Shree Renuka Sugars’ standalone performance in the September quarter was a mixed bag, but reflects the upturn in the sugar cycle. While realisation in the domestic market boosted revenue from the sugar segment, the other business segments such as power, co-generation and trading sales witnessed dip in revenues and profitability.
The industrial alcohol segment also proved to be a drag. Nevertheless, even as overall revenue from domestic operations (half of consolidated revenues) saw a marginal 2.4 per cent uptick year-on-year to Rs 1,154 crore, Shree Renuka reported a turnaround with net profit of Rs 7.7 crore against a loss of Rs 57.3 crore in the year-ago period. Although the domestic as well as Brazilian operations are likely to report better performance in the next one-two quarters, most of the positives are factored in the price. Not surprisingly, the stock hasn’t seen major movement after the results last weekend. The consensus target price for the stock according to Bloomberg stands at Rs 33.40, which indicates limited upside from the current levels of Rs 31.9.
Improved volume, realisation
Domestic sugar prices remained firm on the back of an 11.5 per cent cut in production estimates by the Indian Sugar Mills Association (Isma) to 23 million tonnes for sugar year 2012-13 (October-September) owing to lower rainfall in key sugar producing states of Maharashtra and Karnataka. The domestic prices saw 25 per cent rise from around Rs 29 a kg to Rs 36.3 a kg during the recently concluded quarter. Thus, average realisation for Shree Renuka increased from Rs 30 a kg in the year-ago quarter to Rs 32.5 a kg in the September quarter. Along with a volume increase of 50 per cent to 300,000 tonnes, sales, therefore, surged 69 per cent year-on-year to Rs 973 crore.
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Sugar trading volume (primarily for exports) declined from Rs 417 crore in the September 2011 quarter to Rs 106 crore in the September 2012 quarter. However, this was understandable looking at good demand and realisations in the country. The distillery sales, too, declined 32.7 per cent to 25,101 kilolitres with average realisation marginally down to Rs 29 a litre. Power sales dipped 63.2 per cent to seven million kilowatt hours.
With improved sugar realisation, the EBIT margin for the segment increased to 9.4 per cent from 2.8 per cent in the year-ago period. The power segment, however, reported a loss of Rs 20 crore mainly due to higher fuel costs (coal). In the absence of bagasse (the waste left after crushing sugar cane), the company had to use coal for power production that pushed up costs.
Industrial alcohol seeing marginally lower realisation, too, saw subdued margins. However, the sugar segment that saw better margins in turn boosted overall margins. Earnings before interest, taxes, depreciation and amortisation (Ebitda) at Rs 102.4 crore increased 97.3 per cent year-on-year. However, interest costs more than doubled to Rs 146.5 crore, eating away the most of the net profit, which came in at Rs 7.7 crore.
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Outlook
Sugar prices still remain better than last year and are expected to stabilise at current levels of Rs 33 a kg. Further, the absence of sugar exports from India on account of lower domestic sugar production is expected to benefit Shree Renuka Sugars’ refinery operations, which are expected to run at full capacity over the next two-three quarters, observes a Prime Broking report. The refinery operations will get a boost once duty changes proposed by Isma are implemented.
Though the consolidated results are yet to be declared, analysts at Edelweiss observe that the Brazilian subsidiaries (half of consolidated revenues; reported losses last year) have improved operating performance during the quarter on account of higher crushing. Total of 4.6 million tonnes of cane was crushed during the quarter by RDB and VDI, which is 139 per cent higher than the previous quarter and 27 per cent year-on-year.
Analysts believe that financial performance is likely to improve owing to higher realisation in standalone business and better operational performance in Brazil. However, debt concerns still persist. Based on six times FY13 estimated Enterprise Value/ Ebitda, they have a target price of Rs 28 and maintain a ‘Hold’ rating as they await consolidated numbers for Q2 FY13.