DCM Shriram Industries - A Good Small Cap Value Stock With Sugar Play

Belonging to erstwhile DCM Group, DCM Shriram Inds. is a diversified conglomerate with diversified interests in Sugar, Chemicals and Rayon Tyre Cord Fabrics.

1)Company has 12,000 TCD capacity in Sugar Division. It also has cogen power plant of which 12 MW is sold outside.

2)In Chemical Division, Company is producing Extra Neutral Spirit which is supplied to liquour industry. Last year, company installed super distillation plant which enabled it to produce high quality alcohol for premium segment.

3)Company is one of the leading producers of Rayon Tyre Cord Fabrics in India, part of which is for exports.

Rationale for stock recommendation
Due to boom in sugar prices, its sugar division is performing extremely well. Further, despite rise in molasses prices, even chemical division is reporting improved performance due to buoyant demand. Due to huge demand from fast growing Tyre Industry, Tyre Cord Division is also doing extremely well. Company is likely to report all time high profit in 09-10.

Last year, company was in limelight due to aborted takeover attempt by Delhi based brokerage firm.Company has reported extremely good results for year ended March 2009.

1)Topline grew by 43% to 798 crs
2)PAT stood at Rs 39.64 crs (against loss in previous year), turnaround of 44crs
3)EPS stood at 22.78. Stock is trading at 5.18xFY09 EPS

Company has reported Super-fabulous results for Q1:

1. Topline has flared by 50%
2. PBT has zoomed by 6700%
3. Despite big income tax provision, PAT has polevaulted by 13500%.
4. Q1 EPS is 11.60

At present, sugar scrips have reached very high valuations as sugar prices continue to rise. P.E. Ratio of Sugar Industry is more than 18 due to very high P.E. Ratio (35 for Shree Renuka, 20 for Triveni Engineering) of some bigger players. However, P.E. Ratio of 5 for DCM Shriram is extremely low considering that company has other divisions also which reduces risks associated with cyclical sugar business.

STOCK IS TRADING AT JUST 3.00X FY10E EPS. DEFINITELY THE CHEAPEST STOCK IN SUGAR INDUSTRY.Even if company has a low P.E. Ratio of 6, its share price should be Rs. 237/-, based upon FY10E EPS.Promoters had taken preferential offer at Rs. 90/-.A good small cap stock to buy at dips.