Macquarie Research: Buy Shree Renuka Sugars- Target Rs 107

Shree Renuka Sugars Ltd.: Sweeten your portfolio

Initiating with Outperform, TP of Rs107/share (25% upside)
Shree Renuka Sugars (SHRS IN) is India’s largest sugar company. Our positive
view on SHRS is based on improving global sugar supply outlook due to adverse
weather in key sugar producing regions. Further, South India-based integrated
sugar producers (like SHRS) are likely to fare better than their North Indian
peers in a year of domestic surplus (SS11E). We believe SHRS will be a key
beneficiary of impending reforms in the domestic sugar industry.
Well placed to benefit from global supply/demand tightness
Global supply-demand has turned favourable: Dry weather has affected the
outlook for Russian, European and South African output, while raising concerns
over the size of Brazil’s 2011 cane crop. Meanwhile, wet weather has led to
downgrades in Pakistani, Central American and Indonesian production. Our agricommodities
analyst, Kona Haque, believes sugar balance will be tight in SS11.
Ideally located to capture white premium: Post its recent acquisitions, SHRS
has 60,000 TCD crushing capacity in Brazil along with 5,000 TPD export refinery
in India. SHRS has positioned itself to take advantage of favourable global
balance and white premium. SHRS benefits from its proximity to large sugar
importing countries (China, Middle East) as well as the largest exporter (Brazil).
South based integrated mills better placed in surplus year
Sugar production is likely to be 36% higher in SS11E aided by good monsoon
and 15% higher cane cultivation. While all sugar companies face a challenge in
negotiating lower cane price this year, we believe South Indian mills are more
likely to succeed than North Indian mills. In absence of state advised price in the
south, SHRS has been able to loosely link cane costs to sugar prices.
Sugar sector reforms will potentially boost profits by 25%
Sugar is a highly regulated industry in India. The government regulates sugar
sales by administering a monthly release quota for every mill as well as
procuring at less than market price (levy sugar) for subsidised public distribution.
The minimum price for cane procurement is also set by the government. The
prospects for sugar decontrol is gathering momentum. The government has
recently cut the levy sugar burden from 20% of production to 10% for SS11E.
We are hopeful of gradual deregulation taking place, which will be a big boost for
the Indian sugar industry.
40% ahead of consensus – Brazil likely surprise factor
Strong cashflows alleviate concerns on leverage. SHRS’ gearing is at 1.7x
and debt coverage at 3.3x. However, strong cashflow (US$330m) will bring down
debt coverage to 2.3x by FY12E. SHRS’ Brazilian debt of US$950m has a
repayment tenure of ten years, with first repayment starting in 2013.
Our FY11E EPS of Rs9.4 is 40% ahead of consensus as we expect higher
contribution from Brazil amidst improving sugar outlook.
SHRS is currently trading at 1.7x and 6.7x its FY12E P/BV and EV/EBITDA,
respectively. Our target price is based on mid-cycle multiples of 2.1x P/BV given
the shift in global sugar outlook and expectations of deregulation in India.