Shree Renuka Sugars- Forex gains boosted 3Q earnings ::Macquarie Research,

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Shree Renuka Sugars
Forex gains boosted 3Q earnings
Event
 Shree Renuka reported 3QSY11 results. Company reported net sales and PAT
of Rs22.4bn and Rs1.87bn. Reported profit was boosted by Rs1bn of foreign
exchange gains due to the appreciation of the Brazilian Real against INR.
Standalone PAT was Rs472mn, a large contribution was from cogeneration and
ethanol as domestic sugar was just above breakeven. Reiterate Outperform.
Impact
 Brazilian profits boosted by forex gains. SHRS reported net sales and
profit of Rs10bn and Rs1.4bn from its two Brazilian subsidiaries. However,
profits received a Rs1bn boost due to the strengthening of the Brazilian Real
against the Indian currency (INR). Management has highlighted that sugar
(excluding legacy contracted sugar sales of 47k t at US$c18/lb) and ethanol
realisation were ~US$c25/lb and US$c29/ltr, respectively, in Brazil.
 Brazil sugarcane crushing guidance cut by 10%. The company lowered
their SY11 crushing guidance to 10-10.4mn tonnes from 11.5mn tonnes
earlier due to lower sugarcane availability. The company crushed ~3.4mn
tonnes of sugarcane in 3Q with an average yield of ~11.6%. However, better
realisation due to firm sugar and ethanol prices should compensate for some
of the production loss. Due to higher realisation from ethanol, the company
has changed the product mix towards ethanol (54%) in 3Q.
 Washout year for refining business. The company has refined only 70k
tonnes of raw sugar in 3Q and is unlikely to achieve its 0.7mn refining
guidance (0.26mn tonnes refining in 3 quarters). During the call, management
refused to give any further colour on this guidance for the current year as they
feel they have already missed earlier guidance a few times.
 Management is optimistic for SY12E as they feel steps like increasing the
sugarcane plantation in Brazil (planning to plant sugarcane crop in ~35k
hectare this year) and restructuring will help obtain better operational
performance. Management has also stated that they have already hedged
~40% of their SY12E Brazil sugar production between US$24/lb-US$30c/lb.
Earnings and target price revision
 We cut our SY11E earnings by ~20% on the back of lower volume guidance.
Price catalyst
 12-month price target: Rs80.00 based on a Price to Book methodology.
 Catalyst: Deleveraging of balance sheet
Action and recommendation
 Outperform maintained. We remain positive on SHRS’s long-term story with
a cautious stance near term due to high leverage. We believe operational
efficiency at Brazil and a smart hedging policy will help SHRS in SY12E.
Steps like increased own plantation and expiry of legacy contracts should also
help.