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Shree Renuka Sugars (SHRS)
Sugar
Subdued results. SHRS reported 1QFY11 EBITDA (SA) at Rs986 mn (-63.9% yoy,
+187% qoq) vs our estimates at Rs1.38 bn. The miss came on lower-than-estimated
volumes; EBITDA margins were in line at 9% (our estimate 8.7%). Consolidated EBIDTA
was subdued, at Rs3 bn, on account of legacy hedging contracts in the Brazilian
business at low realizations (US cents 16.5 in RDB; 20 in VDI). Going forward,
profitability in India and Brazil is likely to improve.
Standalone 1QFY11 results – lower than estimates led by lower volumes
SHRS reported 1QFY11 revenue at Rs11 bn vs our estimates at Rs15.85 bn on account of (1) lower
sales volumes in the sugar business (30% lower than our estimates), and (2) lower sales volumes in
the distillery business (20% lower than our estimates). EBITDA margins in 1QFY11 at 9% were
higher than our estimates at 8.7%. On account of the above, 1QFY11 PAT at Rs304 mn was lower
than our estimates at Rs705 mn. Profitability in 1QFY11 was depressed on account of sale of high
cost inventory (sugar) from the last year. Going forward, we expect profitability to improve as the
company sells sugar produced from cane crushed during the current year.
Brazilian business reports weak results – weak realizations on account of legacy hedging contracts
Brazilian business reported subdued 1QFY11 PAT at Rs246 mn (Renuka’s share; including other
income). Subdued profitability is led by weak realizations on account of legacy hedging contracts
for raw sugar. As per our understanding, VDI and RDB have hedged the current season’s (April ’10
–March ’11) sugar production at US cents 20 and 16.5 per lbs, respectively. At the same time, they
have to pay for the raw material (sugarcane) as per the cosecana formula linked to average
realizations per ton of cane across the Brazilian sugar mills. Therefore, even as the realizations have
remained constant, raw material costs have increased with higher price of sugar and ethanol,
leading to depressed profitability.
Raw sugar price – too high for our comfort; maintain REDUCE
We have compared the current price across various soft commodities (cotton, sugar, soy, wheat
etc.) with their 10-year average price. Current price of raw sugar at US cents ~32 is 170% higher
as compared to its 10-year average price vs other soft commodities, where the current prices are
60-100% above their 10-year averages. Though not wholly conclusive, this data is a pointer
towards the higher profitability of sugarcane w.r.t. other crops. This is also true in India as
sugarcane (at Rs2,050 per ton) is a lot more profitable as compared to other crops like paddy and
wheat. Though we are unable to comment on when the sugar prices will fall, we expect a 20-25%
downside in the international raw sugar price. We are modeling raw sugar price at US cents 24
and 25 per lbs for FY2012E and FY2013E, respectively. Maintain REDUCE with TP of Rs90.
International sugar prices; too high for our comfort
International sugar prices (raw sugar at US cents 33/lbs; white sugar at US$800/ton) are too
high for our comfort. Though we are unable to call as to when the prices would correct; we
are sure that the normalized level for sugar prices is 20-25% lower than the current price.
To back our argument we have compared the current price of various soft commodities
(wheat, rice, soy, corn) to their 10-year average price. According to us, the 10-year average
price would represent the normalized price across commodities at which the returns to a
farmer over multiple cycles would more or less be equal as:
10 year average price represents the normalized price across multiple crop cycles.
Farmer chooses to cultivate a particular crop based on the expected financial returns as
compared to other crops. Each of these crops being replacements for each other
depending on their relative financial returns, cropping patterns should shift amongst
various crops so as to make financial returns in each of them broadly equal over multiple
crop cycles.
As per exhibit 4, sugar is at the highest level compared to its 10-year average price as
compared to other soft commodities. According to us, it means that room for correction in
sugar prices is much more than other soft commodities and therefore, we compute our
earnings for the Brazilian companies at US cents 24 and 25 for FY2011E and FY2012E,
respectively.
