In an interview to CNBC-TV18, SP Tulsian of sptulsian.com shared his readings and outlook on market and specific stocks.
Below is the verbatim transcript of the interview.
Latha: What is the stock that you are watching today?
A: I have chosen Dwarikesh Sugar. If you see the performance of the company for the crushing season which has ended in the month of April, they have recorded the growth of 35 percent in the sugar production against 26 percent recorded by the whole of Uttar Pradesh (UP) state at 86 lakh tonne. Company has produced or manufactured sugar of 33 lakh tonne plus. The recovery has been the highest for this company in UP because UP has been the leader for this year sugar production. They had a recovery of about 11.78 percent.
Now coming on the financial performance, if I take a call on the company’s profit before tax (PBT), PBT has been at Rs 212 crore, but profit after tax (PAT) has been at Rs 158 crore. This implies that there is a tax provision of about Rs 58 crore. However, let us understand that this entire Rs 56-58 crore has been on account of the deferred tax which is just a book entry and no tax has been paid by the company. There is no tax outgo. So, technically, I will be taking this PBT of Rs 212 crore only as the PAT also.
Technically one can always argue that because of the book entry of the deferred tax the eventual PAT optically is seen at Rs 158 crore. So, cash EPS is at Rs 135 for FY17 against Rs 41 of FY16 and because the company is holding the inventory of about 23 lakh tonne of sugar, 23 lakh bag of sugar, 22.68 lakh bag of sugar to be precise, at a valuation of Rs 30 or sub Rs 30 has an inventory gain of Rs 150 crore. Some people argue that this is just a one time inventory but it is nothing like that. It is the nature of all UP based sugar mills that they always have the sizeable inventory at the end of March 31 which gets liquidated in the next quarter and losses or profits are booked accordingly in the subsequent quarter in Q1 and Q2.
So, since I have said that the FY17 has been the record performance for the company, I am expecting that FY18 will be slightly better than this. In fact FY17, we have seen a growth in the bottomline by four times, 400 percent. It is difficult for me to quantify that at this stage, but it will definitely be higher by about 10-15 percent because UP is going to show a production growth of about maybe 8-10 percent in sugar, estimated production of about 95 lakh tonne while this company may show a double digit growth in the sugar again. So, taking all this into account, I am expecting that the bottomline will be higher again in the FY18 on the PBT level.
Now coming on the recent news which the company has announced or has taken up is the stock split from Rs 10 to face value of Rs 1. Once you have that, probably I think the record that will get announced somewhere in the first or second week of August and at that time -- now share is ruling at Rs 430, and optically if you see on the stock split, Rs 43 with a cash P/E of about 3 or maybe operating P/E of about 4-4.5. So, that will be seen quite cheap because there are no other sugar stocks available at such low valuation, having highest recovery, such good inventory, such good profitability.
I am keeping very positive view on the sugar cycle because maybe in the month of June there has been destocking by the stockist. So, there was poor offtake at the mills level, but that process of the higher lifting of sugar will start from the month of July because of the festive season and because of the destocking taken place at the distributor level. So, I am expecting that the inventory will be largely cleared in July to September quarter.
So taking all this into account, I have taken an estimate or price target of about Rs 535 for the stock in next six months or so.
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