Andhra Sugar Company

VCK Share and Stock Broking Ltd. FOR PRIVATE CIRCULATION

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Sector: Medium Diversified

SHARE HOLDING PATTERN

Valuation table (Rs. crs) Year end March FY04 FY05 FY06E Sales 353.04 415.85 539 Growth (%) 13.2 15.6 29.6 EBITDA 84.7 101.14 130 OPM (%) 22.5 22.9 23 Net profit 28.19 39.53 57.6 Net profit margin (%) 7.98 9.5 10.7 EPS (Rs) 10.4 14.58 21.4 CEPS 17.0 22.2 28.6 DPS (%) 40 50 60 ROCE (%) 17.43 19.9 24.06 RONW (%) 16.94 20.0 24.3 Sales/Assets 1.42 1.67 2.26 Interest coverage (x) 2.92 4.23 5.5 Debt/equity (x) 1.3 1.09 0.93 Enterprise Value (crs) 367.6 610 610 EV/Sales (x) 1.04 1.47 1.13 EV/EBITDA (x) 4.34 6.03 4.69 P/E (x) 5.01 10.28 7.0 P/BV (x) 0.77 2.05 1.72 Market cap/Sales 0.34 0.97 0.75 PEG Ratio 0.3 0.25 0.15

The Andhra Sugars Ltd. Time Period: Long Term Recommendation: Strong Buy Price: Rs.149 Price target: Rs.300 Dated: 25th July’05 Investment Arguments

??The company’s annual sugar producing capacity increased to 1.8 lakh tonnes from about 1.5 lakh tonnes. Sugar crushing capacity increased from 7500 Tonnes per day to 9100 tonnes per day. Sugar factories situated at Tanuku, Taduvai and Bhimadole in the fertile and rain fed well-irrigated West Godavari district.

??The company has 2 plants for caustic soda manufacturing at Kovvur and Sagonda.The capacity at Sagonda plant is being increased from 200 TPD to 350 TPD. This will increase the combined capacity of both the plants to appx. 1,66,000 Tonnes per annum from 1,12,200 tonnes per annum. Besides, this company is heavily into chloral alkali segment with bye products like chlorine, HCl, etc. We believe chlor alkali segment of business is very strong as internationally the prices of commodities like caustic soda are strengthening & firming up due to continued robust demand.

??The company has already started producing HTPB, which is used exclusively by ISRO as solid fuel for the launching of rockets. It is the only producer of HTPB in India.The company started production of liquid hydrogen also just recently.

??The company has got wind power plant and it is a renewable energy source and this has reduced the power cost. The company can also benefit from carbon trading in the future due to the investment in wind power, which is renewable energy source.

??The company is consistent dividend payer and paid 40% dividend for FY04 and 50% dividend for FY05.

Valuation: At CMP Rs.150, it is trading at forward PE of 7 only. Taking into consideration the growth and consistent robust demand of both sugar and caustic soda, we feel that the stock is highly undervalued and very attractively poised for huge appreciation from this level. We expect the price target of Rs.300 with 1 year long term view.

Face Value Rs.10

BSE code 521313 NSE code ANDHRSUGAR Market cap (Rs crs) 370.3 Free float (%) 36 52-wk Hi/Lo (Rs) 157.65/47.5 Avg. daily volume 106605 Absolute Return 12M (%) 86.4 BSE Return 12M (%) 159.06

