Challenging the changes INITIATING COVERAGE

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1 Challenging the changes INITIATING COVERAGE Shri. S. Baskar Vice President & Company Secretary (Finance) Sakthi Sugars Limited (O) /42/43/44/ /42/4 Stock metrics Bloomberg code SCST IN Reuters code BSE Group SKSG.BO BSE Code NSE Code Face Value B SAKHTISUG Rs10 Market Cap (Rs cr) WeekHigh/Low /18.10 Sensex Nifty 5269 Average volume % Share Holding Pattern 3% 10% 36% Promoter FII Mutual Fund & Insurance Others Research Analyst Sheetal Nirmal sheetal.nirmal@inventuregrowth.com Ext-628 Denil Savla denil.savla@inventuregrowth.com Ext-581 Mar 26 th, I N V E N T U R E. Current Price Rs.59 Potential Upside 93% Target Price Rs. 114 Time Frame 24 Months Sakthi Sugars Ltd (SSL) Industry Sugar- Integrated Sakthi Sugars Limited is amongst one of the largest producers of Market Data Shareholding Pattern : sugar in India. The company works with a cane crushing capacity of more than tonnes. White Crystal Sugar is the main product of the company. Sugar manufactured by Sakthi Sugars Limited has met global standards of ICUMSA (International commission for uniform method of sugar analysis) and hence, has a huge market potential overseas. The company has four divisions namely; Sugar, Co-generation, Distillery & Auto component and all the division are generating revenues except auto component which has neglible revenue. However, the company is expecting huge revenues of about 1000 Crs in next two years from auto component. Valuation We have valued the company on PE basis. Currently it is trading at a PE multiple of 1.98x of CY09 earnings. Industry PE is around 5 times. Considering the future earnings of the company we have arrived at a target price of Rs.114 assigning the PE of 2.5 of CY11E earnings, with potential upside of around 93%. We recommend buy rating on this stock at current level. Year Ended March F Y 08 F Y 09 F Y10E F Y 11E Net Sales (Rs. Crs) Growth (%) EBIDTA (Rs. Crs) Growth (%) PBIT (Rs. Crs) Growth (%) PAT (Rs. Crs) Growth (%) EBIDTA Margins (%) Net Profit Margins (%) EPS ROE (%) EV/EBIDTA (x) PE Source: IGSL Research

2 TABLE OF CONTENT Sr. No. Particulars Page No. 1 Investment Rationale 3 2 Investment Concern 5 4 Company Background 6 5 Plants And Capacity 8 7 Business Model 9 8 Industry Overview 10 9 Financial Charts Profit & Loss Account Analysis Balance sheet Analysis Ratios Peer Group Analysis 17 2

3 Value addition by production of bagasse boards Investment Rationale De-Risking the business Model Sakthi Sugars Limited (SSL) works under integrated Business Model consisting of Power Generation, Distillery & Sugar. Apart from this, the company is engaged in manufacturing Auto component whose total revenue is around 40 Crs but it is not included in consolidated results and the company is expecting the top line of 265 Crs next year. Starting up of new 25 MW power plant SSL through its Co-Generation Power Plant which has current installed capacity of 92 MW is setting up its second co-generation power plant with capacity of 25MW power generation at Sakthinagar unit, which is expected to be commissioned in the year Company expects to generate around 2.30 Crs units and sell it at Rs 5.9/unit. This segment is expected to contribute around 9% to 10% of FY10 and FY11 revenues respectively Company has entered into a Master Restructuring Agreement with the Lenders Restructuring of Debt Company has entered into a Master Restructuring Agreement with the Lenders in respect of restructuring of its debts under the Corporate Debt Restructuring Scheme announced by Reserve Bank of India. The interest paid before restructuring was around 14% of average debt which would come down to 10%, hence making a positive impact on PAT Margins. Can be a potential take over candidate The company has to raise high Debt and low cash reserves due to the past year losses. However, Sugar mills in Tamil Nadu are paying only Rs.1700 per ton for sugarcane which is less than what the UP sugar mills are paying, thereby reducing the cost of raw materials. Therefore, Sugar business is profitable for this company even if international sugar price declines to $ 400 per ton. Sugar plants of this company are most efficient and well integrated. The auto component plants and Soya products are also efficient plants. It can be possible candidate for take over if the company continues its past performance. As the company s fundamentals are positive. 3

