Monday, 3 January 2011

Andhra Sugars - A quick look

A friend of mine suggested I look at Andhra Sugars. I took a quick look and here are my observations.

Andhra Sugars is mainly involved in manufacturing sugar, alcohol & alco chemicals, aspirin, chloro alkali, sulphuric acid and super phospate. To support its operations, the company has its own power generation capacity including a wind power generator.

There is some traction in its sugar and caustic soda areas. Caustic soda prices have gone up by nearly 30% in the last few months and sugar prices are also firm.

The company has initiated carbon credit trading benefits.

Financials:-
1. Overall, the company's financial numbers does not inspire much confidence. The revenue growth over a 5-year period is nearly flat.
2. The same situation is present for both operating earnings and Net Profit. The FY06 to FY10 EPS CAGR is 2.57%.
3. There has been no equity dilution in the last 5 years
4. The company pays a healthy dividend and the yield is nearly 4% (Rs 5 on CMP of Rs 120) although the payout has been fluctuating and has been Rs 7.5,6,5,6,5 in the last 5 years.

Observation:-
The company may well perform in the near term due to its twin engines of sugar and caustic soda price realization, but I would be very reluctant to invest here as this is purely a commodity business and it results are hostage to the various commodity cycles. So, if you decide to invest, you need to track the commodity prices closely and pick ear;y signs of topping. That, too me, is a lot of work which I am not very good at.

2 comments:

  1. Good Observations Abhi, just the kind I would want from my fund manager! Now that your study says that it may not be a great idea to pile this on in big numbers, I might think of my strategy once again!

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  2. Don't get me wrong. I think it will do well in the short term (say the next 6 months). The issue is it may be difficult to track the sugar and caustic soda cycles. This is not a buy and hold type of business. here you have to be on your toes constantly to be able to make money.

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