KCP Sugar - (Buy@Rs.20, Target Rs.30) - LKP Bytes

The story so far...

KCP Sugar has two sugar factories in the state of Andhra Pradesh - Vuyyuru & Lakshmipuram. Vuyyuru facility has a crushing capacity of 8500 TCD along with 50klpd distillery and chemical operations and incidental co-generation of 15mw power per day. The Lakshmipuram facility has a crushing capacity of 4500 TCD. The distillery and chemicals business of the company is highly profitable. Unlike its peers in the industry, KCP Sugar is basically a player in sugar and does not have large capacities in distillery and power due to which its valuation is at a discount to its peers.

What went wrong last fiscal?

Sugar prices last fiscal remained depressed in keeping with the trend in previous years and hence profitability remained subdued with the company reporting a net profit of Rs285mn for FY'12.

The story ahead...

With sugar prices beginning to look up from the beginning of July this year we expect KCP Sugar to leverage its strong balance sheet (net worth of 200crs and long-term debt of only 30crs) and capitalize on its sugar inventory ( estimated to be close to 175crs as per our calculations).

KCP Sugar in our view should start reporting encouraging profits from the second quarter of this fiscal as long as sugar prices remain the way they have been in July 2012. We expect the company to post a net profit of Rs500mn this fiscal which would translate into an EPS of Rs4.4.

KCP Sugar at CMP of 20 trades at 4.5xFY'13E earnings and has a book value of Rs18 with a very strong balance sheet with proven ability to successfully come out of long sugar down cycles. We are optimistic on the prospects of this southern sugar producer and recommend a BUY with a one year price target of Rs30.

Source : Equity Bulls

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