This is also true in the Indian context, as sugarcane (at Rs2,050 per ton) is much more
profitable w.r.t. paddy and wheat (Exhibit 5). On account of this, we expect sugarcane
production in India in the next sugar season (September ’11-August ’12) to increase by 5-
10% vs the current year’s production.
Lower refining margins – big risk to the Indian business
White-raw gross spread has been reducing from April ’10 onwards and is currently hovering
within a range of $65-80/ton. We note that lower refining margins are a big risk to domestic
earnings as we are projecting the company would refine 1.2 mn and 1.3 mn tons of raw
sugar in FY2011E and FY2012E, respectively. As of now we are modeling white-raw spread
of $90 and $95 per ton, in FY2011E and FY2012E, respectively, which is higher than the
spreads in the market right now and implies almost US $30 per ton of EBITDA in the refining
business. Roughly, 20% of FY2011E EBITDA (Rs6.54 bn) is accounted for by the refining
business. We would note that the company would barely breakeven in its refining business if
the current spreads were to sustain in the future.
In the conference call, the management guided on the gross spreads increasing going
forward. According to the management, the company sells white sugar at $20-40 premium
to Liffe price in South-East Asia as it is the region with maximum deficit.
Conference call highlights
Dispatches for ethanol to OMCs started in December at a provisional price of Rs27/lit. The
government committee is still looking to finalize the parameters to decide the pricing
ethanol in the future. Most probably, the price would be benchmarked to the price of
gasoline. The company expects good price for ethanol going forward.
Realizations for power in the Indian business would improve going forward as spot prices
have moved up. The company expects to realize Rs5/unit in the spot market in the
coming quarter.
The average cost of sugarcane for the year, in the domestic business would be Rs2,400
per ton (including harvesting and transportation charges).
Sugar recovery ratio in the domestic business has been 11.5% till date. It is likely to
improve to 12.2% going forward.
VDI margins are lower than usual as prior quarter’s costs were booked in the 1QFY11.
VDI has crushed lower volumes than what was considered likely in the beginning of the
year as a result of which the overheads per ton for the year are higher than the initial
estimates. As a result, the incremental expenses (on account of higher overheads) for the
last two quarters have been booked in the current quarter.
The company has hedged the next years (April’11-March’12) sugar production in Brazil by
using put spreads which leave the upside open in case the prices trend higher.
There is very low inventory of sugar in the Brazilian companies (30,000 T).
Initial estimates peg the next years (April’11 to March’12) sugarcane production in South-
Central Brazil at 560 mn tons against 557 mn tons in the current year. Sugar production
might increase more than the increase in production of sugarcane (1% higher) as some of
mills have changed the capacity mix in favor of sugar (vs ethanol) on account of higher
realizations in the former.
Change our estimates; maintain TP of Rs90
We are reducing our EBITDA estimates for the domestic business by 14% each for FY2011E
and FY2012E to Rs6.54 bn and Rs6.40 bn, to build lower gross spread (white – raw) in the
refining business. We are modeling gross spread of $90 and $95 (vs $100 and $105 per ton
earlier) for FY2011E and FY2012E, respectively.
We have increased our EBITDA estimate for the Brazilian business by 15% to Rs8.62 bn to
factor in higher raw sugar realizations at US cents 24 per lbs and 25 per lbs for FY2012E and
FY2013E, respectively.
We maintain REDUCE rating with target price of Rs90.
