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Shree Renuka Sugars Ltd.
Better times ahead
Cutting PO but maintain Buy on rising earnings from Jun Q
Renuka Sugar shares have fallen 30% since Nov 2010, possibly owing to (1) poor
results in the Dec2010 and Mar2011 quarters (2) an increase in debt and current
liability, and (3) a peak off in global sugar prices amidst uncertainty of production
in India and Brazil. We have cut our FY11e (YE Sep) EPS by 30% and our PO by
12% to Rs100. We expect the stock to rerate from 4.7x FY12e EV/EBITDA (adj),
owing to (1) an increase in profit starting in Jun2011, led by the seasonal recovery
in Brazil, and (2) a reduction in production uncertainty.
Brazil offseason hurts Mar2011 quarter and FY11e EPS
We have cut EPS for the year ending Sep2011 by 30%, owing to higher offseason
losses in the Brazil unit, led by harvest delays and lack of stock. We are not including
the likely benefit of an increase in profit margin on sugar exports from India, owing to
possible delays in the implementation of the export policy. We expect profits to jump to
Rs3.9bn in Apr-Sep 2011, compared to Rs847mn in Dec10-Mar11. We have cut our
FY12e EPS by 2%, but expect profits to grow by 50% in FY12e and 12% in FY13e.
End of India season without surprise to stabilize sugar price
Global raw sugar prices fell 28% from the peak of USd35.31/lb in early Feb2011 to a
low of USd25.65/lb in mid-Mar 2011, driven by threat of higher exports from India and
Brazil. We expect prices to stabilize and not fall below USd25/lb, owing to (1) rise in
visibility of not more than 25mt sugar production in India in FY11, and (2) the recent
announcement by UNICA that Brazil’s exports will increase only 2.5% in Apr11-Mar12,
the slowest in four years. We note that sugar is up 7% from the 15th Mar lows.
Very high debt amidst rising interest rate is the biggest risk
Renuka had gross debt of Rs72bn on Dec2010 and current liability of Rs38bn on
Sep2010. Gross debt to equity, at 3x, is risky, given the ongoing rise in interest
rates and volatile sugar prices. Renuka may mitigate risk with long-term contracts.
Earnings recovery ahead
Renuka’s quarterly profit excluding other income is likely to rise from June2011
onwards, after falling for five consecutive quarters. We expect the current quarter
ending Mar2011 to be the worst, owing to the offseason in Brazil. Key drivers of
the earnings recovery from the June 2011 quarter onwards are likely to be the
following.
The onset of the Brazil crushing season from Apr2011 that will boost sales
volume at a higher price, given the favorable market outlook.
Better refining throughput and sugar prices in India following the recent gov’t.
policy allowing exports.
Global sugar price outlook getting better
Sugar prices globally have been inching up since the middle of March 2011,
driven by the following favourable changes, and are likely to stay at least above
USd25/lb in the medium term.
The end of the uncertainty about India’s sugar production in the current
season has lessened concerns of a huge jump in exports from India.
Only a 2.5% rise in exports from central south Brazil in the Ap2011-Mar2012
season, the lowest in four years, has lessened the threat of a supply surge.
The jump in ethanol prices in Brazil to a 25% premium, compared to over a
25% discount last year has lessened the threat of an increase in investment
on sugar production capacity in Brazil.
Uncertainty of India’s production about to end
We had estimated in Oct2011 that India would produce 24.5mt of sugar in the
Oct2010-Sep2011 season. At the end of Mar2011, India’s sugar production stood
at 20.6mt. Considering the seasonal production pattern in India and the fact that
most mills in Uttarpradesh have already closed down, the possibility of any
deviation to our estimate is marginal.
Brazil production outlook muted
UNICA, the apex association for sugar manufacturers in the Central South region
of Brazil, announced its estimate of sugar production for the Apr2011-Mar2012
season on 31st March 2011. Following are key highlights of the upcoming
season.
1. Total sugar exports to grow by 0.6mt, i.e., 2.5%, to 24.9mt. This is the lowest
level in four years.
2) The total sugarcane crushing amount is expected to rise by 3%, to 568.5mt,
and sugar production to rise by 3%.
3) The average age of the sugarcane crop has gone up sharply, a worrying factor,
and needs a huge investment in the current year.
4) The first half of the upcoming season is likely to be weak.
