Wealth Research

Andhra Sugars Ltd.

BUY
Stock Relative to Sector Outperform Sector Relative to Market Outperform
Stock Information CMP (Rs.) MKT CAP (Rs. Cr) 52 WK H/L Target Price (Rs.) Performance Rel to BSE500 -1m (%) -3m (%) -12m (%) Company Information BSE Code NSE Code EPS CY12E (Rs.) P/E FY12E Free float (Rs. cr) 1 Year Return (%) Avg. Daily volume in lakh (12m) Shareholding Pattern (%) Sept-11 Promoters Institutions Non-promoter corp. Public Foreign Institution 53.27 0.81 7.09 37.06 1.77 QoQ Chg -0.45 -0.11 -0.38 0.91 0.03 590062 ANDHRSUGAR 60 1.9 157 7.9% 0.01 5.2 15.3 5.0 116.10 314 130/84.55 160

Date 16th January 2012

Deep value stock, an ideal play on soaring Caustic Soda prices

Investment arguments One of the strongest players in the caustic soda and sugar businesses: Andhra Sugar Ltd. (ASL), is a diversified company engaged in the production of more than 15 products, of which caustic soda and sugar account for more than 80% of consolidated sales (for H1FY2012, caustic soda accounted for more than 50% of the consolidated revenue and around 93% of the consolidated PBT). The company has rarely seen any labour unrest in the last 4 decades. In addition, the company also has 55% stake in a listed entity, JOCIL, which is one of the most efficient manufacturer of fatty acids and soaps, catering to prominent FMCG companies like HUL, ITC, Clariant and Asian Paints. ASL has a consistent track record for 43 years of distributing high dividends; dividends were Rs.5/per share for FY2010 and Rs.5.50/per share for FY2011. At the current market price, the dividend-yield is 5.2%. ASLs strong performance is backed by the companys competitive positioning in the domestic chlor-alkali industry, which is attributable to its large scale chlor-alkali operations, decades of business experience, lean cost structure (considering its access to power at competitive rates) and relatively favorable demand-supply scenario in southern India. Higher margin from caustic soda segment boosting the overall profitability: During FY2011, performance of the caustic soda and chemical division was affected. While turnover of caustic soda division increased by 6%, decline in realizations and steep increase in power tariff affected the profitability of the segment. Sales realizations declined from Rs.22,682 per tonne in FY2010 to Rs.18,461 per tonne in FY2011. However, domestic average price of caustic soda has increased by 39% YoY in Q1FY2012, 63% YoY in Q2FY2012 and 54% YoY in Q3FY2012, which has improved the segment EBDITA margins and the overall PAT margins for ASL in the current year. In H1FY2012, caustic soda accounted for more than 50% of the consolidated revenues and around 93% of the consolidated PBT. Going ahead, caustic soda prices being firm in Q3FY2012, we expect higher revenue and contribution from caustic soda segment. During FY2011, the 400 TPD Saggonda plant has been upgraded with energy efficient technology, which will bring down the power cost going forward. ASL sugar division to benefit from favourable dynamics in Andhra Pradesh: ASL has been an efficient player in the sugar sector and has gradually diversified into chemicals and power generation. Over the last few years, there has been a rise of 11.5% in the area covered under sugarcane cultivation in Andhra Pradesh from 1.57 lakh hectare to 1.75 lakh hectare. The presence of its sugar operations in the fertile West Godavari belt of AP has resulted in healthy recovery rates of around 11% compared to 9.3% in UP, in a normal year of cane cultivation. This makes the cost of producing sugar cheaper in AP compared to UP. We expect cane cultivation to increase in the current season and cost of procurement to remain under control providing more stability. We expect the sugar cycle to turnaround in the next 12 months; hence the best strategy would be buy stocks before the spin of the cycle. Rich assets and investments in listed and unlisted subsidiaries: The company holds rich assets & investments with diversified stakes in various listed and unlisted entities holding around 55% stake in the efficient caustic soda manufacturer, JOCIL Ltd. valued at Rs.50 crore (Market Cap of Rs.90 crore), around 28.98% stake in Andhra Petro which is valued at Rs.58 crore, and holds 1 crore shares in unlisted entity Andhra Pradesh Gas Power Corporation Ltd. (APGPCL), which is a gas based power generating company located at Vijjeswaram in West Godavari District for availing power that is about half the cost of power sourced from the state electricity board. Its value we believe would be close to the market capitalization of ASL. Risk to our view: Any natural calamity which will hamper the supply of sugarcane, and any adverse policy change on import duty of caustic soda could impact the profitability of the company. Valuation and recommendation Total investments of ASL are higher than the current market cap of Rs.280 of the company. Also, the value of investments and replacement cost of assets is estimated to be Rs.2,000 crore, which is 4 times the enterprise value (EV) of about Rs.480 crore. ASL is an investor friendly company, for 43 years consistently rewarding its shareholders with higher dividends; it gave a dividend of Rs.5.50/per share for FY2011. For FY2012, the dividend is expected to be around Rs.6, with a dividend yield of 5.2% at the current market price. We believe the present EV of ASL at Rs.480 crore, is 1/4th the total of Investments and replacements of assets and it does not capture the real intrinsic value of the assets of the company. Also ASLs promoter holding is extremely fragmented with 118 individuals holding 53.27% in the company, so making it an easy takeover target. In case it becomes a target of M&A activity, the stock can become a multi-bagger. At the CMP of Rs.116, the stock is trading at a PE of 1.9x FY2012E EPS of Rs.60. Hence, we recommend a buy on the stock, for a target price of Rs.160, which translates to a PE of 2.7x FY2012E EPS (consolidated) of Rs.60.

