KCP Sugar- The Beneficiary of Government Reforms

Origin

KCP Sugar and Industries Corporation Limited is one of the leading players in the sugar sector.  The company currently has a market capitalization of Rs.396.85 crores.

The Market

India is the second largest producer of sugar after Brazil.

• In order to keep a check on prices and to avoid speculation in a year where there is an expected shortfall, the Indian Government has asked the SEBI to ban futures trading in sugar. This is the second agri-commodity to be banned (after Channa) since the SEBI became the commodity regulator in September last year.
• The Indian Sugar Mills Association (ISMA) has estimated a 7.3% fall in national sugar output to 23.26 millions in comparison to the previous year.
• The government has asked the sugar companies to release stock in the market to reduce prices from the Rs.40-42 range to Rs.35-36. However, this stance will not allow to keep stocks to meet future expected shortages which may have a detrimental impact.
• An estimate says that there were around 99 cooperative sugar factories in 2015-16 out of which only about 30-40 are to begin the sugarcane crushing this season due to raw sugarcane shortage. These have received loans worth Rs.3273 crores and installments on these amounting to Rs.1000 crores remain unpaid. These factories may turn into NPAs.

The various decisions taken by the government includes relaxing the mandatory sugar export rule whereby taxes will now be applied on the actual exports rather than estimated and a 20% export duty to maintain domestic supply in conditions of drought.

Financials

• The Q1 FY 2017 reported that net sales have fallen from Rs.189.90 crores to Rs.112.70 crores.
• The company has still shown a rise in PAT from Rs.7.25 crores to Rs.10.96 crores which can be attributed to a huge decline in the consumption of raw materials and other expenses.
• The EPS has shown an increasing trend and has recovered from a negative             
• 1.93 in the last year’s first quarter to a positive 0.93 in this year’s first quarter. Also, the EPS has shown a 51% rise from the previous quarter rising from 0.64 to 0.97.
• The promoters holding stood at 40.23%, while Institutions and Non-Institutions were holding 0.08% and 59.69% respectively.

KCP Sugar share price made a recent high of Rs. 46.00 and closed today at Rs. 34.55 at a P/E of 9.62. The market capitalization of the stock is Rs. 399.12 crore. The stock has given correction of 25% from recent high of 46 and is available at a good support of 34. We recommend a Buy in KCP Sugar at current levels with a target of 44.