Jump in ethanol price in Brazil has boosted sugar outlook
The price of anhydrous ethanol in Brazil has gone up sharply relative to the
export price of sugar recently, driven by a jump in international crude oil prices, as
well as tight supply. The increase in the ethanol price is likely to restrain the shift
in usage of sugar cane in favour of sugar. Since Apr2008, Brazil mills have
increased the usage of cane for sugar from 39% to 45%, owing to the higher
sugar price relative to ethanol. Given the recent change in the ethanol price from
a discount of 40% to a premium of 20% relative to sugar, the mix of sugarcane
usage in favour of sugar may not happen, thus leading to subdued growth in
sugar production in Brazil.
Brazil sugar earnings model
Renuka owns two companies in Brazil, including VDI, in which it has 100% stake
and RDB, in which it has 50.4% stake. Following is a brief description of Brazil
assets and key assumptions.
Total cane crushed by the Brazil units in the season ending Mar2011 was
about 10.5mt, out of which VDI had crushed 1.5mt and RDB had crushed
9mt. We expect the Brazil unit to crush 11.5mt of cane in the Apr2011-
Mar2012 period and 13mt in the Apr2012-Mar2013 period.
VDI has two units, with total cane crushing capacity of 3.1mt, but operated at
50% utilization in the Apr10-Mar11 season. VDI is likely to crush 2.5mt of
cane in the Apr2011-Mar2012 season and 3mt in theh Apr2012-Mar2013
season. VDI is likely to source 30% of its cane from 3rd parties and grow 70%
of its cane requirement on leased lands.
RDB had 10.5mt cane crushing capacity and operated at 80% utilization.
RDB’s capacity is being expanded to 12mt. Also, RDB’s cogeneration
capacity is being expanded to 295MW from 203MW, following which saleable
power capacity will rise from 140MW to 230MW. We expect RDB to crush
9mt in the Apr2011-Mar2012 period and 10mt in the Apr2012-Mar2013
period.
The Brazil unit had produced a total of 0.68mt sugar and 400mn ltr of alcohol
in the year ending Mar 2011. We expect the Brazil unit to produce 0.92mt of
sugar and 380mn ltr of alcohol in Apr2011-Mar2012. In the Apr2012-
Mar2013 period, we expect Brazil units to produce 1.1mt of sugar and 440mn
ltr of alcohol. The sale of power is likely to rise from 385mn units in Mar 11 to
415mn units in the Mar12 year and further to 600mn units the Mar 13 year.
The Brazil unit had suffered from a poor selling price in the year ending
Mar2011. We expect the avg. sugar realization to rise from USd18/lb in the
Mar11 year to 23.5 in the Mar 12 year. The realisation of alcohol is likely to
rise from an avg. of BRL1.0/ltr to BRL1.25/ltr in the Mar12 year.
Considering that the Brazil unit’s crushing season ends in Mar, while the
consolidated entity follows a Sep year, we have assumed 65% of the Mar12
year profit and 35% of the Mar11 year profit in our consolidated entity
number for the year ending Sep2011. We have followed a similar principle for
consolidation for subsequent years.
It is also worth highlighting that the Brazil units will not allocate any minority
interest expense for RDB, in which it has 50.3% capacity, for the initial
couple of years until the accumulated losses gets recovered.
EBITDA of the Brazil unit could rise by 2% for every 1% rise in realization.
Stretched balance sheet is the biggest risk
Renuka’s net debt-to-equity at the end of Sep 2010 expanded to 2.45x from 0.5x
in Sep2009 following acquisitions. The company’s current ratio also fell, to 1.08 at
end of Sep2010 from 1.78x at end of Sep 2009. The company is likely to incur
capex of Rs10bn in FY11 (YE Sep), owing to (1) setting up 1mt refinery at
Kandla, Gujarat, and (2) expansion of cane plantation and mill capacity in Brazil.
However, the capex level is likely to fall from FY12 onwards. We expect net debtto-
equity to improve to 2x by Sep11 and 1x by Sep13. We also expect the current
ratio (current asset/Current liability) to be 1.16x by Sep11 and 1.5x by Sep13.
Valuation
We have valued the Brazil unit of Renuka Sugar on a DCF basis and the Indian
unit on the basis of replacement cost. Our PO of Rs100/sh includes Rs39 as the
value of the India unit and Rs61/sh as the value of the Brazil units.
