Down cycle hits Shree Renuka Sugars

Brazilian acquisition turns sour, leaving insufficient operating profit to service debt

The cyclical downturn in the sugar sector has taken a toll on Shree Renuka Sugars’ Brazilian operations. The company’s Brazilian subsidiary, Shree Renuka do Brasil Participacoes, together with its subsidiaries, filed for judicial protection to recover. Acceptance of request will provide the company such protection for 180 days, during which it will have to present a plan to the court for approval with the creditors. Any reversal in fortunes is unlikely soon.

Renuka had acquired 100 per cent stake in Renuka Vale do Ivai S/A and 50.34 per cent stake in Renuka do Brasil S/A (Equipav) in 2010. It increased stake in the latter to 59.4 per cent in 2012. The firm’s operational global capacities are 22 million tonnes per annum (mtpa), of which 60 per cent are in Brazil. The acquisitions did not lead to desired benefits on the profitability front due to the downturn in the sugar cycle.

The global market has seen surplus sugar production in the past five years and Brazil has seen two droughts. Even as a build-up in global inventories for the past few years leads to weak realisations, the depreciation of currencies of major sugar-producing countries such as Brazil has hit Renuka further, by making its foreign-denomination debt costlier. From a loss of Rs 31 crore in FY12, Renuka’s consolidated losses have widened to Rs 1,813 crore in FY15. Its debt, Rs 1,343 crore in FY09, increased to Rs 6,508 crore in FY10 after acquisitions, and has continued to grow. At the end of FY15, its debt was Rs 8,897 crore.

The company believes re-organisation under the judicial recovery system is the way ahead. If approved,  challenges still remain,  given the weak sugar cycle. The Brazilian operations are running at 45 to 50 per cent capacity utilisation. In the current crushing season, one of its subsidiaries with 10.5-mtpa capacity has crushed 4.4 mt of cane till September 27, compared to 5.4 mt in the previous season. A second subsidiary, having 3.1 mtpa capacity, has crushed 1.3 mt, similar to last season.

In the domestic arena, too, sugar surplus has risen to 9.8 mt at the end of sugar year 2015. While the government is trying to boost exports, gentle global prices mean the sector will require some incentives, say analysts. The stock lost four per cent on Wednesday to close at Rs 7 a share.

Any recovery has to be led by a viable reorganisation of its Brazilian operations and debt as well as sugar prices.