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SHREE RENUKA SUGARS
Muted performance from Brazilian subsidiaries
Revenue slightly below estimate; PAT disappoints
Shree Renuka Sugars’ (SHRS) Y-o-Y consolidated revenue was slightly below our
estimate at INR 22.5 bn, up 57.3% Y-o-Y, due to strong revenue from its Brazilian
subsidiaries. Consolidated PAT was at INR 664 mn, including ~INR 290 mn MTM
forex gain on long-term debt from Brazilian subsidiaries. Adjusting for the forex
gain net of tax, PAT was at INR 447 mn, which is significantly below estimate.
Key highlights
• Domestic sugar segment improved significantly Q-o-Q with EBIT margin at
9.1% in Q1FY11 vis-à-vis 1.9% in Q4FY10.
• Most of the high-cost inventory was sold in the quarter and going forward,
profitability of domestic operations is expected to improve further on lower
raw material costs and also on better by-product performance.
• Ethanol inventory, at 33,830 KL, to benefit SHRS with off take improvement.
• Improving power realization along with higher exports to boost profit.
• The 3,000 TPD (tonnes per day) Kandla sugar refinery project has been
delayed slightly and expected to be completed by March 2011. Nevertheless,
we have factored in this delay in our numbers already.
VDI and Renuka Do Brasil to contribute significantly from Q3FY11
• Contribution from VDI and Renuka Do Brasil (Equipav) was muted in Q1FY11
due to legacy contracts robbing the benefit of higher raw sugar spot prices.
• However, management has confirmed that most of these contracts have
expired and realisation is expected to be much higher for sugar to be
produced from the new crop from April 2011 (hedged at 23-24 cents/lb with
put option spreads, giving an opportunity to tap any further upside).
• In FY10, these subsidiaries have booked over INR 1 bn to P&L towards
unrealised forex MTM gains on long-term debt and any adverse currency
movement may result in reversal of these MTM gains.
• On account of enhanced plantation of own cane, volume improvement is
expected for Brazilian subsidiaries in the new crop year from April 2011.
Outlook and valuations: Positive; maintain ‘BUY’
With visible turnaround in domestic operations and strong improvement expected
in contribution of Brazilian subsidiaries, the outlook is positive for SHRS. Despite
below-expected Q1FY11 performance, we maintain our estimates for FY11 and
revise up our FY12E EPS 8%, on account of the higher realisation expected for
Brazilian sugar and ethanol than the one we factored in earlier. At CMP of INR 83,
the stock is trading at P/E of 11.8x FY11E and 7.6x FY12E and at EV/EBITDA of
6.2x FY11E and 5.0x FY12E. We maintain ‘BUY’ recommendation on the stock.
Segmental performance
While SHRS’ sugar segment contributed ~72.4% to standalone revenue in Q1FY11 vis-àvis
67.9% in Q1FY10, the EBIT margin of sugar in Q1FY11 dipped to 9.1% vis-à-vis
20.3% in Q1FY10 on account of higher cost of production in Q1FY11. However, Q-o-Q,
EBIT margin improved significantly by 720bps from 1.9% in Q4FY10 on account of higher
realisation and new cane coming at lower price. Y-o-Y, the trading margin is significantly
lower at 2.4% in Q1FY11 vis-à-vis 19.8% in Q1FY10.
Though the revenue contribution of cogeneration and distillery segments has improved
Q-o-Q to 9.9% from 4.5% in Q4FY10 and EBIT margin improved significantly Q-o-Q,
they are still significantly lower Y-o-Y. Going forward, we expect EBIT margin of
byproducts to improve on account of expected improvement in volumes of distillery and
realisations for power.
Other highlights
• Consolidated EBIDTA margin dipped 50bps Q-o-Q to 13.4% in Q1FY11, on account
of lower–than-expected contribution from the high margin Brazilian subsidiaries.
• However, standalone EBITDA improved significantly Q-o-Q to 9.0% in Q1FY11 vis-àvis
2.4% in Q4FY10, on account of higher realisation of sugar coupled with improved
contribution from by-products.
• Quantity of sugar cane crushed in Indian operations of SHRS in Q1FY11 was at 1.67
mn MT, i.e. ~2.7% Y-o-Y growth, resulting in 167,301 MT of sugar production.