The Brazil mills are likely to generate US$33 per tonne of cane EBITDA and incur
capex of US$8/t on a stable state basis sugar price and generate US$19/t of cane
free cash. Assuming a cost of capital of 13% and 2% terminal growth, the
enterprise value of the Brazil mills comes to US$170/tonne of cane. At 14mt
capacity, we have thus valued the Brazil mills at US$2.38bn, implying an
EV/EBITDA of 6.5x. We expect the Brazil mills to get UScent24/lb as the sugar
price realization on a sustainable basis. At the EV arrived at on the basis of the
DCF, the EV/EBITDA for FY12e comes to 6.5x.
We have valued Renuka’s India unit at a replacement cost of Rs39.7bn at end of
FY12e. This EV implies an EV/EBITDA of 4.5x FY12e.
Price objective basis & risk
Renuka Sugars (SRNKF)
Our PO of Renuka Sugar, at Rs100/sh, is based on a sum of the parts of Rs61/sh
for the Brazil units and Rs39/sh for the Indian units. We have valued the Brazil
units at 6.5x EV/EBITDA FY12 (YE Sep), which is in line with the benchmark
valuation of Brazil mills and is imputed from DCF. We have valued the Indian unit
at the replacement cost of Rs39.7bn, which implies 4.5x EV/EBITDA on FY12e
earnings. Our PO of Rs100/sh includes Rs35 for RDB, Rs27 for VDI and Rs39 for
the Indian unit. At our PO of Rs100, the stock will trade at a 5.5x FY12e
EV/EBITDA. Renuka had traded at a significantly higher valuation before 2010,
however, it wass derated following the expansion of net debt-to-equity to 2.45x
from 0.5x. Also decline in current ratio to 1x from around 2x has impacted
valuation. We expect the stock to rerate along with the rise in earnings, as well as
the reduction in debt levels of the Indian sugar mills. At our PO, the stock would
trade at PB of 1.8x FY12e, which we believe is justified, as we expect Renuka to
earn at least a 26% ROE in next two years. Risks to our price objective are (1) a
lower-than-estimated price for sugar, (2) sharply higher capex on growing
sugarcane in Brazil, owing to the rise in the cost of fertilizer and other inputs, and
(3) lower exports from India, owing to goverment restrictions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shree Renuka Sugars Ltd.
Better times ahead
Cutting PO but maintain Buy on rising earnings from Jun Q
Renuka Sugar shares have fallen 30% since Nov 2010, possibly owing to (1) poor
results in the Dec2010 and Mar2011 quarters (2) an increase in debt and current
liability, and (3) a peak off in global sugar prices amidst uncertainty of production
in India and Brazil. We have cut our FY11e (YE Sep) EPS by 30% and our PO by
12% to Rs100. We expect the stock to rerate from 4.7x FY12e EV/EBITDA (adj),
owing to (1) an increase in profit starting in Jun2011, led by the seasonal recovery
in Brazil, and (2) a reduction in production uncertainty.
Brazil offseason hurts Mar2011 quarter and FY11e EPS
We have cut EPS for the year ending Sep2011 by 30%, owing to higher offseason
losses in the Brazil unit, led by harvest delays and lack of stock. We are not including
the likely benefit of an increase in profit margin on sugar exports from India, owing to
possible delays in the implementation of the export policy. We expect profits to jump to
Rs3.9bn in Apr-Sep 2011, compared to Rs847mn in Dec10-Mar11. We have cut our
FY12e EPS by 2%, but expect profits to grow by 50% in FY12e and 12% in FY13e.
End of India season without surprise to stabilize sugar price
Global raw sugar prices fell 28% from the peak of USd35.31/lb in early Feb2011 to a
low of USd25.65/lb in mid-Mar 2011, driven by threat of higher exports from India and
Brazil. We expect prices to stabilize and not fall below USd25/lb, owing to (1) rise in
visibility of not more than 25mt sugar production in India in FY11, and (2) the recent
announcement by UNICA that Brazil’s exports will increase only 2.5% in Apr11-Mar12,
the slowest in four years. We note that sugar is up 7% from the 15th Mar lows.
Very high debt amidst rising interest rate is the biggest risk
Renuka had gross debt of Rs72bn on Dec2010 and current liability of Rs38bn on
Sep2010. Gross debt to equity, at 3x, is risky, given the ongoing rise in interest
rates and volatile sugar prices. Renuka may mitigate risk with long-term contracts.