Price Performance

Source: Centrum Wealth, Bloomberg

(Figures in Rs. Cr.)

Y/E MAR
2009A 2010A 2011A 2012E

Net Sales
7584 8491 8483 1,353

Growth %
31.8% 12.0% -0.1% 59.5%

EBIDTA
154.1 194.2 146.5 354.8

Growth (%)
15.4% 26.0% -24.6% 142.2%

Adj. PAT
54.7 76.8 57.3 162.6

Growth %
41.8% 40.3% -25.4% 183.7%

EPS (Rs.)
20.2 28.3 21.1 60.0

P/E
5.7 4.1 5.5 1.9

Source: Company, Centrum Wealth

Jabal Patel, VP Research Navneet Damani, Research Analyst

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Analysis

One of the strongest players in the caustic soda and sugar businesses
Andhra Sugar Ltd. (ASL), is a diversified company engaged in the production of more than 15 products, of which caustic soda and sugar account for more than 80% of consolidated sales (for H1FY2012, caustic soda accounted for more than 50% of the consolidated revenue and around 93% of the consolidated PBT). The company has rarely seen any labour unrest in the last 4 decades. In addition, the company also has 55% stake in listed entity, JOCIL which is one of the most efficient manufacturer of fatty acids and soaps, catering to prominent FMCG companies, like HUL, ITC, Clariant, Asian Paints. ASL has a consistent track record for last 43 years of distributing high dividends; dividends were Rs.5/per share for FY2010 and Rs.5.50/per share for FY2011. At the current market price, the dividend-yield is 5.2%. ASLs strong performance is backed by the companys competitive positioning in the domestic chlor-alkali industry, which may be attributed to its large scale chlor-alkali operations, decades of business experience, lean cost structure (considering its access to power at competitive rates) and relatively favorable demand-supply scenario in southern India.

Higher margin from caustic soda segment boosting the overall profitability
During FY2011, performance of the caustic soda and chemical division was affected. While turnover of caustic soda division increased by 6%, decline in realizations and steep increase in the power tariff affected profitability of the segment. Sales realizations declined from Rs.22,682 per tonne in FY2010 to Rs.18,461 per tonne in FY2011. However, domestic average price of caustic soda has increased by 39% YoY in Q1FY2012, 63% YoY in Q2FY2012 and 54% YoY in Q3FY2012, which has improved the segment EBDITA margins and the overall PAT margins for ASL in the current year. In H1FY2012, caustic soda accounted for more than 50% of the consolidated revenues and around 93% of the consolidated PBT. Going ahead, caustic soda prices being firm in Q3FY2012, we expect higher revenue and contribution from the caustic soda segment. During FY2011, the 400 TPD Saggonda plant has been upgraded with energy efficient technology, which will bring down the power cost going forward. ASL: Segmental margin of Sugar and Caustic Soda business
Caustic Soda
1900 1600 1300 1000 700 1/4/09 1/6/09 1/8/09 1/2/10 1/4/10 1/6/10 1/8/10 1/2/11 1/4/11 1/6/11 1/10/09 1/12/09 1/10/10 1/12/10 1/8/11 1/10/11 1/12/11 Caustic Soda

