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Shree Renuka Sugars
Resilient Model Likely to Face Stiff Tests
What's Changed
Rating Overweight to Equal-weight
Price Target Rs105.00 to Rs57.00
EPS Sep’11 Cut/New Mar’12 From Rs9.0 to Rs3.4/Rs9.27
We downgrade SHRS to EW from OW. The stock
has outperformed the Sensex by 5% over last three
months. Contrary to market expectations, we
believe potentially lower international sugar prices,
currency volatility, and uncertainty on the domestic
sugar season (production, cane prices, exports) are
likely to result in volatile stock price performance.
What's new: 1) Earnings revisions: We cut our
Sept-11E EBITDA by ~24%, driven by a 40% cut in
domestic business (sugar volumes/realizations and
ethanol) and an 11% cut in the Brazil business (higher-
than-expected legacy contracts). Our new Sept-11E
EPS stands at Rs3.4 (vs.Rs9.0). 2) International
prices: Our commodities team sees downside risks to
prices as higher global supply offsets the Brazil shortfall.
Where we differ – Resilient model but stiff tests
ahead: 1) Consensus expects international sugar prices
to remain elevated. We disagree. 2) Consensus is
bullish on the group/stock despite uncertainty about
production, cane costs, and exports for F2012. We
would wait for more clarity to emerge. In our view, SHRS
has a relatively resilient and well-integrated model, and
valuation at 7x P/E and 1.2x P/B appears reasonable
(long-term averages ~11x and ~2x). However, the stock
is likely to be volatile, driven by strong September
quarter earnings, adverse macro environment, and
domestic news on production, exports, and cane prices.
What’s next/key catalysts: Cane procurement price
(next two months), decision on exports (next nine
months), turnaround in RDB margins (next six months),
and potential balance sheet deleveraging.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shree Renuka Sugars
Resilient Model Likely to Face Stiff Tests
What's Changed
Rating Overweight to Equal-weight
Price Target Rs105.00 to Rs57.00
EPS Sep’11 Cut/New Mar’12 From Rs9.0 to Rs3.4/Rs9.27
We downgrade SHRS to EW from OW. The stock
has outperformed the Sensex by 5% over last three
months. Contrary to market expectations, we
believe potentially lower international sugar prices,
currency volatility, and uncertainty on the domestic
sugar season (production, cane prices, exports) are
likely to result in volatile stock price performance.
What's new: 1) Earnings revisions: We cut our
Sept-11E EBITDA by ~24%, driven by a 40% cut in
domestic business (sugar volumes/realizations and
ethanol) and an 11% cut in the Brazil business (higher-
than-expected legacy contracts). Our new Sept-11E
EPS stands at Rs3.4 (vs.Rs9.0). 2) International
prices: Our commodities team sees downside risks to
prices as higher global supply offsets the Brazil shortfall.
Where we differ – Resilient model but stiff tests
ahead: 1) Consensus expects international sugar prices
to remain elevated. We disagree. 2) Consensus is
bullish on the group/stock despite uncertainty about
production, cane costs, and exports for F2012. We
would wait for more clarity to emerge. In our view, SHRS
has a relatively resilient and well-integrated model, and
valuation at 7x P/E and 1.2x P/B appears reasonable
(long-term averages ~11x and ~2x). However, the stock
is likely to be volatile, driven by strong September
quarter earnings, adverse macro environment, and
domestic news on production, exports, and cane prices.
What’s next/key catalysts: Cane procurement price
(next two months), decision on exports (next nine
months), turnaround in RDB margins (next six months),
and potential balance sheet deleveraging.
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