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Shree Renuka Sugars Ltd.
Poor Q1 not a problem
„Weaker Q1FY11 does not hurt full year outlook; Buy
Renuka Sugar reported net profit of Rs664mn in the quarter ending Dec 2010
(Q1FY11, YE Sep). Company’s profit is 46% below our estimate of Rs1.2bn and
is down 75% y-o-y. Key reason for earnings miss are (1) lesser sugar sales in
India, and (2) higher than estimated interest cost in the Indian unit. Despite the
earnings miss we maintain our estimate as the company’s sales volume is likely to
be substantially better in the remainder of the year and have better margin.
India unit profit to improve on higher export and ethanol
Benefit of higher realization on sugar export at Rs33/kg compared to Rs26/kg in
the domestic market along with doubling of exports is like to boost the profit of
Indian unit substantially from Q2FY11. In addition to higher profit on sugar export
Renuka will benefit from doubling of ethanol sales to oil marketing companies
from Q2FY11 compared to Q1FY11.
Brazil to have stronger volume and price in Apr-Sep 2011
We expect Brazil units to have net profit of US$105mn in Apr2011-Mar2012
period, the first full year Brazil crushing season under Renuka’s management
compared to only US$20mn in Sep2010-Apr2011 period. Higher realization and
rise in capacity utilization along with a reduction in interest cost owing to debt
restructuring should boost profit. Near 60% of Apr2011-Mar2012 Brazil unit profit
is likely to accrue to Renuka in FY11 ending Sep 2011.
Sequential rise in profit for rest of FY11e to drive re-rating
Dec 2010 was a lean quarter owing to adverse regulation in India and lack of
contribution from Brazil. We expect sharp sequential profit expansion owing to a
jump India’s export and ethanol in Q2FY11. Brazil to aid from Q3FY11. Stock at
5.4x FY11e EV/EBITDA is attractive as sugar should remain firm for next two
years
Price objective basis & risk
Renuka Sugars (SRNKF)
Our PO of Renuka Sugar at Rs114/sh is based on 6x FY11E EV/EBITDA.
Renuka has traded in a EV/EBITDA range of 4.5x to 10x in last four years. At 6x
EV/EBITDA Renuka will trade in line with Brazil peers and the median multiple of
Indian sugar mills. At our PO the stock would trade at PB of 2.5x FY11e, which
we believe is justified as we expect Renuka to earn at least 26% ROE in next two
years. Risks to our price objective are (1) a lower than estimated price for sugar,
(2) delays in commissioning of new 3000TPD raw sugar refining capacity in
Kandla, Gujarat, and (3) lower exports from India owing govt restriction.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shree Renuka Sugars Ltd.
Poor Q1 not a problem
„Weaker Q1FY11 does not hurt full year outlook; Buy
Renuka Sugar reported net profit of Rs664mn in the quarter ending Dec 2010
(Q1FY11, YE Sep). Company’s profit is 46% below our estimate of Rs1.2bn and
is down 75% y-o-y. Key reason for earnings miss are (1) lesser sugar sales in
India, and (2) higher than estimated interest cost in the Indian unit. Despite the
earnings miss we maintain our estimate as the company’s sales volume is likely to
be substantially better in the remainder of the year and have better margin.
India unit profit to improve on higher export and ethanol
Benefit of higher realization on sugar export at Rs33/kg compared to Rs26/kg in
the domestic market along with doubling of exports is like to boost the profit of
Indian unit substantially from Q2FY11. In addition to higher profit on sugar export
Renuka will benefit from doubling of ethanol sales to oil marketing companies
from Q2FY11 compared to Q1FY11.
Brazil to have stronger volume and price in Apr-Sep 2011
We expect Brazil units to have net profit of US$105mn in Apr2011-Mar2012
period, the first full year Brazil crushing season under Renuka’s management
compared to only US$20mn in Sep2010-Apr2011 period. Higher realization and
rise in capacity utilization along with a reduction in interest cost owing to debt
restructuring should boost profit. Near 60% of Apr2011-Mar2012 Brazil unit profit
is likely to accrue to Renuka in FY11 ending Sep 2011.
Sequential rise in profit for rest of FY11e to drive re-rating
Dec 2010 was a lean quarter owing to adverse regulation in India and lack of
contribution from Brazil. We expect sharp sequential profit expansion owing to a
jump India’s export and ethanol in Q2FY11. Brazil to aid from Q3FY11. Stock at
5.4x FY11e EV/EBITDA is attractive as sugar should remain firm for next two
years
Price objective basis & risk
Renuka Sugars (SRNKF)
Our PO of Renuka Sugar at Rs114/sh is based on 6x FY11E EV/EBITDA.
Renuka has traded in a EV/EBITDA range of 4.5x to 10x in last four years. At 6x
EV/EBITDA Renuka will trade in line with Brazil peers and the median multiple of
Indian sugar mills. At our PO the stock would trade at PB of 2.5x FY11e, which
we believe is justified as we expect Renuka to earn at least 26% ROE in next two
years. Risks to our price objective are (1) a lower than estimated price for sugar,
(2) delays in commissioning of new 3000TPD raw sugar refining capacity in
Kandla, Gujarat, and (3) lower exports from India owing govt restriction.
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