Promoters55%

Public33%

Body corpora

tes9%

FI3%


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Company Profile: Andhra Sugars, which was incorporated in 1947, is engaged in the manufacture and sale of sugar, Organic and Inorganic Chemcials.Edible & Non-Edible Vegetable Oils and Non-Conventional (Wind Power) Power Generation at Tanuku, Kovvur, Guntur, Taduvai, Saggonda and Ramagiri in Andhra Pradesh. The Tanuku plant manufactures 5000 TCD of Sugars and Taduvai plant 2500 TCD. Its by-product Molasses which is the raw material for alcohol is being produced @ 15 KL per day capacity in the initial stage in the Alcohol plant at Tanuku.Now this is increased to 30 KL per day. Bagasse is being used for Co-generation of Electricity. The Caustic Soda plant is having production capacity of about 112,000 MT per annum. The by-products for Caustic Soda plants are Hydrogen and Chlorine. The production capacities of Caustic Soda at Sagonda plant were increased from 175 TPD to 200 TPD and soon it is being increased to 350 TPD to meet the future demand for Caustic Soda and other Chloro-alkali Industry products. Andhra Sugars also operates 2.025 MW Wind power at Ramagiri and a Co-generation power plant at Taduvai. Since the company owns 2 Caustic Soda plants where Electricity is the raw material along with salt, it is necessary to have access to power at economical costs. A sulphuric acid plant of 250 tpd is also operational at the new chemical complex at Sagonda.

Tariff (%)

Customs Excise Prices (Jan 05) Landed cost (Rs/Tonne)

2004-05 2005-06 2004-05 2005-06 Domestic(Rs./tonne) International($/tonne) Pre budget Post budget Caustic soda 20.4 15.3 16.3 16.3 21000 335 24061 22979


Andhra Sugar 3

Business Division and Financial Performance 1.Sugar: The sugar manufacturing units are located at Tanuku, Taduvai and Bhimadole in West Godavari district of Andhra Pradesh.The combined crushing capacity of all 3 plants together is 9100 TCD.The 43% of the total revenue comes from sugar business. (Rs. Crs.) 2003 2004 2005Revenue 143.98 178.71 227.63EBIDTA 11.6 14.33 34.71EBIDTA Margin 8.06 8.02 15.25ROCE 6.6 6.7 15.35 2.Caustic Soda: The Company has an integrated inorganic chemicals complex at Kovvur and Saggonda manufacturing wide range of chlor-alkali products like caustic soda, sulphuric acid and other allied chemicals. The 40% revenue comes from caustic soda business. (Rs. Crs.) 2003 2004 2005Revenue 154.36 184.72 211.28EBIDTA 32.68 38.81 35EBIDTA Margin 21.17 21.01 16.57ROCE 21.33 23.35 14.69 3.Power Generation: The Company has 2.025 MW wind power unit at Ramagiri, AP and co-generation power plant at Taduvai.About 2% of the revenue comes from power generation and selling to AP State Electricity Board. (Rs. Crs.) 2003 2004 2005Revenue 9.97 10.4 10.73EBIDTA 2.39 3.77 2.86EBIDTA Margin 23.97 36.25 26.65ROCE 11.46 19.08 16.07 4.Other Chemicals: About 15% of the revenue comes from this segment, which comprises mainly of sulphuric acid, hydrogen, HTPB and chlorine, etc. (Rs. Crs.) 2003 2004 2005Revenue 66.46 83 79.23EBIDTA 12.73 9.87 7.94EBIDTA Margin 19.15 11.89 10.02ROCE 38 20.67 8.6


Andhra Sugar 4

Caustic soda

ECU realizations surge

? ? Consumption of caustic soda rose by a moderate 3 per cent in 2003-04 after the huge growth witnessed in 2002-03. Chlorine demand fell on account of lower demand from the EDC segment.

? ? ECU realizations of producers surged by around 4.5 per cent in 2003-04, led by caustic soda prices, which shot up by 23 per cent.

? ? Over the medium term, the demand for caustic soda is expected to increase by a moderate 4 per cent.

? ? In 2004-05, ECU realizations are estimated to have risen by 5.5 per cent and are expected to rise by around 8 per cent in 2005-06, led by an upturn in caustic soda prices, while chlorine prices are expected to remain fairly firm.

? ? Rising caustic soda prices have been supported by higher international prices, which are expected to prevail over the medium term, and improvement in the domestic demand-supply balance.

? ? Operating margins are expected to improve in spite of higher power and fuel costs, as the rise in ECU realizations would completely offset the impact of the same.

Budget Impact

Customs duty cut - marginally negative for the industry

A. The cut in peak customs duty rates from 20 per cent to 15 per cent will marginally affect the caustic soda and soda ash industry. Although, at present, the domestic prices of both products are at a discount to the landed cost, prices will remain under pressure and are expected to fall marginally.

