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Shree Renuka Sugars Limited
Brazilian Samba
Investment rationale
Flexible cane price mechanism
Shree Renuka Sugars Limited (SRS) follows a flexible cane price mechanism
where the cane costs are linked to the sugar price, subject to the floor of Fair
and Remunerative Price (FRP), thereby minimising the cyclicality to the profits.
Healthy refining margins
The company has an operational port-based refining capacity of 2,000tpd
at Haldia and is also setting up another 3,000tpd refinery at Mundra. These
refineries will operate on a re-export model in times of surplus sugar situation
in India. The current refining spreads allow it to make healthy margins of
~USD35-40/mt.
Improving fundamentals at Brazil
With global sugar price on a firm trend, the fundamentals at Renuka Sugars
Do Brazil (RDB) and Vale Do Ivai (VDI), have improved substantially as the
companies' source part of their cane from the leased farms, where cane costs
are stable irrespective of sugar price trend.
De-leveraging of balance sheet
With improvement in profitability at RDB and VDI, we expect a considerable
improvement in the balance sheet strength over the next 15-18 months.
Valuation and outlook
At the CMP of INR97, the stock trades at a P/E and EV/EBIDTA of 10.1x and
5.2x discounting its FY11e numbers, respectively.
We believe that the present business model of SRS should result in the company
benefiting from firm global sugar prices coupled with normalised profits from
the domestic operations. Additionally, a steady deleveraging of the balance
sheet should result in a gradual re-rating of the stock considering its scale of
operations and geographical diversification. We reiterate our BUY
recommendation on the stock with a target price of INR119.
Investment rationale
Background
Shree Renuka Sugars Limited (SRS) is the largest sugar manufacturer in southern India
with an operational capacity of 35,000tcd across seven units in Karnataka and
Maharashtra. It also has a cogen (surplus) and distillery capacity of 135MW and
930KLPD, which minimises the cyclicality to revenues and profits. SRS has followed an
asset light model to scale-up where it has acquired co-operative mills on lease. This
has helped it achieve significant scale in operations at minimal capital costs.
The key advantage SRS enjoys over UP-based companies is the flexible cane price
mechanism where price paid to farmers is linked to sugar prices (subject to the floor
of FRP). This enables it to minimise the cyclicality to profits even during down cycles.
Additionally, SRS has the largest sugar refining capacity in India, with an operational
capacity of 6,000tpd and expandable to 9,000tpd by 2QFY11e post commissioning
of the port-based capacity at Mundra. The business model for the port-based refineries
will be raw sugar imports for re-exports during times of surplus in India and for
domestic sales during deficit times. For FY11e, we expect the refinery to operate on a
re-export model as India’s production will match the demand.
Foray into Brazil
SRS has emerged as the seventh largest sugar manufacturer in Brazil post the acquisition
of RDB (earlier known as Equipav) and VDI in FY10. While it acquired 100% stake in
VDI at an EV of USD240m, 50.34% stake in RDB was acquired at an EV of
~USD1.15bn. It has also refinanced the existing high cost loans with USD denominated
loans, which will help reduce interest burden.
While VDI has a cane crushing capacity of 3.1mmt spread across two units in the
state of Parana, RDB has two units with a capacity of 10.5mmt in Sau Paulo. It also
has a cogen capacity of 203MW, of which ~110MW is saleable to the grid.
With the foray, SRS has gained access to four modern facilities with a total cane
crushing capacity of 13.6mmt. All the units source cane from a mix of leased farms
and third party purchase. While cane costs from third party purchases are linked to
sugar prices, cane costs from leased farms follow a steady increase that is linked to
the lease payments. Another advantage of having a presence in Brazil is that the
industry is de-controlled unlike India where the government intervenes to keep prices
at acceptable levels.
As part of the strategy to improvise its business model and increase profitability, SRS
also plans to increase the area under owned cultivation for sourcing cane and also
increase the flexibility for altering its product mix between sugar and ethanol. Thus,
SRS has strengthened its presence in the two largest sugar producing countries viz.
Brazil and India.
Furthermore, with increasing volumes coupled with improved product flexibility, SRS
can also capitalise on any price arbitrage between sugar and ethanol prices and
benefit from widening of raw-white sugar spreads. This can potentially also lead to a
sharp scale-up in trading operations.
Capex
On the domestic operations, the company is setting up a 3,000tpd port-based refinery
at Mundra at a cost of INR3.5bn. Expected to commission by 2QFY11e, the refinery
will operate on a re-export model in FY11e as India’s sugar production will match the
demand of ~23mmt.
At VDI, SRS plans to increase the flexibility for sugar production to 70% at both the
units at a total capex of ~USD85m (Real44m). This should increase the flexibility of
changing the product mix between sugar and ethanol depending on the product
prices. It also has plans to increase the cane crushing capacity at RBI from the present
10.5mmt to 12.5mmt and power capacity from 204MW to 295MW at a total capex
of ~USD129m (Real218m).
Pricing outlook
On the domestic scenario, we expect prices to remain stable till March 2011 at
~INR27,000/mt in Karnataka and Maharashtra. Post March 2011, the trend will be
determined by the overall production, which we expect at ~24.5-25mmt. At these
levels of production and factoring for exports of 1.5mmt, the availability will match
the domestic consumption levels.
Globally, production has been impacted by adverse climatic conditions in countries
like Brazil, Russia, Pakistan and Thailand on account of adverse climatic conditions.
Production estimates in India have also been pegged at ~25mmt against the initial
estimates of ~26mmt on account of lower than expected increase in acerage. We
expect prices to stabilise at 25-30cents/lbs against the current price of ~33cents/lbs.
Valuation and outlook
At the CMP of INR97, the stock trades at a P/E and EV/EBIDTA of 10.1x and 5.2x
discounting its FY11e numbers, respectively.
We believe that the present business model of SRS should result in the company
benefiting from firm global sugar prices coupled with normalised profits from the
domestic operations. Additionally, a steady deleveraging of the balance sheet should
result in a gradual re-rating of the stock considering its scale of operations and
geographical diversification. We reiterate our BUY recommendation on the stock with
a target price of INR119.
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