Recommendation from Sugar sector

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

UGAR SUGAR WORKS: A SWEET DISH FOR INVESTORS

HERE IS WHY
✓Commands a good market share
✓High demand in international markets
✓Well-positioned for growth

India is the world’s second-largest producer of sugar, after Brazil. Rising incomes are contributing to a rise in the consumption of sugary processed food and beverages. The industry's expansion is being driven by rising sugar demand from emerging markets such as India and China. It is also supported by the growing population in emerging economies like India, which is also expected to boost the demand for sugar. The sugar industry is also expected to benefit from the increasing use of sugar in the production of biofuels. The rising demand for biofuels is expected to boost the demand for the global sugar industry in the coming years. Owing to this, our low price scrip choice for this issue is from this sector. Ugar Sugar Works is a sugar manufacturing company and is a part of the Ugar Group, which is a diversified conglomerate with interests in sugar, ethanol, power and real estate.

The company has a crushing capacity of 18,000 tonnes per day and produces sugar, ethanol and electricity. Ugar Sugar Works has a market share of over 2 per cent. The company exports its products to over 20 countries worldwide. The revenue generated from the sugar business is 75 per cent. The ethanol business contributed 20 per cent of the total revenue and the rest from electricity. The company also produces and sells power from bagasse to the grid. Ugar Sugar Works produced 2.6 lakh tonnes of sugar in the fiscal year 2022-23. This is a 3.7 per cent reduction from the previous year. The cause of decline in output is due to lower sugarcane production. The production in India fell in the fiscal year 2022-23 compared to the previous year. However, despite the drop in output, the company’s sales increased due to higher sugar prices and high demand in the international market.

The lower production of sugar in India and an increase in demand from China helped the company to generate good revenue. In Q4FY23, Ugar Sugar Works’ consolidated revenue rose by 58.45 per cent YoY to ₹627.24 crore compared to ₹408.48 crore from the previous year’s same quarter. 

On a sequential basis, revenue grew by 2.70 per cent. PBIDT excluding other income increased by 267.19 per cent YoY to ₹105.06 crore compared to ₹28.61 crore from the previous year’s same quarter while sequentially it increased by 39.21 per cent. Net profit stood at ₹65.26 crore compared to ₹14.84 crore, a YoY growth of 339.74 per cent, while sequentially it increased by 43.34 per cent. The PBIDT excluding other income margins increased by 490 bps YoY and 426 bps QoQ and stood at 16.23 per cent. Net profit margin grew by 645 bps YoY and 286 bps QoQ and stood at 10.08 per cent. The company has well-managed its operating margin despite facing high price challenges.

At TTM, Ugar Sugar Works is trading at a PE of 11.6 times which is slightly lower than its three-year median PE. The company has maintained a healthy three-year average ROE and ROCE of 48 per cent and 16.7 per cent, respectively. The company has three-year compounded sales and profit growth of 27 per cent and 96 per cent, respectively. It has a debt-to-equity of 1.58 times with a comfortable interest coverage ratio of 4.07 times. The company has established a strong market position in the regions it operates and has an impressive track record of profitability. It is wellpositioned to continue to grow in the coming years. Considering all these factors, we recommend BUY.