Home >Markets >Stock Markets >ICICI Direct's top picks in sugar sector; sees up to 50% upside

Sugar stocks have been in focus after the government in June released a roadmap for ethanol blending programme. ICICI Direct in a research report said that it had reiterated its positive stance on the sugar sector along with an imminent re-rating and it continues to remain positive on the sector.

''Sugar stocks have seen 2-4x run-up in four months while valuation multiples have been re-rated from 3-5x to 8-10x PE. The sector has seen a turnaround from being a cyclical to a structural growth sector backed by government’s aggressive ethanol blending programme,'' analysts at ICICI Direct said.

The brokerage believes that more than 15% blending levels would help the sugar industry to divert 6 million tonnes (MT) of excess sugar produced every year. ''With aggressive distillery capacity addition in India, our coverage sugar companies would see strong earnings growth over the next three years,'' it added.

ICICI Direct has Buy rating on these sugar stocks:

Balrampur Chini: Though BCML has faced a considerable drop in sugar production this sugar season due to red rot, the brokerage believes changing sugarcane variety would help regain lost sugarcane in its catchment area.

''We value the stock at 14x FY23 earnings with a revised target price of 515 (earlier 385) & maintain BUY rating.'' (Target Period: 12 months)

Dalmia Bharat: With the strong cash flow generation and light balance sheet, the company would be able to increase its payout in future, it said. ‘’We also believe small sugar mills or single unit sugar mills could be a potential acquisition target for the company given its de-leveraged balance sheet.’’

The brokerage has a revised target price of 650/share (earlier | 450) and maintains its Buy recommendation.

Triveni Engineering: ‘’With strong earnings growth, cash flow generation, the company would not only be able to deleverage its balance sheet but is also expected to increase shareholder’s payout (dividend, buybacks) to ~40%. We maintain Buy recommendation with a target price of 270/share,’’ ICICI Direct note said.

Dwarikesh Sugar: With possibility of higher exports and domestic sales quota, the broker believes DSL would be able to liquidate its excess inventory. With high earnings growth & inventory reduction, DSL would be able to generate operating cash flow of 150-300 crore every year. It has a Buy rating with a revised target price of 110 (earlier 62).

Dhampur Sugar: ‘’We believe the company would be able to generate sustainable cash flows in future and increase its dividend payout. However, de-merger of the business into two separate entities would be an overhang in the medium term. We have revised target price to 500 (earlier 260) and maintain our BUY recommendation,’’ the note said.

Avadh Sugar: ICICI Direct said Avadh has a sizable sugar & ethanol capacity and is also further increasing its distillery capacity to utilise B-heavy route for producing ethanol. With the increasing clarity on global sugar prices and ethanol blending programme, a sugar inventory reduction is imminent. It has changed its cautious stance on the company given strong earnings growth and free cash flow visibility.

It has a revised target price of 685/share (earlier 345) and has changed its recommendation from HOLD to BUY.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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