B. As a large number of caustic soda manufacturers use captive power plants, which primarily use furnace oil as fuel, the cut in Customs duty from 20 per cent to 10 per cent on FO/LSHS will lower their manufacturing costs marginally.


Andhra Sugar 5

Government has initiated antidumping duty on caustic soda: This is going to help the domestic manufacturers. Recent Yuan revaluation by China is also going to help the domestic chlor alkali segment by making cheap china imports dearer and competitiveness of Chinese imports declining.

Industry Structure: India is the largest consumer of sugar and one of the largest producers in the world. This Year also India is expected to produce about 13.3 million tonnes as against 12.5 million tonnes of sugar last year. But world prices are firming up due to the EU policy of withdrawing heavy subsidy given to the sugar industry. Buoyancy in Major end user industry of caustic soda-Aluminium and Paper Aluminium and paper are the major industries, which find extensive use of caustic soda as major raw material. Going by the demand pattern of aluminium, major players like NALCO, Hindalco are going for major expansion, which will become operational within next 2 years. This will further give a boost to the consumption demand of caustic soda. Paper is another major consumer of caustic soda. The capacity expansion of about 6 lac tonnes has been announced by 7 large players in this sector. This expansion will become operational by 2006 end and this will also increase demand for more caustic soda. Bagasse – A waste lump remaining after squeezing of juice from sugar in sugar production is used for power co-generation as well as raw material for paper manufacturing. Rising Income & consumerism giving boost to more & more sugar consumption The consumption pattern of sugar is also related to the rising income and growth of economy of the country. Globally historically we can see that countries with the growing economy & prosperity tend to consume more sugar due to the rising consumption of soft fatty, junk food and the declining consumption of raw and fibrous food. This can be


Andhra Sugar 6

Understood best by the recent obesity problem china is facing due to the change in food patterns Financial Performance: The company has shown stellar performance over the years. The company’s sales stood at Rs.458.96 crs. for FY2004-05 against Rs.397.18 crs.for FY2003-04 registering impressive growth of 15.6%. The interest came down by 15.6% from 22.88 crs. in FY04 to Rs.19.32 crs.in FY05.profit after tax jumped by 40% to Rs.39.53 crs. in FY05 against Rs.28.2 crs. Concerns: The Company being in commodity manufacturing business of sugar and caustic soda can be vulnerable to cyclical nature of the commodity business. This can have adverse impact on the business growth of the company. But both sugar and caustic soda has shown strong upward trend in demand due to the shortage of these commodities in India and international market in addition to the robust demand due to strong industrial growth in India and China. As the company is into sugar as well as caustic soda, we have compared these 2 business segments separately with their respective peers in that segment. We have divided the net worth and equity into 2 equal divisions to reflect the proportion of the business revenue achieved from each of these 2 major divisions.

Company Performance comparison (Sugar Business)

Company Name PE EPS Div (%) Sales ROCE RONW P/BV

P/Sale

s

Market Cap/sales

Andhra Sugar 10.28 14.58 50 227.63 15.35 35.2 2.0 0.65 0.89 KCP Sugar 7.14 35.85 25 310.5 13.24 27.74 2.84 0.82 0.93

Sakthi Sugars* 9.92 8.41 0 289 0.56 -7.92 0.82 0.29 0.9

Ugar Sugars** 8.74 1.6 30 230.5 15.07 20.48 4.8 0.11 1.0 ? ? *Financial year June end. We have taken FY 04 June figures ? ? **Financial year September FY04 end. Figures of last year

Caustic Soda Business Division

Company Name PE EPS Div (%) Sales ROCE RONW P/BV

P/Sale

s

Market Cap/sales

Andhra Sugar 10.28 14.58 50 211.28 14.69 35.2 2.0 0.65 0.89 Gujarat Alkalies 7.54 19.6 15 1135 21.8 30.0 2.0 0.13 0.96

Chemfab Alkalies 7.25 26.0 100 73.56 35.23 51.67 4.9 3.8 1.3


Andhra Sugar 7

Price based on sugar industry business

Price Based on Chlor alkalies business

Actual price of Stock = A+B =Rs.300 Valuation and Recommendation:

At CMP Rs.150, it is trading at forward PE of 7 only. Taking into consideration growth and consistent robust demand for both sugar and caustic soda, we feel that the stock is highly undervalued and very attractively poised for huge appreciation from this level. Combining both the business of sugar and chlor alkali segment, we expect the price target of Rs.300 with 1-year long-term view.

