Shree Renuka Sugar- Riding high on acquisitions:ICICI Sec

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Riding high on acquisitions…
Shree Renuka Sugars reported strong Q4SY10 results with sales surging
~125% from | 1093.3 crore in Q4SY09 to | 2460 crore led by a 23.9%
increase in domestic sugar volumes and volume from the acquired
companies (VDI and Renuka do Brazil). Domestic realisations increased
from | 24.8 per kg in Q4SY09 to | 26.7 per kg in Q4SY10. The EBITDA
margin, however, dipped by 160 bps from 15.5% to 13.9% due to
declining domestic sugar prices and high cane cost paid earlier this year.
The interest cost rose ~7x from | 20.3 crore to | 167.0 crore due to large
debt on the books of Renuka do Brasil (RDB). Other income stood at |
111.2 crore. It consists of foreign exchange gains on long-term debt on
RDB’s books due to currency appreciation. Higher EBITDA and other
income resulted in 14.8% growth in net profit to | 117.1 crore.


􀂃 Operational highlights
The company’s sugar sales increased by 36% on a standalone basis to
3,89,184 tonnes with the average realisation being | 26.7 per kg for the
quarter. The current inventory of the company is 3,59,451 tonnes of white
sugar (2,44,153 tonnes of manufactured and 1,15,298 of imported) and
88,565 tonnes of raw sugar. We believe the company would be able to
sustain volumes from its Brazilian subsidiaries and realisations of RDB will
be strong on the back of firm global prices.

Valuation
At the current price of | 90, the stock is trading at 7x its SY11E EPS of |
12.8 and 6.8x its SY12E EPS of | 13.2. Given the sharp recovery in global
sugar prices to 26 cents/lb, margins from VDI and Equipav (the acquired
companies) would improve significantly in the future. Simultaneously,
domestic operations would improve from the next quarter as sugarcane
prices will be lower in SY11. We believe sustained global prices above 22
cents and lower sugarcane cost in India would result in strong margins in
SY11 despite lower domestic sugar prices. We have valued the stock at
8x its SY12E EPS of | 13.2 to arrive at a target price of | 105 per share.