Earnings recovery ahead
Renuka’s quarterly profit excluding other income is likely to rise from June2011
onwards, after falling for five consecutive quarters. We expect the current quarter
ending Mar2011 to be the worst, owing to the offseason in Brazil. Key drivers of
the earnings recovery from the June 2011 quarter onwards are likely to be the
following.
The onset of the Brazil crushing season from Apr2011 that will boost sales
volume at a higher price, given the favorable market outlook.
Better refining throughput and sugar prices in India following the recent gov’t.
policy allowing exports.
Global sugar price outlook getting better
Sugar prices globally have been inching up since the middle of March 2011,
driven by the following favourable changes, and are likely to stay at least above
USd25/lb in the medium term.
The end of the uncertainty about India’s sugar production in the current
season has lessened concerns of a huge jump in exports from India.
Only a 2.5% rise in exports from central south Brazil in the Ap2011-Mar2012
season, the lowest in four years, has lessened the threat of a supply surge.
The jump in ethanol prices in Brazil to a 25% premium, compared to over a
25% discount last year has lessened the threat of an increase in investment
on sugar production capacity in Brazil.
Uncertainty of India’s production about to end
We had estimated in Oct2011 that India would produce 24.5mt of sugar in the
Oct2010-Sep2011 season. At the end of Mar2011, India’s sugar production stood
at 20.6mt. Considering the seasonal production pattern in India and the fact that
most mills in Uttarpradesh have already closed down, the possibility of any
deviation to our estimate is marginal.
Brazil production outlook muted
UNICA, the apex association for sugar manufacturers in the Central South region
of Brazil, announced its estimate of sugar production for the Apr2011-Mar2012
season on 31st March 2011. Following are key highlights of the upcoming
season.
1. Total sugar exports to grow by 0.6mt, i.e., 2.5%, to 24.9mt. This is the lowest
level in four years.
2) The total sugarcane crushing amount is expected to rise by 3%, to 568.5mt,
and sugar production to rise by 3%.
3) The average age of the sugarcane crop has gone up sharply, a worrying factor,
and needs a huge investment in the current year.
4) The first half of the upcoming season is likely to be weak.
Jump in ethanol price in Brazil has boosted sugar outlook
The price of anhydrous ethanol in Brazil has gone up sharply relative to the
export price of sugar recently, driven by a jump in international crude oil prices, as
well as tight supply. The increase in the ethanol price is likely to restrain the shift
in usage of sugar cane in favour of sugar. Since Apr2008, Brazil mills have
increased the usage of cane for sugar from 39% to 45%, owing to the higher
sugar price relative to ethanol. Given the recent change in the ethanol price from
a discount of 40% to a premium of 20% relative to sugar, the mix of sugarcane
usage in favour of sugar may not happen, thus leading to subdued growth in
sugar production in Brazil.
Renuka owns two companies in Brazil, including VDI, in which it has 100% stake
and RDB, in which it has 50.4% stake. Following is a brief description of Brazil
assets and key assumptions.
Total cane crushed by the Brazil units in the season ending Mar2011 was
about 10.5mt, out of which VDI had crushed 1.5mt and RDB had crushed
9mt. We expect the Brazil unit to crush 11.5mt of cane in the Apr2011-
Mar2012 period and 13mt in the Apr2012-Mar2013 period.
VDI has two units, with total cane crushing capacity of 3.1mt, but operated at
50% utilization in the Apr10-Mar11 season. VDI is likely to crush 2.5mt of
cane in the Apr2011-Mar2012 season and 3mt in theh Apr2012-Mar2013
season. VDI is likely to source 30% of its cane from 3rd parties and grow 70%
of its cane requirement on leased lands.
RDB had 10.5mt cane crushing capacity and operated at 80% utilization.
RDB’s capacity is being expanded to 12mt. Also, RDB’s cogeneration
capacity is being expanded to 295MW from 203MW, following which saleable
power capacity will rise from 140MW to 230MW. We expect RDB to crush
9mt in the Apr2011-Mar2012 period and 10mt in the Apr2012-Mar2013
period.
The Brazil unit had produced a total of 0.68mt sugar and 400mn ltr of alcohol
in the year ending Mar 2011. We expect the Brazil unit to produce 0.92mt of
sugar and 380mn ltr of alcohol in Apr2011-Mar2012. In the Apr2012-
Mar2013 period, we expect Brazil units to produce 1.1mt of sugar and 440mn
ltr of alcohol. The sale of power is likely to rise from 385mn units in Mar 11 to
415mn units in the Mar12 year and further to 600mn units the Mar 13 year.
