Shree Renuka Sugars Limited

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1 Shree Renuka Sugars Limited BUY CMP: Rs Date: February 23, 2010 Key Ratios: Particulars FY09 (12 m) FY10E (12 m) FY11E (12 m) OPM (%) NPM (%) ROE (%) ROCE (%) P/BV(x) P/E(x) EV/EBDITA(x) Debt-Equity Ratio * Year ending September 30th Key Data: Sector Sugar Industry Face Value Rs wk. High/Low Rs /72.70 Volume (2 wk. Avg.) BSE Code V.S.R. Sastry Vice President Equity Research Desk vsrsastry@firstcallindiaequity.com Target Price: Rs Market Cap. : Rs mn. SYNOPSIS Shree Renuka Sugars, an integrated manufacturing company with strategic focus on sugar and its allied products in power and ethanol. The company has inked definitive agreements with Grupo Equipav to acquire majority stake in the latter's Brazilian unit Equipav S.A. The company will acquire 50.79% stake in Equipav S.A. for $329 million or Rs 1,530 crore. The company is setting up a refinery to process and refine raw imported sugar near Kandla Port in Kutch district of Gujarat. Shree Renuka board approves 1:1 bonus issue. The company is looking to acquire promoter s stake in the second largest sugar producer of the country - Balrampur Chini Mills. ICRA has assigned a short-term rating of A1+ to the Rs 1 billion Commercial Paper programme of Shree Renuka Sugars (SRSL). The company has bought 5% stake in India's second largest commodities exchange NCDEX for Rs 36.50crore. Sugar being a Seasonal Industry, the performance of the Company varies from quarter to quarter. The company s top line and bottom line are expected to grow at a CAGR of 38% and 80% over FY08 to FY11E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com 1

2 Table of Content Content Page No. 1. Investment Highlights Peer Group Comparison Key Concerns Financials Charts & Graph Outlook and Conclusion Industry Overview 16 2

3 Investment Highlights Result Updates (Q1FY10) For the first quarter, the top line of the company increased 257%YoY and stood at Rs mn against Rs mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs mn from Rs mn of the corresponding period of the previous year i.e., an increase of 2272%YoY. EPS of the company for the quarter stood at Rs.8.23 for equity share of Rs.1.00 each. 3

4 Expenditure for the quarter stood at Rs mn, which is around 215% higher than the corresponding period of the previous year. Cost of materials of the company for the quarter accounts for 79% of the sales of the company and stood at Rs mn from Rs mn of the corresponding period of the previous year i.e., an increase of 130%YoY. Employee cost stood at Rs mn from Rs mn and accounts for 1% of the revenue of the company for the quarter i.e., an increase of 21%YoY. OPM and NPM for the quarter stood at 26% and 18% respectively from 16% and 3% respectively of the same period of the last year. 4

5 Segment-Wise revenue for the quarter Segment Revenue (Rs. million) Sugar Cogeneration Trading Ethanol Other 5.00 Total Less: Inter Segment Revenue Net sales/income from Operations FY09 Performance in line with expectation The company s Top line has increased 33% to Rs mn from Rs mn of FY08. Bottom line for the year increased 68% to Rs mn. from Rs mn of FY08 These numbers are in line with our expectation. Earnings per share of the company for the year stood at Rs.7.08 per share. Expenditure of the company for the year stood at Rs.23504mn, which is around 26% higher than FY08. Cost of materials for the year stood at Rs mn from Rs mn of FY08 i.e. an increase of 55%YoY. Employee cost increased 36%YoY to 5

6 Rs mn. Interest expenditure increased 54%YoY to Rs mn and depreciation increased 83%YoY to Rs mn. Segment-Wise revenue for FY 09 Segment Revenue (Rs. million) Sugar 18, Cogeneration 2, Trading 1, Ethanol 1, Other Total 24, Less: Inter Segment Revenue -2, Net sales/income from Operations 22, Shree Renuka to acquire majority stake in Equipav S.A. The company has entered into Definitive Agreements with Grupo Equipav for an investment of Rs 15.3 billion (USD 329 million) leading to a majority, controlling equity stake in Equipav S.A. AÇÚCAR e ÁLCOOL (``Equipav``), one of the largest sugar/ethanol companies in Brazil. 6

7 The company consists of two very large and modern sugar/ethanol mills with integrated co-generation facilities in Sao Paulo state in Southeast Brazil having a combined cane crushing capacity of 10.5 million tons of cane per annum (44,400 tcd). In addition, Equipav has a co-generation capacity of 203 MW. The mills will be expanded to a combined capacity of 12.0 million tons (56,600 tcd) per annum and 295 MW with a capital expenditure of RD 218 million. Cane supply comes from the cultivation of about 115,000 Ha of land of which nearly 2/3rd is farmed by the Company with very high level of mechanization for both planting and harvesting. The mills have easy access to the main ports of Santos and Paranagua. Shree Renuka Sugars will achieve (after closing adjustments) a majority stake of not less than 50.79%. The balance stake in the venture would be held by the founding Equipav group. Equipav had net debt of approximately RD 1.5 billion as on Dec. 31, 2009 (USD 822 million, Rs billion). The investment will fund capital expenditure as mentioned above, pay down debt and increase working capital. The deal is subject to approval of an acceptable debt restructuring package by the lenders to the Company and certain other conditions customary to such transactions. Closing is expected in 40 days. Banco Itau BBA, Brazil and Motilal Oswal Investment Advisors acted as the strategic and financial advisors to Shree Renuka. Veirano e Advogados Associados, Brazil and Crawford Bayley & Co. acted as legal advisors. Grupo Equipav is one of the large conglomerates in Brazil, holding equity stakes in over 20 companies besides the above which are present in the sectors of highway concessions, bus terminals, water and sewage, electricity generation, mortar production, waste management and maintenance of green areas. The Group is present in sugar and ethanol sector since Brazil is the largest producer and exporter of sugar with India being the largest consumer of sugar in the world. This acquisition will significantly multiply SRSL`s presence in the Centre-South region of Brazil and enhance its competitiveness and size in the global sugar business. In November 2009, SRSL announced the agreement to acquire 100% of Vale Do Ivai, a Brazilian sugar/ethanol production company. That acquisition included two sugar/ethanol production facilities in the state of Parana, with a combined cane crushing capacity of 3.1 million tons of cane per annum and a shareholding in logistic assets including terminals for storage and loading of sugar and ethanol at the port of Paranagua. Shree Renuka Sugars to set up refinery at Kandla. The company is setting up a refinery to process and refine raw imported sugar near Kandla Port in Kutch district of Gujarat. The company is planning to set up its refinery with a capacity of 3,000 tonnes a day (TPD) and has planned to import raw sugar for processing at Kandla. 7