• Though the recovery rate in Q1FY11 was lower at 10.4% vis-à-vis 10.64% in
Q1FY10, management guided that the recovery currently is significantly higher.
• White premium has dipped to as low as USD 70 per MT during the past few months.
However, the premium for contracts in the latter part of CY11 is currently in the
USD 100-120 per MT range which should result in strong refining margins going
forward.
• Standalone inventory as on December 31, 2010, comprises 267,900 MT white sugar,
5,321 MT imported white sugar, and 220,392 MT raw sugar.
• While ethanol sales have been just 13,664 KL in Q1FY11 i.e. 0.8% lower Y-o-Y,
SHRS carries an ethanol inventory of 33,830 KL and molasses inventory of 84,824
MT as on December 31, 2010. With the realisation expected to be strong at ~INR 27
per litre of ethanol going forward, on account of ethanol blending, the company
stands to benefit from this inventory once volume offtake improves.
• Though the volume offtake in cogen was robust, realisation has been weak in
Q1FY11 at INR 3.8 per unit. Though it is higher Q-o-Q compared to INR 3.3 in
Q4F10, it is at steep discount to the realisation in Q1FY10 at INR 4.9 per unit.
Management indicated that this segment would be posting better margins in the
coming quarters on account of improving power realizations (which is at ~INR 5 per
unit currently).
• Currently, ISMA’s estimate for SS11 sugar production stands at 25 mn MT.
• As SHRS capitalises the plantation cost portion for its Brazilian subsidiaries along
with amortisation, we have considered only the non-cash portion of depreciation and
amortisation in our cash flows.
VDI and Equipav
• Most of this year’s sugar production for VDI and Equipav was sold at significantly
lower price than the global price, due to older contracts that were in existence,
wherein realizations were ~20 cents/lb for VDI and ~17 cents/lb for Equipav.
• SHRS has undertaken hedging of 80% of next year’s sugar production volumes for
the Brazilian subsidiaries at 23-24 cents/lb, with put option spreads.
• VDI and Equipav posted revenue of INR 1,624 mn and INR 7,535 mn and EBITDA
margin of 24.1% and 25.2%, respectively.
• At the PAT level, though VDI and Equipav posted ~INR 305 mn, it is primarily due to
MTM forex gains on long-term debt, adjusted for which the PAT level contribution
from VDI and Equipav was negligible. Nevertheless, with improvement in capacity
utilisation and realizations expected, coupled with lowering of interest costs, we
expect to see significant level of PAT contribution from these two subsidiaries over
the next two years.
• Due to end of crushing season, production numbers for Brazilian subsidiaries are
lower Q-o-Q.
• Q2FY11 being an off-season in Brazil, these subsidiaries are not expected to
contribute much.
• Cane crushing for VDI and Equipav is expected to be ~2.5 mn MT and ~9.5-9.7 mn
MT, respectively, in CY11 vis-à-vis ~1.5 mn MT and ~9 mn MT, respectively, in
CY10.
• VDI will be obtaining ~90% of cane requirement from own plantations while the
balance will be procured from third party farmers and on the other hand Equipav will
be obtaining ~60% from own plantations and the balance from third party farmers.
• SHRS is currently undertaking capacity expansion projects in Brazilian subsidiaries:
• Increasing flexibility in VDI’s plants to produce up to 70% sugar out of total
capacity (which is at 60% currently).
• Expanded sugar cane plantation to 9,762 hectares in VDI, thus providing for an
increase of 1 mn MT of cane supply for the 2011 crop season. This will ensure
higher capacity utilisation for VDI in CY11.
• Expanding anhydrous ethanol production capacity to have greater flexibility to
enhance ethanol product mix on account of improving dynamics for anhydrous
ethanol vis-à-vis hydrous ethanol.
• Plans to enhance the total crushing capacity of Brazilian subsidiaries to ~15 mn
MT from the current capacity of ~13.5 mn MT.
• Gross debt in Brazilian subsidiaries as on December 31, 2010, is at INR 44.4 bn –
consisting of 58% USD denominated debt and the rest in BRL (Brazilian real).