Source: Bloomberg/ Centrum Wealth

ASL sugar division to benefit from favourable dynamics in Andhra Pradesh

ASL has been an efficient player in the sugar sector and has gradually diversified into chemicals and power generation. Over the last few years, there has been a rise of 11.5% in the area covered under sugarcane cultivation in Andhra Pradesh from 1.57 lakh hectare to 1.75 lakh hectare. The presence of its sugar operations in the fertile West Godavari belt of AP has resulted in healthy recovery rates of around 11%, compared to 9.3% in UP, despite similar cane prices in both the states in the range of Rs.220-240 per tonne. This makes the cost of sugar production cheaper in AP compared to UP. In 2011 ASL has seen an increase in cane crushed compared to the previous year in view of better cane cultivation by farmers. However, sugar sales realization was lower compared to FY2010 due to depressed selling price. We expect cane cultivation to increase in the current season and cost of procurement to remain under control, providing more stability. We expect the sugar cycle to turnaround in next 12 months; hence the best strategy would be buy stocks before the spin of the cycle. The AP State Government has announced a special grant of Rs.200 a tonne of cane for farmers under 9 cooperative sugar factories. The government is also working on a comprehensive five-year package for the sugar cane sector. The government would encourage factories to go for co-generation, chemicals production and other value added products to enhance value for industries and farmers. Stable and high margin caustic soda business offset the down cycles in sugar segment
(Rs. crore)

FY2008 154.0 225.5 -9.2 61.3 -6.0 27.2

FY2009 170.0 255.9 22.2 76.0 13.1 29.7

FY2010 196.5 252.3 31.7 95.5 16.1 37.8

FY2011 82.05 255.6 -9 62.9 -11.0 24.6

Segment Revenues Sugar Business Caustic Soda Segment PBIT Sugar Business Caustic Soda Segment Margin (%) Sugar Business Caustic Soda

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Sugar business of Andhra Sugar shows cyclicality in nature and is impacted by government policies on quota, levy price, exports quota and domestic sugar prices. While the sugar business reported a loss at the segmental level during the downturn of the economy in FY2008 and again in FY2011, the business turns around at the peak of the sugar cycle with two digit margins. Whereas, caustic soda is a high-margin stable business, with decent growth in revenues over last 3-4 years with strong growth in segment margins at the peak of the cycle. Even during the slow down in the economy in FY2008, ASLs caustic soda business reported extremely well segment margins of 27%. Availability of cheaper power through AP Gas & Power, which is around half the cost of power sourced from the state electricity board, helps to bring down the cost of production of caustic soda. Hence, caustic soda business provides stability the revenue stream, mitigating the risk from fluctuation in the sugar business. ASL: Segmental Margin of Sugar and Caustic Soda business
Segmental Margin (% ) 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0
Sugar B usiness C austic Soda

37.8

27.2

29.7 13.1

24.6 16.1

FY 2008 -6.0

FY 2009

FY 2010

FY 2011 -11.0

Source: Company/ Centrum Wealth

ASL has chalked out an aggressive growth strategy for coming years: The management has a conservative approach to business and does not resort to high leverage. The company has the right strategy for expansion which does not put any undue stress on the balance sheet and internal cash generation is the preferred source of financing expansion activities. Due to the advantage of economies of scale and diversification, during FY2011, the 400 TPD Saggonda plant has been upgraded with energy efficient technology, which will bring down the power cost going forward. Consent for establishment of poly-aluminium chloride plant has been received and the plant commenced production in June 2011. Chlorine, which is the main raw material for this plant, will be internally sourced. The potassium carbonate plant at Tanuku commenced commercial production in FY2011. Potassium hydroxide kye, the main raw material for this plant is being sourced internally from ASLs plant at Kovvur. It has varied applications in bulk drugs/ pharma industry. Environmental clearance for its planned expansion of the caustic potash plant, hydrochloric acid plant, sodium hypo plant, mono-chloro acetic acid plant and single superphosphate plant are received. Land has been purchased at the Jawaharlal Nehru Pharma City, Visakhapatnam, for the production of pharmaceuticals. Feasibility studies are under progress to identify and take a decision for production of a suitable pharma product at this site. ASL proposes to set up a gas based power plant at Saggonda to meet power requirements for captive consumption. Consent for operation has been received from the state pollution control board for operating a 6,000 TCD and a 9 MW captive power plant at sugar unit III, Bhimadole. This plant will be expanded to operate at 6,000 TCD in phases. During FY2011, export orders were executed with multinational companies in the U.S., Germany and Mexico indicating a good market potential for Aspirin abroad. Steps have been initiated to increase the capacity of the Aspirin Plant from the present 1,000 MT to 2,000 MT per annum.

