SHREE RENUKA SUGARS Subdued quarter; outlook strong:: Edelweiss

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􀂄 Strong revenues with consolidation of Brazilian subsidiaries
Shree Renuka Sugars’ (SHRS) Y-o-Y consolidated revenue was above our
estimates at INR 24,600 mn, up 125% Y-o-Y and 23% Q-o-Q, due to strong
revenues at its Brazilian subsidiaries and high trading volumes. Consolidated PAT
was at INR 1,179 mn (up 15.6% Y-o-Y), including ~INR 1,120 mn forex gain from
the Brazilian subsidiaries on long-term debt. Adjusting for the forex gain, PAT is at
INR 33.9 mn, below estimates (on above estimated interest and depreciation at
Brazilian subsidiaries). Consolidated EBIDTA margin was significantly up Q-o-Q, at
13.0% in Q4FY10 vis-à-vis 8.1% in Q3FY10, on account of higher contribution
from high margin Brazilian subsidiaries (~30% EBITDA margin).


􀂄 Strong operational performance at VDI and Renuka Do Brasil
Owing to strong uptick in the global raw sugar prices, though VDI and Renuka Do
Brasil (Equipav) posted strong operational cash flows, PAT was subdued on
account of lower-than-optimal operations, high depreciation (~USD 100-120 mn
per annum) and greater interest costs. However, SHRS has completed the
restructuring exercise of its loans with banks for Equipav. Also, it made some
down payments, which is expected to enhance profitability. Moreover, with the
global sugar supply expected to be tight, going forward, we expect strong global
sugar prices. This is likely to help VDI and Equipav post strong cash profit, which
is likely to be used to deleverage the consolidated balance sheet, which could
considerably improve profitability over the next 2-3 years.

􀂄 Sugar to turn profitable; by-product contribution to improve
We have assumed average cane price for SHRS for SS11 at INR 2,400 per MT,
which translates into cost of production of ~INR 24.4 per kg (ex revenues from
by-products). Further, average sugar realisation is assumed at INR 26 per kg,
which makes the sugar segment more profitable vis-à-vis H2FY10. Moreover,
contribution from by-products is likely to improve owing to higher volumes (driven
by higher cane availability and lower cane prices in SS11 vis-à-vis SS10, coupled
with strong realisation for ethanol). Profit in FY11 is expected to be subdued visà-
vis FY10 due to inventory loss of ~INR 1.5 bn and low trading profits.

􀂄 Outlook and valuations: Positive outlook; maintain ‘BUY’
Considering strong cash flow generation from SHRS’ Brazilian subsidiaries and
likely turnaround in the domestic operations, SHRS’ outlook is positive and we
have revised our EPS estimates up for FY11E and FY12E. At CMP of INR 90, the
stock is trading at P/E of 12.5x FY11E and 8.9x FY12E, and at EV/EBITDA of 6.4x
FY11E and 5.1x FY12E. We maintain ‘BUY’ on SHRS, with a target price of INR
115 per share based on 6.5x FY12E EV/EBIDTA.