Shree Renuka Sugars- In a sweet spot:: Macquarie

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Shree Renuka Sugars
In a sweet spot
Event
 Our global agri-commodity analyst, Kona Haque, attended the London sugar
week, where hundreds of sugar producers, consumers and traders from all
across the world gathered. At the various seminars, parties and meetings she
attended, the broader sentiment on global sugar prices was bullish. If Indian
sugar exports surprise on the upside, price outlook will likely be neutral from
current level; otherwise, upside risks to higher sugar price are increasing.
 We believe Renuka Sugars, with large sugar producing assets in Brazil, will
be a key beneficiary of firm global sugar prices. We reiterate Outperform

.
Impact
 Tight global sugar surplus – raw sugar near US$30c/lb. Severe production
downgrades for the 2010/11 season due to weather shocks has kept global
sugar prices firm in 2H CY10 and is within striking distance of US$30c/lb from
a low of US$14.2c/lb in 1H. With no new supply from Brazil due to inter-crop
period and major Indian export still elusive, we believe prices are unlikely to
cool off for the next couple of quarters.
 Quantum of Indian exports to guide global prices. With India turning
surplus after two consecutive years of deficit, the quantity of Indian exports
holds the key to global sugar balance and prices since quantity of Indian
surplus (~2mt) would be the global sugar surplus in SS11E. Although the
government sounded positive on sugar exports, double-digit food inflation is
tying its hand to allow more than 2mt of sugar exports for SS11E.
 SHRS to benefit from firm global prices and white premium. SHRS with
~2/3 cane crushing capacity in Brazil will likely benefit immensely since
current sugar prices far exceeds company guided cost of production
of~US$15c/lb. Further, the US$85–95/ton range of white premium augurs well
for SHRS due to its large refining capacity. The 3,000TPD Kandla refinery is
expected to start in 2Q FY11E and SHRS may reap rich dividends in case of
supply tightness.
 Prefer south based sugar mills in a surplus year. We believe that 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).
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) Sector de-regulation.
Action and recommendation
 SHRS is currently trading at 1.7x and 6.6x its FY12E P/BV and EV/EBITDA,
respectively. Our target price of Rs110/share is based on mid-cycle multiples
of 2.1x P/BV given favourable sugar fundamentals and impending
deregulation in India.