These projects are expected to strengthen the company's product range, accelerate growth and improve revenue generation.

Financial Performance 5 fold jump in net profit in H1FY2012

The company posted a net profit of Rs.55.93 crore on revenue of Rs.848.34 crore during FY2011, on a consolidated basis. For H1FY2012, the company posted a robust set of numbers with net sales registering a 78.3% YoY increase to Rs.375.8 crore. Net profit has jumped 5 fold for H1FY2012 to Rs.47.81 crore compared to Rs.10.55 crore in H1FY2011 on the back of improved off-take and realizations witnessed by the key divisions of the company (namely sugar, caustic soda, caustic potash, sulphuric acid). Its EPS increased to Rs.17.64 in H1FY2012, as compared to Rs.3.89 posted during the corresponding period last year.

The improved performance was attributable to the caustic soda and industrial chemicals division. The EBIT margins of both these segments stood at 31% and 26%, respectively in H1FY2012, as compared to 17% and 17%, respectively during H1FY2011.

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Rich assets and investments in listed and unlisted subsidiaries

The company holds rich assets & investments with diversified stake in various listed and unlisted entities holding around 55% stake in the efficient caustic soda manufacturer, JOCIL Ltd. valued at Rs.50 crore (Market Cap of Rs.90 crore), around 28.98% stake in Andhra Petro which is valued at Rs.58 crore, and holds 1 crore shares in unlisted entity Andhra Pradesh Gas Power Corporation Ltd. (APGPCL), which is a gas based power generating company located at Vijjeswaram in West Godavari District for availing power that is cheaper than power sourced from the state electricity board. ASL also holds majority stake in unlisted subsidiaries like Andhra Farm Chemicals Corporation Limited (76.8%) and Hindustan Allied Chemicals Limited (77.4%). Total investments of ASL are higher than the current market cap of Rs.280 of the company. Also, the value of investments and replacement cost of assets is estimated to be Rs.2,000 crore, which is 4 times the enterprise value (EV) of about Rs.480 crore. ASL is an investor friendly company, for 43 years consistently rewarding its shareholders with higher dividends; it gave a dividend of Rs.5.50/per share for FY2011. For FY2012, the dividend is expected to be around Rs.6, with a 5.2% dividend yield at the current market price.

We believe the present enterprise value (EV) of ASL at Rs.480 crore, is 1/4th the total of Investments and replacements of assets and it does not capture the real intrinsic value of the assets of the company. Also ASLs promoter holding is extremely fragmented with 118 individuals holding 53.27% in the company, so making it an easy takeover target. In case it becomes a target of M&A activity, the stock can become a multi-bagger. At the CMP of Rs.116, the stock is trading at a PE of 1.9x FY2012E EPS of Rs.60. Hence, we recommend a buy on the stock, for a target price of Rs.160, which translates to a PE of 2.7x FY2012E EPS (consolidated) of Rs.60.

Company Profile
Andhra Sugars Ltd. was incorporated in 1947. It is a part of the Andhra Sugar Group. ASL is a diversified company with business interests in manufacture of Sugar, Chemicals and Oil. Its main product is Sugar, which is produced at plants in West Godavari of AP. ASL is engaged in the manufacture and sale of sugar, organic and inorganic chemicals at plants located at Tanuku, Kovvur, Taduvai, Saggonda and Bhimadole. The company generates wind power at Ramagiri in Andhra Pradesh and at Annaikulam, Kurichampatti, Surandai and Kundadam in Tamil Nadu. It manufactures sugar at three units, Sugar Unit-I Tanuku, Sugar Unit-II Taduvai and Sugar Unit-III Bhimadole. During the fiscal year ended March 31, 2011, the three sugar units crushed an aggregate 754,635 metric tonnes of cane. Molasses, which is a by-product from the sugar plants is the raw material for its distillery located at Tanuku, producing industrial alcohol and ethanol. It has inorganic chemical complexes at Kovvur and Saggonda manufacturing a range of inorganic chemicals. The company is a manufacturer of caustic soda in southern India.

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