Shree Renuka Sugars Limited - Currency movements - positive on P&L, negative on Balance Sheet - Antique

We met the management of Shree Renuka Sugars Ltd. (SRS) to get an update on the outlook for the domestic and Brazilian operations. Following are the key takeaways of our interaction with the management:

Refining operations to support profitability of sugar segment

With domestic sugar prices remaining stable to weak over the last few months coupled with high sugarcane costs, profitability of the sugar segment is under pressure. However, the refining operations is providing support to profitability with refineries operating at optimum utilisation levels and spreads remaining stable.

Ethanol offtake to gather momentum

The Oil Marketing Companies (OMC's) have issued an order for supply of 400m litres of ethanol, of which SRS has secured orders for 36m litres, to be delivered till November 2013. OMC's also plan to float a fresh tender for supply from December 2013 to November 2014. SRS has commenced supplies to a few depots and expects the deliveries to gather momentum going forward. It expects an average rate of ~INR36-36.5/litre.

Karnataka government approves pricing sugarcane based on scientific formula

The Karnataka government has approved the bill where the sugarcane pricing will be based on a scientific formula, taking into account prices of sugar and by-products. This will help reduce the volatility to profits of sugar mills operating in the state.

Brazil operations to benefit from improved yields and higher ethanol offtake

The initiatives taken by the Brazilian government (reinstating the 25% mandatory blending, increase in gasoline prices and increase in credit on federal taxes) will boost ethanol demand by 3.6bn litres and will help increase the sugarcane diversion towards ethanol. This would also aid in reducing the sugar availability and provide some support to global sugar prices. On the costing front, better than expected sugarcane yields and recovery rates at RDB would keep costs under control and help improve profitability.

Valuation and outlook

At the CMP of INR17, the stock trades at a PE and EV/EBIDTA of 5.5x and 5.1x, respectively, discounting its FY15e earnings. We remain confident of the management's abilities to turnaround operations at RDB and strengthen the balance sheet over the next two years. We maintain our BUY recommendation with target price of INR28.

Source : Equity Bulls

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