Stock Review: Ponni Sugars

Ponni Sugars is an undervalued stock in a sector which is currently out of favour, so this gives you increased margin of safety by investing in these kinds of stocks. If you take a look at Ponni Sugars, this is a company which is located in Tamil Nadu; it has got a crushing capacity of about 3000 tonne crushed daily (TCD). Companies in Tamil Nadu are not allowed to expand, unless there is a command area available for cultivation of sugarcane. So, in that aspect, there is a limitation in the company to expand their sugar capacity further. But the company is implementing about 19 megawatt power project at a total outlay of about Rs 100 crore and they are also quoting a distillery of about 45 kilo litres per day and a total outlay of about Rs 60 crore. So, these are the expansions, which are currently going on in the company, which will be operational in the next two years.

If you take a look at the financials of the company, for FY10, the sales were about Rs 250 crore which were almost up by about 75% compared to FY09, profit after tax was about Rs 37 crore and the company paid a tax of about Rs 18 crore. This company has got a very small equity of about 8.7 crore which means the earning per share (EPS) of more than Rs 40 for FY10. The current price is about Rs 110 which means that you are getting a stock at a PE of less of 3. The company has been a dividend paying company. It paid a divided of 40% last year. So, from these levels the downside at least looks extremely restricted, given the fact that sugar prices internationally have been going up for the past few weeks and expert say that they are unlikely to come down too much. So, from that, it looks to be undervalued stock with a good management and the downside from the current price looks extremely restricted.

Target is a function of sugar prices. If sugar prices continue to trade higher, the way they been doing for the past few weeks, This stock has a potential to give about 50-100% return in the next one to one-and-a-half year. Whereas the downside from these prices looks maybe just about 10-15%, in case the market drops. This stock is may not going to drop way below where it is quoting right now.