Shree Renuka Sugars Limited - Adverse currency movement further depresses earnings - Antique

Shree Renuka Sugars Ltd. (SRS) standalone results for 1QFY14 were below our estimates as a result of lower than expected profitability on sugar and ethanol segments. Losses on sugar in the cane milling business and lower ethanol sales during the quarter impacted profitability. However, dividend from its subsidiary and 55% decline in interest costs helped the company reduce losses during the quarter.

Results highlights

Higher refining sales boost revenues

Standalone net sales surged by 31% to INR19.4 on back of increasing contribution from the refining operations and higher power sales. Revenues of sugar segment rose by 51% on back of 66% rise in volumes to 598,530mt as realisations weakend by 8% to INR29,812/mt. Revenues of ethanol segment declined by 64% to INR325m as ethanol offtake by OMC's remained subdued and picked up only from July 2013 onwards.

Lower profitability in sugar and ethanol segments drag overall margins

EBIDTA margins contracted by 950bps to 2.6% on account of lower profitability in sugar and ethanol segments. High cost of production and off-season expenses resulted in losses on sugar in cane milling business as refining operations reported profits of ~INR600m. Accordingly, EBIDTA declined by 72% to INR498m (estimate of INR1.3bn). Dividend income of INR368m coupled with 55% decline in interest costs reduced pre tax losses to INR49m. Including forex losses of INR874m, SRS reported losses of INR636m against a profit of INR133m in 1QFY13.

Good operational quarter for Brazilian operations

Sugarcane crushing at Brazilian operations in 1QFY14 rose by 54% to 2.9mmt. Since only 35% of the sucrose was diverted towards sugar production compared to 63%, sugar production declined by 12% whereas ethanol production surged by alomst 3x to 139m litres. Higher volumes coupled with favourable costing metrics on account of higher ATR's and cane yields should lead to improvement in profitability at Brazilian operations in FY14e.

Valuation and outlook

At the CMP of INR16, the stock trades at a PE and EV/EBIDTA of 5.5x and 4.9x, respectively, discounting its FY15e earnings. While the adverse currency movement is creating near term challenges in terms of forex losses and increasing debt on USD denominated debt, 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 INR26 (previous target price of INR28).

Source : Equity Bulls

Keywords