The brokerage stated in its report said that increased sugar prices and rising ethanol volumes would lead to significant profitability growth for sugar producers.

 

Following the brokerage's upbeat outlook for the sugar sector, shares of Dalmia Bharat Sugar and Industries and Balrampur Chini Mills rose to a 52-week high on Thursday, during the trade.

 

“We believe sugar companies would see strong earnings growth on the back of higher sugar prices and increase in ethanol volumes owing to completion of large distillery capacity expansion, Given sustainable crop pattern in UP due to easy availability of water, sugar companies would be bigger beneficiary of higher sugar prices. We initiate coverage on Balrampur Chini, Triveni Engineering, Dalmia Bharat Sugar and Dwarikesh Sugar in the sector," said the brokerage in its report.

 

The brokerage further noted in its report that due to lower sugarcane yields in Maharashtra and Karnataka, gross sugar production decreased to 37.3 mt in 2022–2023. According to DAM Capital analysts, rapidly emerging El Nino conditions will further hinder the states' ability to produce sugar and will keep domestic sugar prices over ₹37/kg. This would help UP sugar firms by increasing the volume of sustainable sugar and sugar realisation.

 

“We expect sugar companies to witness strong earnings growth for FY23-26E. We initiate coverage on the sector with a positive outlook," added the brokerage.

 

The brokerage house has assigned the stocks of Dalmia Sugar, Dwarikesh Sugar, Triveni Engineering Industries Ltd, and Balrampur Chini Mills Ltd a ‘buy’ recommendation. Let's check what the brokerage has to say about each one of them.

 

Balrampur Chini Mills

The brokerage in its report claimed that Balrampur Chini Mills is one of the most effective sugar producers in the nation with the biggest ethanol production capacity.  

 

"We believe the company would benefit from higher sugarcane crushing, full utilisation of its new capacities and higher sugar prices. We value the stock at 15x FY25 P/E to arrive at a target price of ₹510/share. We like Balrampur Chini Mills given its large ethanol capacity, increasing sugarcane availability in its catchment area and its ability to swiftly change in ethanol sugar mix. We initiate coverage on Balrampur Chini with a BUY rating and see 22% potential upside from the CMP of ₹416," the brokerage said.

 

Triveni Engineering

According to the brokerage, Triveni Engineering is a sugar company with a greater share of high margin refined sugar industry located in western Uttar Pradesh. With the increase in ethanol blending to 20% levels by 2025–2026, it is well positioned to take advantage of the growth opportunity. Additionally, it has a substantial engineering division, which might unleash value in the event of a future demerger.

 

“Triveni Engineering is well poised to reap the benefit of higher sugar prices, large ethanol capacity addition and robust engineering business. We initiate coverage on the stock with a BUY rating and a target price of ₹415/share, and see 16% potential upside from CMP of ₹355," said the brokerage.

 

Dalmia Bharat Sugar

“Dalmia Bharat Sugar is expanding its distillery capacity from current 710 KLD (220 mn litre pa) to 1100 KLD (320 mn litre pa) by September 2024 by adding grain-based ethanol capacities. Distillery segment is expected to contribute 45% to revenue by FY25. The company would be generating operating cash flow of Rs1.4 bn and 2.1 bn in FY24 and FY25, respectively. We value the company at 12x P/E to arrive at a target price of ₹540/share and a Buy recommendation, and see 26.7% potential upside on the stock from CMP of ₹426," DAM Capital said.

 

Dwarikesh Sugar 

According to the brokerage, the company is one of the sugar producers with the highest recovery rate at the lowest cost. The doubling of the distillery's capacity would aid in future sugar-ethanol blend optimisation.

 

“Given high sugar prices and lowest cost of production, Dwarikesh Sugar is expected to see strong earnings growth in next two years. We initiate coverage on Dwarikesh Sugar with a BUY rating and a target price of ₹120/share, and sees an potential upside of 28.7% from CMP of ₹93," added the brokerage.