• Cost of debt for Brazilian subsidiaries, post debt restructuring, is at 7.5%.
Company Description
SHRS, based in Karnataka and Maharashtra, with a sugar manufacturing capacity of
35,000 TCD and 6,000 TPD refining capacity. Starting with a crushing capacity of 3,500
TCD in FY03 under the leadership of its Managing Director, Mr. Narendra Murkumbi, the
company has gradually become a large sugar and bio-fuel conglomerate. It remains one
of best integrated business models in India, with the ability to grow across sugar cycles
on the back of its flexible operating model where co-products support profitability during
a downturn, while sugar and refining help in leveraging up-cycle benefits.
Investment Theme
SHRS’ uniqueness is its versatile and secular business model, which gives it several
advantages over its peers: (1) highly integrated and flexible operations with large
coproducts capacity; (2) all capacities are based in Maharashtra and Karnataka, where
the operating environment is less regulated compared to Northern India. Also, yields in
these states are higher than country average. The sugar mills in these states also have
higher crushing days as compared to the Northern sugar mills; (3) SHRS sugar plants
have the proximity to ports, and high inter-plant synergies. In addition to these, the
latest acquisitions in Brazil – VDI and Equipav gives SHRS, a presence in the world’s
largest sugar manufacturing country and to take advantage of the tightness in supply
globally.
Key Risks
Sugar has been politically one of the most sensitive sectors in India, where decisions are
populist and not based on economics. Any government move to control sugar prices
which might result in the fall in sugar prices, will be a negative for the sector.
Any upward revision in the estimate of sugar production in FY11 from ~25-26 mn MT
may lower sugar prices and pose downside risk to our earnings estimate for FY11.
Due to the substantial size of Equipav, any issue in terms of performance of Equipav
might significantly alter the consolidated performance of SHRS.
Any adverse movement in foreign currency movement might result in reversal of the
unrealised MTM gains on long term debt in the Brazilian subsidiaries, resulting in denting
the profits for SHRS.
As SHRS will be having substantially higher leverage at the consolidated level, due to the
Brazilian acquisitions, increase in interest rate may impact profitability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SHREE RENUKA SUGARS
Muted performance from Brazilian subsidiaries
Revenue slightly below estimate; PAT disappoints
Shree Renuka Sugars’ (SHRS) Y-o-Y consolidated revenue was slightly below our
estimate at INR 22.5 bn, up 57.3% Y-o-Y, due to strong revenue from its Brazilian
subsidiaries. Consolidated PAT was at INR 664 mn, including ~INR 290 mn MTM
forex gain on long-term debt from Brazilian subsidiaries. Adjusting for the forex
gain net of tax, PAT was at INR 447 mn, which is significantly below estimate.
Key highlights
• Domestic sugar segment improved significantly Q-o-Q with EBIT margin at
9.1% in Q1FY11 vis-à-vis 1.9% in Q4FY10.
• Most of the high-cost inventory was sold in the quarter and going forward,
profitability of domestic operations is expected to improve further on lower
raw material costs and also on better by-product performance.
• Ethanol inventory, at 33,830 KL, to benefit SHRS with off take improvement.
• Improving power realization along with higher exports to boost profit.
• The 3,000 TPD (tonnes per day) Kandla sugar refinery project has been
delayed slightly and expected to be completed by March 2011. Nevertheless,
we have factored in this delay in our numbers already.
VDI and Renuka Do Brasil to contribute significantly from Q3FY11
• Contribution from VDI and Renuka Do Brasil (Equipav) was muted in Q1FY11
due to legacy contracts robbing the benefit of higher raw sugar spot prices.
• However, management has confirmed that most of these contracts have
expired and realisation is expected to be much higher for sugar to be
produced from the new crop from April 2011 (hedged at 23-24 cents/lb with
put option spreads, giving an opportunity to tap any further upside).
• In FY10, these subsidiaries have booked over INR 1 bn to P&L towards
unrealised forex MTM gains on long-term debt and any adverse currency
movement may result in reversal of these MTM gains.
• On account of enhanced plantation of own cane, volume improvement is
expected for Brazilian subsidiaries in the new crop year from April 2011.