We value Renuka Sugars at Rs90
Valuation table for Renuka Sugars, March ’12 basis, (Rs mn)
India business
March-2012E
EBITDA 6,473
EV/EBITDA (X) 6.0
EV 38,840
Net debt 11,197
Equity value 27,642
Value per share (Rs) 41
Brazil Business
Rs/$ 45
EBITDA 8,625
EV/EBITDA (X) 7.0
EV 60,372
Net debt 26,089
Equity value 34,282
Value per share (Rs) 51
Total value per share (Rs) 92
Source: Kotak Institutional Equities
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shree Renuka Sugars (SHRS)
Sugar
Subdued results. SHRS reported 1QFY11 EBITDA (SA) at Rs986 mn (-63.9% yoy,
+187% qoq) vs our estimates at Rs1.38 bn. The miss came on lower-than-estimated
volumes; EBITDA margins were in line at 9% (our estimate 8.7%). Consolidated EBIDTA
was subdued, at Rs3 bn, on account of legacy hedging contracts in the Brazilian
business at low realizations (US cents 16.5 in RDB; 20 in VDI). Going forward,
profitability in India and Brazil is likely to improve.
Standalone 1QFY11 results – lower than estimates led by lower volumes
SHRS reported 1QFY11 revenue at Rs11 bn vs our estimates at Rs15.85 bn on account of (1) lower
sales volumes in the sugar business (30% lower than our estimates), and (2) lower sales volumes in
the distillery business (20% lower than our estimates). EBITDA margins in 1QFY11 at 9% were
higher than our estimates at 8.7%. On account of the above, 1QFY11 PAT at Rs304 mn was lower
than our estimates at Rs705 mn. Profitability in 1QFY11 was depressed on account of sale of high
cost inventory (sugar) from the last year. Going forward, we expect profitability to improve as the
company sells sugar produced from cane crushed during the current year.
Brazilian business reports weak results – weak realizations on account of legacy hedging contracts
Brazilian business reported subdued 1QFY11 PAT at Rs246 mn (Renuka’s share; including other
income). Subdued profitability is led by weak realizations on account of legacy hedging contracts
for raw sugar. As per our understanding, VDI and RDB have hedged the current season’s (April ’10
–March ’11) sugar production at US cents 20 and 16.5 per lbs, respectively. At the same time, they
have to pay for the raw material (sugarcane) as per the cosecana formula linked to average
realizations per ton of cane across the Brazilian sugar mills. Therefore, even as the realizations have
remained constant, raw material costs have increased with higher price of sugar and ethanol,
leading to depressed profitability.
Raw sugar price – too high for our comfort; maintain REDUCE
We have compared the current price across various soft commodities (cotton, sugar, soy, wheat
etc.) with their 10-year average price. Current price of raw sugar at US cents ~32 is 170% higher
as compared to its 10-year average price vs other soft commodities, where the current prices are
60-100% above their 10-year averages. Though not wholly conclusive, this data is a pointer
towards the higher profitability of sugarcane w.r.t. other crops. This is also true in India as
sugarcane (at Rs2,050 per ton) is a lot more profitable as compared to other crops like paddy and
wheat. Though we are unable to comment on when the sugar prices will fall, we expect a 20-25%
downside in the international raw sugar price. We are modeling raw sugar price at US cents 24
and 25 per lbs for FY2012E and FY2013E, respectively. Maintain REDUCE with TP of Rs90.
International sugar prices; too high for our comfort
International sugar prices (raw sugar at US cents 33/lbs; white sugar at US$800/ton) are too
high for our comfort. Though we are unable to call as to when the prices would correct; we
are sure that the normalized level for sugar prices is 20-25% lower than the current price.
To back our argument we have compared the current price of various soft commodities
(wheat, rice, soy, corn) to their 10-year average price. According to us, the 10-year average
price would represent the normalized price across commodities at which the returns to a
farmer over multiple cycles would more or less be equal as:
10 year average price represents the normalized price across multiple crop cycles.
Farmer chooses to cultivate a particular crop based on the expected financial returns as
compared to other crops. Each of these crops being replacements for each other
depending on their relative financial returns, cropping patterns should shift amongst
various crops so as to make financial returns in each of them broadly equal over multiple
crop cycles.
As per exhibit 4, sugar is at the highest level compared to its 10-year average price as
compared to other soft commodities. According to us, it means that room for correction in
sugar prices is much more than other soft commodities and therefore, we compute our
earnings for the Brazilian companies at US cents 24 and 25 for FY2011E and FY2012E,
respectively.
