>ANDHRA SUGARS LIMITED: Deep value stock, an ideal play on soaring Caustic Soda prices

Investment arguments
One of the strongest players in the caustic soda and sugar businesses: Andhra Sugar Ltd. (ASL), is a diversified company engaged in the production of more than 15 products, of which caustic soda and sugar account for more than 80% of consolidated sales (for H1FY2012, caustic soda accounted for more than 50% of the consolidated revenue and around 93% of the consolidated PBT). The company has rarely seen any labour unrest in the last 4 decades. In addition, the company also has 55% stake in a listed entity, JOCIL, which is one of the most efficient manufacturer of fatty acids and soaps, catering to prominent FMCG companies like HUL, ITC, Clariant and Asian Paints. ASL has a consistent track record for 43 years of distributing high dividends; dividends were Rs.5/per share for FY2010 and Rs.5.50/per share for FY2011. At the current market price, the dividend-yield is 5.2%. ASL’s strong performance is backed by the company‘s competitive positioning in the domestic chlor-alkali industry, which is attributable to its large scale chlor-alkali operations, decades of business experience, lean cost structure (considering its access to power at competitive rates) and relatively favorable demand-supply scenario in southern India.


Higher margin from caustic soda segment boosting the overall profitability: During FY2011, performance of the caustic soda and chemical division was affected. While turnover of caustic soda division increased by 6%, decline in realizations and steep increase in power tariff affected the profitability of the segment. Sales realizations declined from Rs.22,682 per tonne in FY2010 to Rs.18,461 per tonne in FY2011. However, domestic average price of caustic soda has increased by 39% YoY in Q1FY2012, 63% YoY in Q2FY2012 and 54% YoY in Q3FY2012, which has improved the segment EBDITA margins and the overall PAT margins for ASL in the current year. In H1FY2012, caustic soda accounted for more than 50% of the consolidated revenues and around 93% of the consolidated PBT. Going ahead, caustic soda prices being firm in Q3FY2012, we expect higher revenue and contribution from caustic soda segment. During FY2011, the 400 TPD Saggonda plant has been upgraded with energy efficient technology, which will bring down the power cost going forward.


ASL sugar division to benefit from favourable dynamics in Andhra Pradesh: ASL has been an efficient player in the sugar sector and has gradually diversified into chemicals and power generation. Over the last few years, there has been a rise of 11.5% in the area covered under\ sugarcane cultivation in Andhra Pradesh from 1.57 lakh hectare to 1.75 lakh hectare. The presence of its sugar operations in the fertile West Godavari belt of AP has resulted in healthy recovery rates of around 11% compared to 9.3% in UP, in a normal year of cane cultivation. This makes the cost of producing sugar cheaper in AP compared to UP. We expect cane cultivation to increase in the current season and cost of procurement to remain under control providing more stability. We expect the sugar cycle to turnaround in the next 12 months; hence the best strategy would be buy stocks before the spin of the cycle.


Rich assets and investments in listed and unlisted subsidiaries: The company holds rich assets & investments with diversified stakes in various listed and unlisted entities holding around 55% stake in the efficient caustic soda manufacturer, JOCIL Ltd. valued at Rs.50 crore (Market Cap of Rs.90 crore), around 28.98% stake in Andhra Petro which is valued at Rs.58 crore, and holds 1 crore shares in unlisted entity Andhra Pradesh Gas Power Corporation Ltd. (APGPCL), which is a gas based power generating company located at Vijjeswaram in West Godavari District for availing power that is about half the cost of power sourced from the state electricity board. Its value we believe would be close to the market capitalization of ASL.


Risk to our view:
Any natural calamity which will hamper the supply of sugarcane, and any adverse policy change on import duty of caustic soda could impact the profitability of the company.


Valuation and recommendation
Total investments of ASL are higher than the current market cap of Rs.280 of the company. Also, the value of investments and replacement cost of assets is estimated to be Rs.2,000 crore, which is 4 times the enterprise value (EV) of about Rs.480 crore. ASL is an investor friendly company, for 43 years consistently rewarding its shareholders with higher dividends; it gave a dividend of Rs.5.50/per share for FY2011. For FY2012, the dividend is expected to be around Rs.6, with a dividend yield of 5.2% at the current market price. We believe the present EV of ASL at Rs.480 crore, is 1/4th the total of Investments and replacements of assets and it does not capture the real intrinsic value of the assets of the company. Also ASL’s promoter holding is extremely fragmented with 118 individuals holding 53.27% in the company, so making it an easy takeover target. In case it becomes a target of M&A activity, the stock can become a multi-bagger. At the CMP of Rs.116, the stock is trading at a PE of 1.9x FY2012E EPS of Rs.60. Hence, we recommend a buy on the stock, for a target price of Rs.160, which translates to a PE of 2.7x FY2012E EPS (consolidated) of Rs.60


To read the full report: ANDHRA SUGARS
RISH TRADER