Shree Renuka Sugars-- Focus shifts to Brazil now :::: Macquarie Research

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Shree Renuka Sugars
Focus shifts to Brazil now
Event
 Shree Renuka reported 2Q’SY11 results. Reported profit was weak due to
decline in domestic sugar profits despite higher trading and cogeneration
profits. These numbers reflect primarily the domestic sugar and trading
businesses, as it was an inter-crop period in Brazil. We expect an earnings
boost from Brazilian operations from the current quarter. We reiterate our
Outperform with a revised TP of Rs80/share from Rs105.

Impact
 Domestic sugar business hit by low realisation. Domestic sugar sales
volume declined marginally, but realisations declined 15%. This resulted in
18% decline in revenues and an 84% decline in EBIT from sugar sales in
India. Cogeneration and ethanol EBIT increased 150% and 180% due to a
~10% increase in the merchant power rate (~Rs5.4/unit) and 9% growth in
volumes and high off-take from oil companies respectively.
 Brazilian facilities to start contributing now. The Brazil sugar season starts
from April and we expect SHRS’ Brazilian mills to boost its earnings over the
next two quarters. As per the management, SHRS has hedged 80% of their
Brazilian sugar production at US$23c/lb, as against the realisation of US$15-
16c/lb last year. Realisation from ethanol is currently higher than sugar, and
management is exploring options to change mix in favour of ethanol.
 Global sugar prices likely to sustain at current levels. International raw
sugar prices have fallen to US$21c/lb from an all time high of ~US$35c/lb
three months back due to the robust Brazilian sugar outlook and higher supply
from Thailand. Our global agri commodity analyst Kona Haque expects sugar
prices to bottom ~US$20c/lb in the medium term, below which additional
sugar production would be impaired. Given the competition between ethanol
and sugar, the downside risk to Brazilian sugar production is high.
 Debt increase will weigh on near-term profitability. The company’s gross
debt has increased ~25% due to higher working capital loans and loans to
fund Kandla refinery capex. As a result, the consolidated debt/equity has
increased to 4.4x from 3.8x at the end of Sep quarter.
Earnings and target price revision
 We have cut our SY11E earnings by 12% to factor in high interest costs and
downward revision of refining guidance. We cut our TP to Rs80 from Rs105.
Price catalyst
 12-month price target: Rs80.00 based on a Price to Book methodology.
 Catalyst: Deleveraging of balance sheet, improvement in global sugar outlook
Action and recommendation
 Outperform maintained. We believe operational efficiency at Brazil, a firm
ethanol price outlook in Brazil and a smart sugar hedging policy will help
SHRS in 2H SY’11. Our target price provides 24% upside.