4 Lower Sugarcane Cost over the other State Lower Sugarcane Cost over the other State Cost of production is low as the cost of raw material is lower at 1700 per ton as compared to other states where it hovers around 2200 to 2400 per ton. Auto component business would lift Sakthi Sugars Sakthi Auto Components Ltd, which has a thriving business, may be looking at an overseas acquisition (mostly in Europe) in a bid to strengthen its footprint in the auto business The company has already acquired Portugal company which is one of the biggest manufacturing of auto component in Portuguese. It has already made an investment of Rs. 265 Crs in the form of its subsidiary. Increase in price as there is still sugar deficit in the country Prices have bottomed out but a price rise is expected, as the sugar deficit still continues in the country. Currently, sugar prices in northern India are ruling at Rs 32 per kg and we may see an improvement of Rs 2-3 per kg once the crushing season ends next month. Currently, the landed cost of sugar is around $540 per ton (approx. Rs.24840) and is expected be in the range of $ per ton. At $540 per ton the price/kg comes to around Rs.30 per Kg. Conversion of FCCB is beneficial The company has converted FCCBs of 90crs as on 15th March 2010 and would be converting the outstanding FCCBs by the end of current calendar year at a minimum price of Rs.190/- per share which would reduce all the. FCCB debt liability Reduction in number of pledged shares The promoters have reduced the number of pledged shares to 2.72 mn from mn which is 21 % of total promoters holding in CY09 as it was 96% in CY08 by paying off the debt of around 52 Crs. (Considering Current Market price) 4

5 Investment Concern 32 % of the total outstanding Shares are pledged by the promoters The promoters are holding 35.85% of total outstanding shares of which around 21.76% of the holdings are pledged by the promoters. So if company is unable to repay the loan, the shares will be sold by the bank to recover the unpaid amount, which makes the company vulnerable to a hostile takeover. High Debt The company has a debt of around 1280 Crs as well as high debt equity ratio of.1.41:1 in FY08. Government Interventions Risk of government intervention to control sugar prices cannot be ruled out. As a necessary commodity, the government has to keep the sugar prices under check. The government had imposed stock limits to control prices and have recently imposed severe inventory restrictions on buyers. Also the change in free-sale sugar norms from monthly to weekly release by the government also eased sugar price. The government has asked millers to sell part of their monthly non-levy quota every week. If they do not, the unsold quantity will be converted into levy sugar and sold at a subsidized rate through the public distribution system, Thereby increasing the supply of sugar. Climatic Uncertainty As sugarcane crop requires more water than other crops, hence it directly depends on monsoons. Therefore, there can be significant change in production estimates due to shortfall in rains, resulting mills to pay a higher price, thereby affecting the profit margins in the sugar segment for FY10E. 5

6 Company Background Sakthi Sugars is one of the leading producers of sugar in India with a capacity of over tones crush per day (TCD). The company was incorporated in 1961 with 1250 TCD and has plants in Tamil Nadu and Orissa. In the year 1972, to take advantage of captive molasses, the company started a distillery division with a capacity of 9 Lakh Litre per annum (LLPA) & currently has an expanded capacity of 360 LLPA. Furthermore, to take advantage of the waste Bagasse (Sugarcane Husk) the company had set up a 32 MW Co- Generation Plant for Rs.78 Cr. This captive power facility helped Sakthi to reduce its power cost & improve overall profitability. Currently Sakthi has 92MW captive power plant. The Details of the various Sakthi Plants are stated below: Sugar Units Capacity (TCD) Remarks Sakthi Nagar 9000 Sivganga 4000 Modakuruchi 3500 Dhenakanal 2500 Capable of producing sugar from raw sugar and situated near the port, thereby reducing transport costs on imports and exports Situated near the Tuticorin port, resulting in huge benefits in transport costs on imports and exports Situated near the port, thereby rationalizing transport cost on imports and exports, Located in Erode district, which is prominent for excellent monsoon, Cane Development program in the region by the company ensures higher production in the coming years Proximity to Paradeep port gives tremendous advantage in terms of transport cost on imports Note TCD = Tonnes Crushed per day 6

7 Co- Generation Units Capacity (MW) Remarks Sakthi Nagar 32 MW The company plans to increase the cogeneration capacity by 25 MW taking the total capacity to about 57 MW Sivganga 35MW The plant went operational in Feb 08 Modakuruchi 25MW The plant went operational in Nov 08 Distillery Division Units Capacity (KLPA) Remarks Sakthi Nagar Higher margins for distillery as the company purchases molasses from open markets also. Dhenkanal Note: KLPA = Kilo Litres per annum 7

