Re: Sugar Sector Stocks begins Uptrend
Dwarikesh Sugar IPO hits market
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Dwarikesh Sugar IPO will hit the market from November 29, priced at Rs 65, at a premium of Rs 55. Some analysts say, the pricing could have been lower, but the company s confident of its plans.
Dwarikesh Sugar is coming out with an initial public offering next week, on November 29. With the sugar cycle a rise, analysts say that the IPO is well-timed. However, there are some concerns that it is priced at a substantial premium.
The CMD of Dwarikesh Sugar, Gautam R Morarka told CNBC-TV18 that the pricing of the IPO is well suited to market conditions. "The pricing of sugar per se will remain bullish at least for the next couple of years. The crop has been below normal for the last two years, and this year the cane crop is particularly low in the South and Maharashtra belt," he said.
Analyst Ashok Kumar of Lotus Knowlwealth says that the IPO pricing could have been marginally less, but still assures investors that they can make money on the issue. He said, "In case of an IPO, ideally it should be underpriced marginally. That has not happened here and is a function of the market, and you cannot expect merchant bankers and promoters to underprice an issue significantly. I think there is money to be made on this issue, assuming market conditions remain as they are now."
Kumar further added, "The IPO is riding the sugar industry boom. The company has done well during bad times, which will stand it in good stead. It's proximity to the Gangetic plain is positive, since it minimises the impact of the monsoon which is a big risk for this industry. Beyond that, I think the pricing is right and given the market conditions it should sail through. This is a 100% under-written issue."
The IPO is priced at Rs 65, at a premium of Rs 55. The company is issuing 50 lakh shares of Rs 10 each, and aims to raise Rs 32.5 crore (Rs 325 million). The issue is fully underwritten. Post public issue, the paid-up capital of the company will be Rs 12.56 crore (Rs 125.6 million) and its net worth will be Rs 70.37 crore (Rs 703.7 million). The issue will close on December 3.
On the valuation front, Dwarikesh Sugar still looks moderate, with a PE ratio of 5.35 times, compared to the 12.76 times of sugar major Balrampur Chini, and KCP Sugar's PE of 9.58 times, according to the company’s FY05 earnings. In its September quarter for FY04, Dwarikesh recorded a rise in net sales by 80.17%, to Rs 143.1 crore (Rs 1.43 billion), while its operating margins also climbed from 17.4% to 18.6%. Profit after tax was up from Rs 2.05 crore (Rs 20.5 million) to Rs 9.76 crore (Rs 97.6 million).
Dwarikesh Sugar operates a 6500 TCD Sugar Plant at Bijnor in the sugar-rich belt of UP and co-generates 9 MW of power. After starting commercial production in 1995, the company has been raising its crushing capacity regularly, and also consistently achieved a higher recovery percentage on the product efficiency front. It produced 3.83 lakh quintals of sugar during 1995-96 with a recovery of 9.95%, while it achieved a production of 7.81 lakh quintals with a recovery of 10.39% during FY 2003-04.
According to the company, the IPO proceeds will be used to set up a distillery of 30 KLPD to make industrial alcohol, work on which should commence by January, and a sugar refinery of 200 TPD. Its power cogeneration project will also be expanded.
Morarka told CNBC-TV18, "We have decided to diversify into the manufacture of ethanol, as well as increase our cogeneration power capacity. We are supplying power to the UP power grid for the last two years at 2MW, and we are planning to raise it to 8MW. The 30,000 LPD distillery will also help diversify our portfolio. The dependence on sugar and the risk of cyclical fluctuations could be reduced to a great extent."
Morarka adds, the distillery project is bound to be a major revenue-generator for the company. He said, "Blending 5% ethanol with petrol has been made compulsory by the government, and it is expected to go up to 10% by the middle of next year. With this, there will be a tremendous demand for ethanol. So it will be a major money-churner."
The distillery will also enable the company to use its molasses, which is otherwise sold to others. Dwarikesh currently generates 29,398 tons of molasses, and will then use these to produce ethanol.
While otherwise positive on the IPO, Kumar is concerned about the taxation procedures followed by Dwarikesh Sugars, that enhances its performance. He said, "There is the issue of accounting standard 22 of the Institute of Chartered Accountants of India, which deals with deferred tax assets, as a result of the accounting that they follow. That enhances the company's results by about Rs 8 crore, and impacts the price-book ratio in turn, which gives it a slightly better picture. But that should not take too much away from the issue."
However, Morarka said that the company is within its right to use the accounting standards under dispute, given its performance. "We had a different perception on the deferred taxation provision, and the auditors mentioned that they should be subtracted from the reserves. There is a provision that if you are confident of the profits coming in the future years that may not be provided, and we have achieved profit. So I feel that our claim is justified. We are confident of the company, we have done well and see no reason why Dwarikesh should not surpass all its past performance," he said.
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5th December 2004, 04:36 PM
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