Shree Renuka Sugars-Brazilian business PAT buoyed by other income: Kotak Sec

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Shree Renuka Sugars (90)
Sugar
Brazilian business PAT buoyed by other income. SHRS reported in-line performance at
the standalone level with operating profit at Rs344 mn vs our estimates at Rs156 mn. The
Brazilian business PAT at Rs708 mn (including minority interest) was buoyed by other income
component of Rs1,123 mn. We retain our estimates and increase our target price to Rs90 (Rs80
previously) led by higher valuation of the Brazilian business. We are valuing the Brazilian business
at 7X (previously 6X) March ’12E EBITDA, in line with the peer valuations. Maintain REDUCE.





4QFY10 standalone results – largely in line
SHRS reported 4QFY10 standalone EBITDA of Rs344 vs our estimates at Rs156 mn. The lowerthan-
estimated profitability at the EBIT level in the ancillary businesses was balanced by betterthan-
expected performance in the sugar segment. The reported PAT at Rs116 mn is higher than
our estimated loss of Rs154 mn, on account of tax write-backs of Rs130 mn.

Brazilian business – PAT buoyed by other income; 80% of next years volumes hedged at $0.2/lbs
The Brazilian subsidiaries reported 4QFY10 combined EBITDA of Rs2,316 mn and PAT of Rs708
mn, including minority interest. The reported PAT was buoyed by other income of Rs1,123 mn on
account of foreign exchange gains on the long-term debt. The weak operating performance is on
account of VDI and Equipav, having hedged the current years’ production at $0.2 per lbs and
$0.157 per lbs, respectively. On a combined basis, both the subsidiaries generated Rs597 mn of
cash, after taking out the minority interest.

According to the management, around 80% of sugar volumes in both the subsidiaries for the next
year have been hedged at $0.2 per lbs. Most of the hedging has been done by buying put options
so as to benefit in case the prices are higher.

Reducing white-raw spread; management guides on spreads improving
We note that the refining spreads (white-raw) have started coming down from the 2nd half of
September onwards, to $70-90 (per ton) levels from $130-150 (per ton) levels in the first six
months of the calendar year. The management attributed low spreads to the fact that there was
shortage of raw sugar on account of producers having over committed on sales as a consequence
of which they also had to buy raw sugar from the spot market. With the situation stabilizing, the
spreads should move up from current levels.

Maintain estimates; increasing target price to Rs90 on higher valuation for the Brazilian business
We leave our earnings estimates unchanged. We are increasing the valuation of the Brazilian
business by valuing it at 7X March ’12E EBITDA, in line with the Brazilian multiples. As a
consequence, our target price moves to Rs90 (Rs80 previously). We retain our REDUCE rating.