Industry Average

FY'06E EPS

FY'06E Sales

FY'06E Book Value

Price/share (Rs.)

Weightage Weighted avg.

Price per share

PE 9.0 10.6 -- 95.4 0.6 57.2 Market cap/Sales 0.93 -- 300 279 0.3 84 Price/Book value 2.6 44 114.4 0.1 11.4 Price per share (Rs.)(A) 152.6

Industry Average

FY'06E EPS

FY'06E Sales

FY'06E Book Value

Price/share (Rs.)

Weightage Weighted avg.

Price per share

PE 8.4 10.6 -- 89 0.6 53.4 Market cap/Sales 1.05 -- 255 267.75 0.3 80.3 Price/Book value 2.97 44 130.7 0.1 13.0 Price per share (Rs.)(B) 146.7


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Income Statement (Rs. Cr.)

(Y/E March) FY04 FY05 FY06E Net Sales 353.04 415.85 539 Other Income 21.55 25.06 26 Total Income (incl. stock adj) 374.59 440.91 565 EBDITA 84.7 101.14 130 OPM (%) 22.5 22.9 23 Interest 22.88 19.32 20 EBDT 61.82 81.82 110 Depreciation 17.92 20.64 20 PBT 43.9 61.18 90 TAX (Incl. Def) 15.71 21.65 32.4 PAT 28.19 39.53 57.6 NPM (%) 7.98 9.5 10.7

Balance Sheet (Rs. cr.) Sources Of Fund FY04 FY05 FY06E Equity Share Capital 27.11 27.11 27.11 Reserves & Surplus 147.25 170 210 Shareholder Equity 174.36 197.11 237.11 Debt 233.45 215 220 Total Liabilities 407.81 412.11 457.11 Application Of Funds Gross Fixed Assets 380.16 400 410 Less: Depreciation 140.65 161.29 181.3 ADD: Capital WIP 8.45 10 10 Net Fixed Asset 247.96 248.71 238.7 Investments 31.7 45.0 60 Cash & Cash Equivalents 12.19 34.6 55.0 Current Assets 312.59 343 412 Less: Current Liabilities 146.34 165 190 Net Current Asset 166.25 178 222 Misc.Expenditure (incl. Def. Tax) -38.28 -59.6 -63.7 Total Asset 407.81 412.11 457.1

Cash Flow (Rs. Cr.) FY04 FY05 FY06E 1.Opening cash 10.35 11.38 34.6 2.Net cash from operations 70.36 39.46

50.4

3.Net cash from Investing activities -72.56 -34.69 -25 4.Net cash from financing activities 3.23 18.45 -5 5.Net cash flow during the year (2+3+4) 1.03 23.22 20.4 Closing cash (1+5) 11.38 34.6 55.0

Free Cash Flow -38.86 -80.55 22.27


Andhra Sugar 9

Price Chart

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100105110115120125130135140145150155160165ANDHRA SUGARS (140.150, 141.300, 137.750, 139.450, -0.70000)

Disclaimer - The information in this report has been obtained from sources, which VCK Research believes to be reliable, but we do not hold ourselves responsible for its completeness in accuracy. All estimates and opinions in this report constitute our judgment as of this date and are subject to change without notice. VCK Research will not responsible for the consequence of reliance upon our opinion or statement contained herein or for any omission.

VCK Share & Stock Broking Services Ltd. Analyst: Niraj shah 41, Shakespeare Sarani, Kolkata - 700017 Kolkata Office - Ph:(033) 22872387 Email:[email protected] Mumbai Office - Ph:(022) 56325727

Andhra Sugar Company

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