8 Plants and Capacity Particulars CY08 (18) CY09E CY10E CY11E SUGAR Capacity (TCD) Implied Crushing Days Sugarcane Crushed (MT) Sugar Produced (MT) Recovery Rate (%) 9.5% 9.5% 9.5% 9.5% Sugar Realization (Rs.Cr) % of Total Realization 82% 83% 84% 81% DISTILLERY Capacity (Lakh Liters p.a.) Avg Realization Per Litre (Rs.) Distillery Realization (Rs.Cr) % of Total Realization CO-GENERATION Capacity (MW) Power Generation (KWH) Realization Per Unit (Rs) Co-Gen Realization (Rs.Cr) % of Total Realization 12% % 8

9 Business Model Sakthi operates an integrated business model which enables it to earn better profitability even during the down trend in the sugar cycle. Cane 1000 Kg Press-Mud 300 Kg Molasses 40 Kg Sugar 100 Kg Bagasse 300 Kg Bio-fertilizers 30 kg Alcohol 10 liters Steam 660 Kg Power 130 Kwh Process Steam 460 kg Surplus 100 Kwh Source: Company 9

10 Industry Overview Sugar Cycle Domestic sugar cycle follows a 5-7 year cycle. The down trend in the sugar cycle is marked with improved profitability of sugar mills, the higher and prompt payment to the farmers and hence low sugarcane arrears to the cultivators, higher area under sugarcane cultivation and bumper sugar production. All these lead to drop in sugar prices. Uptrend in sugar cycle starts with increased availability sugar, decline in sugar prices, low profitability of the mills, delayed payment to farmers, high sugarcane arrears & thus farmers switch over to other crops resulting in lower cane production. All these factors result in higher sugar prices and turn around the cycle. 10

11 World Sugar Production Country SY04 SY05 SY06 SY07 SY08 SY09 Brazil India EU China USA Thailan d Source: Indiansugar.com Maxico Current Scenario India is the second largest producer consumer of sugar in the world. The sugar industry is the second largest agrobased industry. The country has 582 sugar factories with an aggregate capacity of lakh tonnes. Out of 582 sugar-producing units in the country, 410 are in the small segment, with 228 having a capacity of 2500 Metric Tonnes Crushed per day (TCD) and 282 having a capacity of 2500 to 5000 TCD. Midsize segment has 64 units with capacities higher than 5000 TCD but below TCD, while only 8 units are large, having capacities of TCD and above. Sugar stocks continue to lag domestic sugar realizations on concerns of high production costs driven by lower crushing duration and low recoveries. We see greater upside for North Indian sugar mills given their high leverage to domestic sugar Realizations, in the short term (up to the general elections in May 2009), the stocks may lag domestic realizations. However, once there is increased visibility on higher sugar Prices; we expect the stocks to lead the rise in sugar Realizations Demand supply tightness to intensify in SS leading to the possibility of historic imports The domestic sugar production in SS (Sugar Season October September 2010) to be around 16.3 million tones, up marginally from the estimated 15 million tones for SS However, domestic demand at 23.8 million tonnes is expected to be far in excess of supply, implying the possibility of near historic sugar imports of around 8 million tonnes, accounting for over one third of total domestic consumption. Inventories are expected to be stretched as a result of the downtrend seen in sugar production since SS. Hence, we expect the sugar stocks to decline from 4.5 months off take in SS. Lower sugar production in is primarily based on the deficient rainfall recorded in Maharashtra and Uttar Pradesh, The major sugarcane producing states of India and the unseasoned rains received in the other sugar producing states of Karnataka and Tamil Nadu. 11

12 Demand-Supply Scenario Particulars SY06 SY07 SY08 SY09 SY10 Cultivation area (mnhctr) Yield ( ton/hctr) Sugarcane Cultivation( mn ton) Drawl Rate (%) Sugarcane for Sugar ( mn ton) Recovery (%) Sugar Production (mn ton) Opening Inventory (mn ton) Imports (mn ton) Total available Sugar (mn ton) Consumption (mn ton) Total Off-take (mn ton) Closing Stock (mn ton) Alcohol production Molasses, a by-product from sugar manufacturing process, is being used for production of alcohol, which in turn is used to produce ethanol. The yield of molasses per tonnes of sugar cane varies from 4.5%-5%. Nearly 90% of the molasses is consumed by industrial alcohol and remaining 10% by the potable alcohol sector which requires around 600 million litres ethanol for 5% blending with petrol in a year. Lower production of sugarcane has affected supply of ethanol. For the ethanol availability is projected at 128 Cr litres, leaving a deficit of 160 Cr litres compared to 45 litres in

