Shree Renuka Sugars Limited - Deleveraging in sight! Albeit gradually - Antique

We met with the management of Shree Renuka Sugars Ltd. (SRS) to get an update on the outlook for domestic and Brazilian operations and also to understand their strategy on how they plan to withstand the current challenging scenario. Following are the key takeaways:

Production in sugar season (SS) 13-14 to be impacted by lower water availability ...

While India is expected to produce ~24-24.2mmt of sugar in SS12-13, outlook for production in SS13-14 appears challenging. Water availability issues in key sugar producing states in southern India like Maharashtra, Karnataka and Tamil Nadu can lead to a decline of 20-30% in these states. Production in Maharashta, which is estimated at ~6.8-7mmt in the current season, may fall to ~4.5-5mmt in SS13-14 while Uttar Pradesh is expected to maintain its production.

... which improves outlook for refining business

Lower sugar production in southern India will lead to India turning a net importer in SS13-14, which improves the outlook for SRS' refining business. The management expects both the port based refineries to operate at optimum utilisation levels, which will partially offset the impact from a potential sharp decline in manufactured sugar volumes.

Share of ethanol expected to increase in Brazil

Over the last three years, proportion of sugarcane being utilised for ethanol has consistently reduced from 55% in SS10-11 to 50.44% in SS12-13. This was largely due to favourable raw sugar prices compared to ethanol prices. However, with robust ethanol demand coupled with ethanol pricing scenario turning favourable, proportion of sugarcane utilised for ethanol is expected to increase. This will also help in reducing the incremental sugar supply, thereby resulting in a stable pricing scenario for sugar.

Valuation and outlook

Although the company continues to perform reasonably well in the domestic operations, concerns persist on the outlook for the Brazilian operations with the same being impacted by many variables like high debt, sugar & ethanol prices, BRL & USD currencies, yields, ATR, etc. Although we remain confident in management's ability to strengthen the balance sheet, we feel the same will happen over the next three years with significant improvement expected only from FY15e. We upgrade our recommendation to BUY from HOLD with a target price of INR35 and advice to buy the stock on declines, which we believe weak results expected from Brazilian operations for 3Q & 4QFY13e will provide.

Source : Equity Bulls

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