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Jan 09, 2013, 03.22 PM IST | Source: Moneycontrol.com

SPA Research's view on Shree Renuka Sugars

SPA Research has come out with its visit report on Shree Renuka Sugars (SRSL). The research firm says SRSL is well placed to benefit from the growth opportunities in the world sugar market. Improving industry dynamics domestically coupled with likely turnaround of Brazilian operations in next couple of years provides some respite to the company.

SPA Research has come out with its visit report on Shree Renuka Sugars (SRSL). The research firm says SRSL is well placed to benefit from the growth opportunities in the world sugar market. Improving industry dynamics domestically coupled with likely turnaround of Brazilian operations in next couple of years provides some respite to the company.

SRSL is carrying a consolidated debt of ~INR 90 bn (Brazil - INR 40 bn) in its books (average rate of 8.5%), resulting in D/E ratio of more than 4x. It expects overall debt to decline in coming years aided by stabilizing Brazilian operations, which would lead to generation of substantial cash flows. Debts to the tune of ~$ 150 mn (~INR 8 bn) are lined up for repayment in each of the next two years. Its earlier plan of deleveraging its balance sheet through sale of Brazilian assets is put on hold as of now. It was earlier looking to sale its Brazilian cogen plant of 295 MW. Replacement cost of setting up a power plant in Brazil is ~$1.5 mn/MW.   Sugar production is expected to decline by ~3 mt YoY to ~23 mt in 2012-13 on the back of ~19% decline in combined production in two sugarcane growing states of Maharashtra and Karnataka to ~9 mt. However lower production will be partially compensated by improved production in UP (+10%) and TN (+5%) respectively. This will result in stable sugar prices at ~INR 33- 35 kg in coming quarters. However, further worsening of domestic sugar production might lead to further spurt in domestic sugar prices.

Although the Rangarajan committee report on decontrol of sugar holds tremendous potential, implementation of the same remains a serious challenge. SRSL believes that removal of 10% levy sugar quota (to improve realizations by ~INR 1.5/kg) and doing away with monthly release mechanism (already increased from 1 month to 4 month), are the only two recommendations that can be implemented as of now. The chances of other recommendations getting implemented like a) linking sugarcane price to realized value from sugar, molasses and bagasse with FRP forming a floor, b) removal on quantitative restriction on sugar exports and imports, c) removal of controls on sale of by-products, and d) gradual phasing away of cane area reservation and minimum distance criteria for mills, appears remote.

Being the only sugar company in the world having manufacturing operations in top two sugar producing regions i.e India and Brazil (40% and 60% respectively), SRSL is well placed to benefit from the growth opportunities in the world sugar market. Improving industry dynamics domestically coupled with likely turnaround of Brazilian operations in next couple of years provides some respite to the company. Any success in balance sheet deleveraging activities will lead to rerating of the company. Currently the stock trades at P/BV of 1.0x its consolidated BV of INR 32.4.

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