Shree Renuka Sugars-Global sugar outlook remain bullish::Macquarie

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Shree Renuka Sugars
Global sugar outlook remain bullish
Event
 We hosted an investor conference call with our global agri commodity analyst,
Kona Haque, on “Global Sugar Outlook”. We also spoke to the management
of three largest sugar companies in India on the domestic sugar situation.
 As the global sugar balance remains tight, we believe sugar prices will remain
bullish at least over the next two quarters. The timing and quantum of Indian
exports will determine global sugar prices during Brazil’s intercrop period. We
believe Shree Renuka (SHRS) will be a key beneficiary of high global prices.


Impact
 Tight global sugar surplus – raw sugar at 39-year high. Severe production
downgrades for the 2010/11 season due to weather shocks have kept global
sugar prices firm in 2H CY10 and within striking distance of US$35c/lb from a
low of US$14.2c/lb in 1H. With no new supply from Brazil due to the inter-crop
period and major Indian exports still elusive, we believe prices are unlikely to
cool off for the next couple of quarters
 Indian exports crucial for global sugar balance. We see little shift in global
demand/supply tightness as uncertainty over Indian exports continue and the
inter-crop period starts in Brazil. The wide range of Indian production
estimates (25mt-28mt) is also adding to the uncertainty and forcing the
government to be cautious on the export quantum. The Indian government’s
conservative approach may push global sugar prices to US$40c/lb.
 Sugar mills hoping for relief from High Court. Uttar Pradesh (UP)-based
sugar mills have approached the High Court (HC) seeking relief from the 25%
hike in cane price set by the state government. In similar situations in SS07
and SS08, HC ruled in favour of the mills. As in the previous instances, if the
court reduces cane prices, it will be a big positive for Indian sugar producers.
 Shree Renuka in a “win-win” situtation. If Indian exports are allowed, it will
be positive for Indian sugar millers, as domestic realisations are 25% lower
than international prices. If exports are not allowed, SHRS will benefit on its
sales from Brazil, as international prices will further increase. Also, the whiteraw
premium is likely to expand from current levels of US$75-80/t in coming
months as importers hit the market to add to their depleting inventories.

Earnings and target price revision
 No change.

Price catalyst
 12-month price target: Rs110.00 based on a Price to Book methodology.
 Catalyst: 1) Continued firmness in sugar price, 2) Quarterly earnings

Action and recommendation
 Outperform maintained. Given favourable global sugar fundamentals and
better realisations in Brazil, we maintain our positive view on SHRS.The stock
is currently trading at 2x and 7x FY12E P/BV and EV/EBITDA, respectively.