The Brazil unit had suffered from a poor selling price in the year ending
Mar2011. We expect the avg. sugar realization to rise from USd18/lb in the
Mar11 year to 23.5 in the Mar 12 year. The realisation of alcohol is likely to
rise from an avg. of BRL1.0/ltr to BRL1.25/ltr in the Mar12 year.
Considering that the Brazil unit’s crushing season ends in Mar, while the
consolidated entity follows a Sep year, we have assumed 65% of the Mar12
year profit and 35% of the Mar11 year profit in our consolidated entity
number for the year ending Sep2011. We have followed a similar principle for
consolidation for subsequent years.
It is also worth highlighting that the Brazil units will not allocate any minority
interest expense for RDB, in which it has 50.3% capacity, for the initial
couple of years until the accumulated losses gets recovered.
EBITDA of the Brazil unit could rise by 2% for every 1% rise in realization.
Stretched balance sheet is the biggest risk
Renuka’s net debt-to-equity at the end of Sep 2010 expanded to 2.45x from 0.5x
in Sep2009 following acquisitions. The company’s current ratio also fell, to 1.08 at
end of Sep2010 from 1.78x at end of Sep 2009. The company is likely to incur
capex of Rs10bn in FY11 (YE Sep), owing to (1) setting up 1mt refinery at
Kandla, Gujarat, and (2) expansion of cane plantation and mill capacity in Brazil.
However, the capex level is likely to fall from FY12 onwards. We expect net debtto-
equity to improve to 2x by Sep11 and 1x by Sep13. We also expect the current
ratio (current asset/Current liability) to be 1.16x by Sep11 and 1.5x by Sep13.
Valuation
We have valued the Brazil unit of Renuka Sugar on a DCF basis and the Indian
unit on the basis of replacement cost. Our PO of Rs100/sh includes Rs39 as the
value of the India unit and Rs61/sh as the value of the Brazil units.
The Brazil mills are likely to generate US$33 per tonne of cane EBITDA and incur
capex of US$8/t on a stable state basis sugar price and generate US$19/t of cane
free cash. Assuming a cost of capital of 13% and 2% terminal growth, the
enterprise value of the Brazil mills comes to US$170/tonne of cane. At 14mt
capacity, we have thus valued the Brazil mills at US$2.38bn, implying an
EV/EBITDA of 6.5x. We expect the Brazil mills to get UScent24/lb as the sugar
price realization on a sustainable basis. At the EV arrived at on the basis of the
DCF, the EV/EBITDA for FY12e comes to 6.5x.
We have valued Renuka’s India unit at a replacement cost of Rs39.7bn at end of
FY12e. This EV implies an EV/EBITDA of 4.5x FY12e.
Price objective basis & risk
Renuka Sugars (SRNKF)
Our PO of Renuka Sugar, at Rs100/sh, is based on a sum of the parts of Rs61/sh
for the Brazil units and Rs39/sh for the Indian units. We have valued the Brazil
units at 6.5x EV/EBITDA FY12 (YE Sep), which is in line with the benchmark
valuation of Brazil mills and is imputed from DCF. We have valued the Indian unit
at the replacement cost of Rs39.7bn, which implies 4.5x EV/EBITDA on FY12e
earnings. Our PO of Rs100/sh includes Rs35 for RDB, Rs27 for VDI and Rs39 for
the Indian unit. At our PO of Rs100, the stock will trade at a 5.5x FY12e
EV/EBITDA. Renuka had traded at a significantly higher valuation before 2010,
however, it wass derated following the expansion of net debt-to-equity to 2.45x
from 0.5x. Also decline in current ratio to 1x from around 2x has impacted
valuation. We expect the stock to rerate along with the rise in earnings, as well as
the reduction in debt levels of the Indian sugar mills. At our PO, the stock would
trade at PB of 1.8x FY12e, which we believe is justified, as we expect Renuka to
earn at least a 26% ROE in next two years. Risks to our price objective are (1) a
lower-than-estimated price for sugar, (2) sharply higher capex on growing
sugarcane in Brazil, owing to the rise in the cost of fertilizer and other inputs, and
(3) lower exports from India, owing to goverment restrictions.
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