13 Financial Charts Net Sales Sales increasing YoY but at a diminishing Growth Rate E 2011E Source: IGSL Research EBIDTA & PAT Margins Even though EBIDTA Margin showing mix trend PAT Margin is rising gradually E 2011E -200 EBIDTA PAT Source: IGSL Research 13

14 Profit & Loss Statement Source: IGSL Research Rs Crs FY08 Particulars FY07 FY09 FY10E FY11E (18) Net Sales % Growth Other Income Total Income Raw material Expenses % Sales Manufacturing Expenses % Sales Employees Expenses % sales Total Expenditure % Sales PBIDT % Growth Interest % Average Debt PBDT Depreciation % Gross Block PBT before extra ordinary items Total Tax % PBT Reported Profit After Tax Minority Interest Net Profit after Minority Interest

15 Balance Sheet Rs Crs FY07 FY08 FY09 FY10E FY11E Sources of Funds Share Capital Equity Capital Reserves & Surplus Total Shareholders Fund Total Debt Deferred Tax Liability FCCB Total Liabilities Application of Funds Gross Block Less: Accumulated Depreciation Net Block Capital WIP Investments Deferred income tax Cash & Bank Balance Total Current Assets Less: Current Liabilities & Provisions Net Current Assets Total Assets Source: IGSL Research

16 Ratio Analysis Turnover Ratios FY07 FY08 FY09 FY10E FY11E Net sales to total assets Net sales to Fixed assets Net sales to net working capital Net Working Capital Days Net sales to inventory Net sales to debtors Liquidity ratios Current ratio Inventory Days Valuation Ratios (x) PE EPS P/BV EV/EBIDTA EV/SALES Market Cap/Sales Return Ratios (%) ROCE ROE Margins (%) EBIDTA EBIT PAT Growth (%) Sales EBIDTA EBIT PAT Source IGSL Research 16

17 Peer Group Analysis Bajaj Hind Balrampur Shree Renuka Dhampur Simbholi Rs Crs Sakthi Sugars Dec Quarter Ended 2009 Net Sales Operating Profit PAT Operating Profit Margins PAT Margins FY09 Net Sales Operating Profit PAT Operating Profit Margins PAT Margins EPS (Rs) Valuations CMP Market Cap P/E Key Ratios Debt/Equity (FY09) Interest / EBIT (FY09) Per Share Data FV week high week low Change from 52 week high (%) Change from 52 week low (%) Source: IGSL Research 17

18 Names Designation Id. Contact Number Nagji Rita CMD - - SALES Ravinder Kasliwal Head Institutional Sales ravinder.kasliwal@inveturegrowth.com /66 Dealing Vinit Rita Institutional Dealer vinit.rita@inventuregrowth.com /66 Rashda Ainapore Institutional Dealer rashda.ainapore@inventuregrowth.com /66 Puja Shah Institutional Dealer puja.shah@inventuregrowth.com /66 Research Denil Savla Research Analyst denil.savla@inventuregrowth.com * 582 Sheetal Nirmal Research Analyst sheetal.nirmal@inventuregorwth.com * 579 Pankti Shah Research Analyst pankti.shah@inventuregrowth.com * 583 Divya Kant Research Analyst divya.kant@inventuregrowth.com * 581 Anshuman Jain Research Analyst anshuman.jain@inventuregrowth.com Sanjeev Haria Research Analyst sanjeev.haria@inventuregrowth.com Sibayan Banerjee Technical Analyst sibayan.banerjee@inventuregrowth.com Ashok Patel Technical Analyst ashok.patel@inventuregrowth.com Madhu Patel Technical Analyst madhu.patel@inventuregrowth.com Disclaimer This Document has been prepared by Inventure Growth & Securities Ltd. The information, analysis and estimates contained herein are based on Inventure s assessment and have been obtained from sources believed to be reliable. Neither Inventure Growth & Securities Ltd nor any of its employees or associates accepts any liability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for its completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This document is for circulation only Visit us at Please send your Feed Back to igslresearch@inventuregrowth.com Inventure Growth & Securities Ltd Corporate Office: - Viraj Tower, 2 nd Floor, Near Landmark, Western Express Highway, Andheri East, Mumbai Tel.: , Fax: