Thursday, July 2, 2009


Investment Summary

DSML is holding sugar inventory of 2.3 lakh tonnes (97.0% of sugar production in 1HFY09)
costing INR 18.9 per kg as of March 2009. We believe the company is expected to benefit
materially due to low cost inventory and recent surge in sugar prices. We expect the
company to make gross margin (sugar price - cane cost) of INR 5.5 per kg and INR 8.0 per
kg of sugar sold in FY09E and FY10E respectively. We also expect EBITDA margins for the
company to improve by 170 bps and 210 bps YoY in FY09E and FY10E respectively.

Our understanding of sugar situation (global and domestic scenario) concludes that average
sugar realisation for the company will increase to INR 21.6 per kg and INR 26.0 per kg in FY09E and FY10E respectively. We believe better sugar realisations together with high
inventory will provide strong traction to the topline. We expect Net sales to grow at healthy
41.0 % in FY09E and 13.7 % in FY10E.

We expect shortage in sugar cane production to persist through SY10 even after accounting
for 25.0 % increase in acreage, resulting in import of raw sugar to cover the shortfall. DSML has refining capacity of 1700 TPD and has contracted to import 1 lakh tonnes of raw sugar. We believe that the company will able to refine only 25000 tonnes of raw sugar in 2HFY09 and rest will be refined in FY10. As per our calculation, the company will add INR 53.8 million in FY09E and INR 217.9 million in FY10E to EBITDA through processing raw sugar.

DSML has increased its exportable power capacity by 33.0% YoY to 80 MW at the end of FY08. We expect gross power sales to increase by 3.2% and 4.7% to INR 535.8 million and INR 560.8 million in FY09E and FY10E respectively. The company plans to start power generation from coal in FY10 and is in negotiation with government for open power sale.

We believe that concerns on highly leveraged balance sheet will subside by FY10 as debt will come to a more manageable level. The company doesn't have any additional capex plan in FY10 and will generate substantial free cash flow for repayment of debt. We expect debt-equity ratio to decline from 2.0x in FY08 to 1.8x in FY09E and 1.3x in FY10E.


At CMP, DSML is trading at 3.7x FY10E earnings and 3.4x FY10E EV/EBITDA. Historically,
sugar companies have mostly traded in one year forward EV/EBITDA band of 4.0-7.0x. Our
target EV/EBITDA multiple of 4.5x values DSML at INR 110. We rate the stock as BUY with
potential upside of 58.0%. Our reasoning for using low valuation multiple to arrive at price
target is due to our belief that sugar cycle will reverse post FY10.

To see full report: DHAMPUR SUGAR