Investors should therefore exercise caution. Greynium Information Technologies, the author, and the brokerage are not responsible for any losses caused as a result of decisions based on the article.