This stock has lost about 27% over the last 7 trading sessions as, along with the indices, the broader markets are also taking a beating. However, sugar stocks in the last few quarters or for the last 1-2 years have been at a sweet spot as prices have been rising steadily. While the name of Dhampur Sugar may sound more like a sugar company, it is more of a diversified game. The company is one of the leading integrated sugar cane processing companies in India. The company’s pioneering efforts to harness the full potential of sugarcane have enabled it to expand its portfolio beyond sugar to include renewable energy, fuel ethanol, alcohol, extra-neutral alcohol, alcohol-based chemicals and biofertilizers.
According to Sharekhan, Dhampur Sugar is focusing on increasing investment in ethanol capacity with strong support from the government’s prudent blending policies, strengthening the non-sugar portfolio of the business and improving overall profitability in the medium and long term. The brokerage has set a target of Rs 691 on the stock, which means that if you buy the shares today, there is a chance of doubling the value.
Dhampur Sugar: Expansion in benefit
Dhampur Sugar will upgrade its distillery facility to KL650 per day in FY2024 from KL400 per day in FY2021 (increased to KLPD500 in Jan 2022). The expansion in distillery capacity would help business revenue post a 29% CAGR during FY2021-2024 at Rs. 1,245.2 crores. The revenue contribution from the ethanol segment will increase to 27% for FY2024 from 14% in FY2021. Sharekhan sees an EPS of Rs 50.7 in FY2022-23. This means that the shares at Rs 371 are barely trading at 7 times their 1-year forward earnings. The sugar company also provides a dividend yield of around 2%.
Dhampur Sugar shares take a capitalization
Shares of the company were trading at Rs 521 on May 6 and are now trading at Rs 363. In a year, the stock has still returned about 14%. Shares of the company have fallen significantly from 52-week highs of Rs 584. Interestingly, the shares also have some way to go in terms of reaching their 52-week low. Investors looking to buy stocks today may also need to understand that while valuations are reasonable, sugar stocks tend to be extremely volatile and therefore caution is needed before investing. In any case, based on the company’s expansion plans, demand for sugar and higher sugar prices, the shares are worth a buy at the current price of Rs 360 or so.
Markets will remain volatile
The markets will continue to be volatile and therefore it is advisable to buy in small amounts during dips. Indices are seeing volatile swings as various factors, including rising interest rates, concerns about slower economic growth and a further tightening measure in China, continued to weigh on investors. Nifty has sharply corrected 6.5% in the last 7 trading sessions. One of the big risks of buying Dhampur Sugar stock, which investors should also be aware of, is that any change in the government’s ethanol blending policy or decrease in sugar supply due to vagaries of the weather or other supply constraints would act as a risk to earnings estimates. Having said that, we don’t see the possibility of that happening in the near future, at least in the next 1-2 years.