“Buy” this sugar stock for a 50% return in 1 year, as suggested by ICICI Direct

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Company Q2FY22 results according to ICICI Direct

Avadh posted strong results with a 3.5x increase in profits, and sales were flat at Rs 619.6 crore, impacted by lower domestic sugar sales. According to ICICI Direct’s research report, the company’s EBITDA was Rs 74.8 crore, up 38.8% YoY, with margins of 12.1% and consequent PAT was Rs 25.2 crore (vs. Rs 7.2 crore in the base quarter).

Key Drivers of Avadh Sugar's Future Price Performance According to ICICI Direct

Key Drivers of Avadh Sugar’s Future Price Performance According to ICICI Direct

  • The company is undertaking an 80 KLD distillery expansion with a CAPEX of Rs 135 crore, which would increase its distillery volumes to 11 crore. Avadh would maximize the production of B-heavy ethanol and sugarcane juice.
  • With the reduction in stocks industry-wide, sugar prices fell from Rs 32.5/kg in June 2021 to Rs 37/kg in November and are expected to remain firm above Rs 35/kg. This would increase revenue over the next three years.
  • With inventory being liquidated over the next year and profitability increasing, the company would be able to deleverage its balance sheet. We expect a debt reduction of Rs 540 crore between FY21 and FY24E.
Buy Avadh Sugar with target price of Rs 680 says ICICI Direct

Buy Avadh Sugar with target price of Rs 680 says ICICI Direct

According to the brokerage’s research report “Avadh is increasing its distillery capacity from 240 KLD to 320 KLD with a CAPEX of Rs 135 crore. This would help it increase its annual ethanol production to 11 crore litre.”

“Avadh’s share price has increased 2.1 times over the past five years (from Rs 220 in November 2016 to Rs 455 in November 2021). We expect a 2x increase in distillery volumes to grow revenue at a CAGR of 41.3% in FY21-24E,” ICICI Direct said in its research report.

The brokerage further clarified to investors that “Avadh is also increasing its ethanol capacity and exporting additional sugar to reduce sugar inventory levels. However, the company still has a high sugar inventory compared to the industry and the increase in domestic sugar prices would benefit the company in terms of liquidating these inventories at high sugar prices.In addition, the liquidation of inventories would help it reduce its debt at a faster rate , which, in turn, would increase profitability. The business would also complete its distillery CAPEX by June 2022, which would help it grow distillery volumes to 11 crore litre. We remain positive on the sector and the company from a longer-term perspective. We maintain our buy recommendation on the stock with a target price of Rs 680/share, valuing the company at 1.4x FY23 BV.”

Disclaimer

Disclaimer

The stock above was taken from ICICI Securities’ 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.

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