The move to acquire Brazil-based Vale Do Ivai and favourable business environment augur well for Shree Renuka Sugars.
In spite of all the hue and cry over rising prices of essential edible commodities, nothing much has happened. Sugar prices are still up by 150 per cent since January 2008 and 85 per cent since January this year, which to some extent is due to the tight demand-supply situation in the domestic market. Estimates suggest that India would have a deficit of 7 million tonnes for the October 2009 to September 2010 sugar season. One of key beneficiaries of this scenario would be Shree Renuka Sugars (SRS), which is a highly diversified and well-integrated domestic player. The company has cane crushing capacity of 35,000 tonnes per day (TCD) and the largest sugar refining facility of 4,000 tonnes per day (TPD) in the country. Recently, it acquired a Brazilian sugar company, which will further add synergies to its business in the domestic market.
| GOOD CATCH | |||
| EV ($ mn) | Capacity (mnt) | EV/tonne ($/t) | |
| Cosan | 7698 | 60 | 128 |
| Sao Martinho | 1879 | 12 | 157 |
| Acucar Guarani | 1253 | 12 | 104 |
| VDI (Acquisition price including planned capex | 240 | 3.1 | 84 |
| Source: Bloomberg, JM Financial | |||
Synergetic move
At the beginning of November 2009, SRC announced its deal to acquire Brazil-based Vale Do Ivai (VDI). The enterprise value (EV) of VDI is pegged at $240 million wherein SRS would acquire a 100 per cent stake in the company for $82 million; the rest is assumed as debt which is repayable over eight years. VDI, which has an annual cane crushing capacity of 3.1 million tonnes (or 16,000 TCD), produces sugar and ethanol. With this acquisition SRS will get a presence in the world’s largest sugar exporting country, Brazil. Among the key strengths, VDI’s manufacturing facilities are located near the ports. More importantly, VDI cultivates almost 72 per cent of its cane requirements at its farms, which are on long-term lease. This insulates VDI from the fluctuation in the cane prices, provides stability to its business as well as a cost advantage when cane prices are high. The acquisition is positive for SRS considering that the company imports a large part of its raw sugar for its refining operations, particularly now given the decline in domestic sugarcane output.
Analysts say that VDI is profitable at the operating level but made losses at net level last year due to high debt in its books and partly because of forex losses. Going ahead, SRS is expecting to increase VDI’s capacities gradually as well turnaround its operations; the former will help SRS increase its raw material security.
| HIGH ON SUGAR | ||||
| FY09 | % change | FY10E | % change | |
| Revenues | 2,816.0 | 33.8 | 5,250.0 | 86.4 |
| EBIDTA | 472.0 | 77.3 | 950.0 | 101.2 |
| EBIDTA margin (%) | 16.8 | 410 bps | 18.1 | 130 bps |
| Net profit | 224.0 | 94.0 | 660.0 | 194.2 |
| EPS (Rs) | 7.8 | 81.0 | 23.0 | 194.9 |
| PE (x) | 29.5 | - | 10.0 | - |
| Note: Year ending is September; bps=basis points E: Estimates % change is year-on-year | ||||
Robust growth
Less than a fortnight ago, SRS announced good set of numbers for the year ended September 2009 led by high sugar prices. Consequently, analysts have revised upwards their earnings estimates for the company and expect strong performance in 2009-10. The company is expected to report a growth of over 80 per cent in revenues, while net profits are expected to grow nearly three-fold—this excludes the numbers of VDI. The robust performance is primarily due to the fact that SRS has procured raw sugar at competitive rates and is expected to benefit from the surge in sugar prices. For 2009-10, analysts are expecting its average realisation to be in the range of about Rs 28-29 per kg as compared to Rs 22-23 per kg last year.
However, analysts are not very confident about the company being able to crush the same amount of sugar in 2009-10 as it did in last year. They sound cautious due to the decline in availability of sugarcane in India, particularly after poor monsoons have reportedly damaged some of the sugarcane crop. As far as refining is considered, SRS will be refining almost 12,00,000 tonne of raw sugar as compared to 600,000 tonne last year, which is expected to result in a 140 per cent increase in refining revenues to Rs 3,600 crore (70 per cent of total revenue compared to over 50 per cent last year). SRS’ other businesses such as distillery and power, which account for about 10 per cent of the total revenue, are expected to grow marginally.
Conclusion
Considering the current industry scenario, Shree Renuka Sugars remains among the preferred picks in the sector given its scale of operations besides an integrated and diversified business model.
The favourable business environment along with contribution from the Brazilian acquisition should help the company report strong set of numbers in the coming quarters. However, at Rs 227.05, the stock is trading at 10 times and 3 times its estimated 2009-10 earnings and price to book value, respectively, leaving limited scope for appreciation in the near-term. Investors wanting to play on the sugar cycle may consider the stock on declines.