This is also true in the Indian context, as sugarcane (at Rs2,050 per ton) is much more
profitable w.r.t. paddy and wheat (Exhibit 5). On account of this, we expect sugarcane
production in India in the next sugar season (September ’11-August ’12) to increase by 5-
10% vs the current year’s production.
Lower refining margins – big risk to the Indian business
White-raw gross spread has been reducing from April ’10 onwards and is currently hovering
within a range of $65-80/ton. We note that lower refining margins are a big risk to domestic
earnings as we are projecting the company would refine 1.2 mn and 1.3 mn tons of raw
sugar in FY2011E and FY2012E, respectively. As of now we are modeling white-raw spread
of $90 and $95 per ton, in FY2011E and FY2012E, respectively, which is higher than the
spreads in the market right now and implies almost US $30 per ton of EBITDA in the refining
business. Roughly, 20% of FY2011E EBITDA (Rs6.54 bn) is accounted for by the refining
business. We would note that the company would barely breakeven in its refining business if
the current spreads were to sustain in the future.
In the conference call, the management guided on the gross spreads increasing going
forward. According to the management, the company sells white sugar at $20-40 premium
to Liffe price in South-East Asia as it is the region with maximum deficit.
Conference call highlights
Dispatches for ethanol to OMCs started in December at a provisional price of Rs27/lit. The
government committee is still looking to finalize the parameters to decide the pricing
ethanol in the future. Most probably, the price would be benchmarked to the price of
gasoline. The company expects good price for ethanol going forward.
Realizations for power in the Indian business would improve going forward as spot prices
have moved up. The company expects to realize Rs5/unit in the spot market in the
coming quarter.
The average cost of sugarcane for the year, in the domestic business would be Rs2,400
per ton (including harvesting and transportation charges).
Sugar recovery ratio in the domestic business has been 11.5% till date. It is likely to
improve to 12.2% going forward.
VDI margins are lower than usual as prior quarter’s costs were booked in the 1QFY11.
VDI has crushed lower volumes than what was considered likely in the beginning of the
year as a result of which the overheads per ton for the year are higher than the initial
estimates. As a result, the incremental expenses (on account of higher overheads) for the
last two quarters have been booked in the current quarter.
The company has hedged the next years (April’11-March’12) sugar production in Brazil by
using put spreads which leave the upside open in case the prices trend higher.
There is very low inventory of sugar in the Brazilian companies (30,000 T).
Initial estimates peg the next years (April’11 to March’12) sugarcane production in South-
Central Brazil at 560 mn tons against 557 mn tons in the current year. Sugar production
might increase more than the increase in production of sugarcane (1% higher) as some of
mills have changed the capacity mix in favor of sugar (vs ethanol) on account of higher
realizations in the former.
Change our estimates; maintain TP of Rs90
We are reducing our EBITDA estimates for the domestic business by 14% each for FY2011E
and FY2012E to Rs6.54 bn and Rs6.40 bn, to build lower gross spread (white – raw) in the
refining business. We are modeling gross spread of $90 and $95 (vs $100 and $105 per ton
earlier) for FY2011E and FY2012E, respectively.
We have increased our EBITDA estimate for the Brazilian business by 15% to Rs8.62 bn to
factor in higher raw sugar realizations at US cents 24 per lbs and 25 per lbs for FY2012E and
FY2013E, respectively.
We maintain REDUCE rating with target price of Rs90.
We value Renuka Sugars at Rs90
Valuation table for Renuka Sugars, March ’12 basis, (Rs mn)
India business
March-2012E
EBITDA 6,473
EV/EBITDA (X) 6.0
EV 38,840
Net debt 11,197
Equity value 27,642
Value per share (Rs) 41
Brazil Business
Rs/$ 45
EBITDA 8,625
EV/EBITDA (X) 7.0
EV 60,372
Net debt 26,089
Equity value 34,282
Value per share (Rs) 51
Total value per share (Rs) 92
Source: Kotak Institutional Equities
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