Outlook and valuations: Positive; maintain ‘BUY’
With visible turnaround in domestic operations and strong improvement expected
in contribution of Brazilian subsidiaries, the outlook is positive for SHRS. Despite
below-expected Q1FY11 performance, we maintain our estimates for FY11 and
revise up our FY12E EPS 8%, on account of the higher realisation expected for
Brazilian sugar and ethanol than the one we factored in earlier. At CMP of INR 83,
the stock is trading at P/E of 11.8x FY11E and 7.6x FY12E and at EV/EBITDA of
6.2x FY11E and 5.0x FY12E. We maintain ‘BUY’ recommendation on the stock.
Segmental performance
While SHRS’ sugar segment contributed ~72.4% to standalone revenue in Q1FY11 vis-àvis
67.9% in Q1FY10, the EBIT margin of sugar in Q1FY11 dipped to 9.1% vis-à-vis
20.3% in Q1FY10 on account of higher cost of production in Q1FY11. However, Q-o-Q,
EBIT margin improved significantly by 720bps from 1.9% in Q4FY10 on account of higher
realisation and new cane coming at lower price. Y-o-Y, the trading margin is significantly
lower at 2.4% in Q1FY11 vis-à-vis 19.8% in Q1FY10.
Though the revenue contribution of cogeneration and distillery segments has improved
Q-o-Q to 9.9% from 4.5% in Q4FY10 and EBIT margin improved significantly Q-o-Q,
they are still significantly lower Y-o-Y. Going forward, we expect EBIT margin of
byproducts to improve on account of expected improvement in volumes of distillery and
realisations for power.
Other highlights
• Consolidated EBIDTA margin dipped 50bps Q-o-Q to 13.4% in Q1FY11, on account
of lower–than-expected contribution from the high margin Brazilian subsidiaries.
• However, standalone EBITDA improved significantly Q-o-Q to 9.0% in Q1FY11 vis-àvis
2.4% in Q4FY10, on account of higher realisation of sugar coupled with improved
contribution from by-products.
• Quantity of sugar cane crushed in Indian operations of SHRS in Q1FY11 was at 1.67
mn MT, i.e. ~2.7% Y-o-Y growth, resulting in 167,301 MT of sugar production.
• Though the recovery rate in Q1FY11 was lower at 10.4% vis-à-vis 10.64% in
Q1FY10, management guided that the recovery currently is significantly higher.
• White premium has dipped to as low as USD 70 per MT during the past few months.
However, the premium for contracts in the latter part of CY11 is currently in the
USD 100-120 per MT range which should result in strong refining margins going
forward.
• Standalone inventory as on December 31, 2010, comprises 267,900 MT white sugar,
5,321 MT imported white sugar, and 220,392 MT raw sugar.
• While ethanol sales have been just 13,664 KL in Q1FY11 i.e. 0.8% lower Y-o-Y,
SHRS carries an ethanol inventory of 33,830 KL and molasses inventory of 84,824
MT as on December 31, 2010. With the realisation expected to be strong at ~INR 27
per litre of ethanol going forward, on account of ethanol blending, the company
stands to benefit from this inventory once volume offtake improves.
• Though the volume offtake in cogen was robust, realisation has been weak in
Q1FY11 at INR 3.8 per unit. Though it is higher Q-o-Q compared to INR 3.3 in
Q4F10, it is at steep discount to the realisation in Q1FY10 at INR 4.9 per unit.
Management indicated that this segment would be posting better margins in the
coming quarters on account of improving power realizations (which is at ~INR 5 per
unit currently).
• Currently, ISMA’s estimate for SS11 sugar production stands at 25 mn MT.
• As SHRS capitalises the plantation cost portion for its Brazilian subsidiaries along
with amortisation, we have considered only the non-cash portion of depreciation and
amortisation in our cash flows.
VDI and Equipav
• Most of this year’s sugar production for VDI and Equipav was sold at significantly
lower price than the global price, due to older contracts that were in existence,
wherein realizations were ~20 cents/lb for VDI and ~17 cents/lb for Equipav.
• SHRS has undertaken hedging of 80% of next year’s sugar production volumes for
the Brazilian subsidiaries at 23-24 cents/lb, with put option spreads.
