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Sunday, October 4, 2009

Ponni Sugars Erode Ltd:Future growth prospects and outlook,a sugar bet

Scripscan:Ponni Sugars Erode Ltd

Story:We have recommended several sugar stocks over the past year and all of them have offered decent returns. But this is one sugar stock that is a bit different in several respects. Chennai-based Ponni Sugars (Erode) Limited (PSEL) was formed following a Ponni Sugars and Chemicals Ltd (PSCL) demerger scheme in 2001. The mill has successfully implemented an innovative lift irrigation scheme by bringing in dry lands under cane cultivation, utilising the effluent discharge of the neighbouring paper mill. The company also sells bagasse for making paper. Since inception, PSEL has bet on the use of bagasse for paper; accordingly, the company installed a coal-fired boiler and later added a multi-fuel boiler in place of the conventional bagasse-fired boilers. Recently, there were reports that PSEL is planning to invest Rs72 crore for setting up a distillery with a capacity of 60KLPD close to its sugar mill at Erode. The investment would be funded through internal accruals and debt, ruling out the equity option. For the project, the company has acquired 25 acres of land and has applied to the state government for a distillery licence.Financially, Ponni Sugars has turned around sharply in 2008-09. It had made a loss of Rs1.88 crore last year. In the nine months of this year, it made a profit of Rs4.95 crore. But profit really zoomed in the last three months of the year; net profit jumped by over Rs7 crore in March 2009, helping Ponni to end the year with a net profit of Rs12.26 crore on an equity capital of Rs8.60 crore. Based on its annual results, that leads to an EPS of Rs14.25. At the current price of Rs57, the stock is trading at 3.96 times its 2008-2009 EPS. Its market-cap to sales is 0.35 times and market-cap to operating profit is 2.12 times. The current shortage in sugar is not likely to disappear soon. So, the EPS for 2009-2010 can be as high as Rs20. Even if the valuation remains the same, the stock price can double. Mercifully, stocks like Ponni are not tracked by analysts and are shunned by fund managers. So, retail investors have an edge. Buy the stock at Rs50.

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