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Sunday, October 25, 2009

Dhampur Sugar Mills Ltd:Best bet in the sugar sector,growth prospects and outlook,buy/sell/hold

Scripscan:Dhampur Sugar Mills Ltd

Story:Late rains in the Gangetic belt have bettered prospects for cane supply.High Retail price of Rs 40 per kg is leading to a paradigm shift in Sugar Industry profits.Even if SMP for Cane is fixed at Rs 200 per quintal, there will be a margin of Rs 8-10 per kg between input cost and wholesale selling price, which should sustain for atleast 2 years.Dhampur carries a debt of Rs 600 crore, but improved cash flows will allow the corporate to pay-off the same, making it debt free.Dhampur Sugar reported robust numbers for the nine months ending April 2009, results with a massive increase in net profit to Rs 42.3 crore (Loss of Rs 3.9 crore) led by an improvement in average sugar realisations to Rs 20.5 per kg, thereby offsetting lower sales volumes. The company should have done exceedingly well in the Q4 to June 2009, as Retail prices first rose to Rs 30 per kg and now range between Rs 35 and Rs 40 per kg.Inspite of tinkering by the Centre and the State Government in Cane pricing as also fixing a higher levy quota based on FRP, the corporate should report bumper profits due to sizeable gains on inventory.Dhampur held a sugar inventory of 2.3 lakh tonnes valued at Rs 18.9 per kg as of March 2009. This will enable it to benefit from the rising sugar price scenario.In Q2SY09, the company altered its depreciation policy wherein depreciation charges for the full year were allocated during periods in which the co-generation plants were expected to operate, thereby increasing depreciation provisioning.At the current price of Rs 109, the stock is trading at 8x its SY09E EPS of Rs 14 and 5x its SY10E EPS of Rs 21.1. Given the company’s large inventory holding and recent decision to import raw sugar we believe the company is well set to benefit from the rising sugar prices.The best bet for you folks in the sugar sector.


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