• VDI and Equipav posted revenue of INR 1,624 mn and INR 7,535 mn and EBITDA
margin of 24.1% and 25.2%, respectively.
• At the PAT level, though VDI and Equipav posted ~INR 305 mn, it is primarily due to
MTM forex gains on long-term debt, adjusted for which the PAT level contribution
from VDI and Equipav was negligible. Nevertheless, with improvement in capacity
utilisation and realizations expected, coupled with lowering of interest costs, we
expect to see significant level of PAT contribution from these two subsidiaries over
the next two years.
• Due to end of crushing season, production numbers for Brazilian subsidiaries are
lower Q-o-Q.
• Q2FY11 being an off-season in Brazil, these subsidiaries are not expected to
contribute much.
• Cane crushing for VDI and Equipav is expected to be ~2.5 mn MT and ~9.5-9.7 mn
MT, respectively, in CY11 vis-à-vis ~1.5 mn MT and ~9 mn MT, respectively, in
CY10.
• VDI will be obtaining ~90% of cane requirement from own plantations while the
balance will be procured from third party farmers and on the other hand Equipav will
be obtaining ~60% from own plantations and the balance from third party farmers.
• SHRS is currently undertaking capacity expansion projects in Brazilian subsidiaries:
• Increasing flexibility in VDI’s plants to produce up to 70% sugar out of total
capacity (which is at 60% currently).
• Expanded sugar cane plantation to 9,762 hectares in VDI, thus providing for an
increase of 1 mn MT of cane supply for the 2011 crop season. This will ensure
higher capacity utilisation for VDI in CY11.
• Expanding anhydrous ethanol production capacity to have greater flexibility to
enhance ethanol product mix on account of improving dynamics for anhydrous
ethanol vis-à-vis hydrous ethanol.
• Plans to enhance the total crushing capacity of Brazilian subsidiaries to ~15 mn
MT from the current capacity of ~13.5 mn MT.
• Gross debt in Brazilian subsidiaries as on December 31, 2010, is at INR 44.4 bn –
consisting of 58% USD denominated debt and the rest in BRL (Brazilian real).
• Cost of debt for Brazilian subsidiaries, post debt restructuring, is at 7.5%.
Company Description
SHRS, based in Karnataka and Maharashtra, with a sugar manufacturing capacity of
35,000 TCD and 6,000 TPD refining capacity. Starting with a crushing capacity of 3,500
TCD in FY03 under the leadership of its Managing Director, Mr. Narendra Murkumbi, the
company has gradually become a large sugar and bio-fuel conglomerate. It remains one
of best integrated business models in India, with the ability to grow across sugar cycles
on the back of its flexible operating model where co-products support profitability during
a downturn, while sugar and refining help in leveraging up-cycle benefits.
Investment Theme
SHRS’ uniqueness is its versatile and secular business model, which gives it several
advantages over its peers: (1) highly integrated and flexible operations with large
coproducts capacity; (2) all capacities are based in Maharashtra and Karnataka, where
the operating environment is less regulated compared to Northern India. Also, yields in
these states are higher than country average. The sugar mills in these states also have
higher crushing days as compared to the Northern sugar mills; (3) SHRS sugar plants
have the proximity to ports, and high inter-plant synergies. In addition to these, the
latest acquisitions in Brazil – VDI and Equipav gives SHRS, a presence in the world’s
largest sugar manufacturing country and to take advantage of the tightness in supply
globally.
Key Risks
Sugar has been politically one of the most sensitive sectors in India, where decisions are
populist and not based on economics. Any government move to control sugar prices
which might result in the fall in sugar prices, will be a negative for the sector.
Any upward revision in the estimate of sugar production in FY11 from ~25-26 mn MT
may lower sugar prices and pose downside risk to our earnings estimate for FY11.
Due to the substantial size of Equipav, any issue in terms of performance of Equipav
might significantly alter the consolidated performance of SHRS.
Any adverse movement in foreign currency movement might result in reversal of the
unrealised MTM gains on long term debt in the Brazilian subsidiaries, resulting in denting
the profits for SHRS.
As SHRS will be having substantially higher leverage at the consolidated level, due to the
Brazilian acquisitions, increase in interest rate may impact profitability.
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