8 At the same site Simbhaoli Sugars the other sugar major is planning to set up a port-based green-field sugar refinery with an estimated investment of Rs 180crore to be financed by way of long-term loans and the promoters' equity and with sugar refining capacity of 1,000 TPD. Shree Renuka board approves 1:1 bonus issue The company board has approved a bonus issue in the ratio of 1:1, i.e. one free share for every shareholder holding a share. The record date for bonus issue will be announced later. The aforesaid issue is subject to shareholders approval. Shree Renuka mulls acquiring promoter s stake in Balrampur chini The company is looking to acquire promoter s stake in the second largest sugar producer of the country - Balrampur Chini Mills. The deal, which may result in Shree Renuka acquiring total 56.5% stake in Balrampur Chini including a mandatory open offer for 20% additional stake, is likely to be in the range of about Rs 3,000-3,100crore. Kolkata-based Saraogi family currently holds around 36.5% stake in Balrampur Chini. If the deal fructifies, the production capacity of Shree Renuka and Balrampur Chini collectively will match the capacity of industry major Bajaj Hindustan. The move comes close on the heels of Bajaj Hindustan missing out on inking a similar deal with Balrampur Chini s promoters. Balrampur Chini Mills, incorporated in 1975, is one of the largest integrated sugar manufacturers in India. Its business portfolio consist of manufacturing and marketing of sugar, ethyl alcohol, ethanol, generation & selling of power & also manufacturing & marketing of organic manure. ICRA assigns `A1+` ratings to Renuka Sugars Credit rating agency, ICRA has assigned a short-term rating of A1+ to the Rs 1 billion Commercial Paper programme of Shree Renuka Sugars (SRSL). ICRA`s rating action factors in the positive outlook on the sugar sector in the near term arising out of stock correction in SY , and SRSL`s significant size of sugar operations, satisfactory operational performance and forward integration into cogeneration and distillery businesses, which will continue to provide alternate revenue streams and some cushion against cyclicality in the sugar business. Shree Renuka Sugars buys 5% stake in NCDEX 8

9 The company has bought 5% stake in India's second largest and most recognized commodities exchange, National Commodity & Derivatives Exchange (NCDEX) for Rs 36.50crore. The company said in its filing with the BSE that it has acquired 5% equity stake in NCDEX from Intercontinental Exchange Holdings and Goldman Sachs Investments (Mauritius). The company had received the commodity market regulator, Forward Market Commission s (FMC) approval to acquire 5% stake in NCDEX. Shree Renuka to expand sugar refining capacity at Karnataka The company will expand its existing sugar refining capacity at its Athani unit in Karnataka from 1,000 tpd to 2,000 tpd and set up sugar refining capacity of 1000 tpd at its Havalga unit also in Karnataka. With the commissioning of the above refineries, the company`s sugar refining capacity will increase to 6,000 tpd, which includes the 2,000 tpd port-based sugar refinery at Haldia, West Bengal and 4,000 tpd refining capacity at three of its integrated sugar mills in Karnataka. Shree Renuka Sugars hikes stake in chemical arm to 80.28% The company has hiked equity stake in one of its Pune based subsidiary companies, KBK Chem-Engineering (KBK) from 54% to 80.28%. KBK is an engineering Company, primarily engaged in providing turnkey solutions in the field of Distilleries, Ethanol plants and Bio-fuels. Shree Renuka Sugars to merge with subsidiary s The company has got board`s approval for merger of two of its of wholly owned subsidiaries namely Godavari Biofuel (P) and Ratnaprabha Sugars. This would not impact the capital structure of Shree Renuka Sugars since both these companies are its wholly owned subsidiaries. The amalgamation apart from creating economies of scale and reducing duplication of administrative, managerial costs and legal & regulatory compliance will facilitate consolidation and unified control of operations. 9

10 Peer Group Comparison Name of the company CMP(Rs.) (As on February 23, 2010) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) Shree Renuka Thiru Arooran Sugars ltd Balrampur Chini Mills ltd Dhampur sugars Rajshree sugars Key Concerns A global economic downturn could affect sugar industry growth Unfavorable government regulations could impact the Company s growth. A downtrend in the sugar industry cycle could erode profitability. Climatic conditions Adverse fluctuation in dollar prices will impact the revenues of the division. 10

11 Financials Results Update 12 months ended Profit and Loss A/C (Consolidated): Value(Rs in million) FY08A FY09A FY10E FY11E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Extraordinary Items Minority Interest Net Profit Equity Capital Reserves Face Value Total No. of Shares EPS * Year ending September 30th 11

12 Quarterly ended Profit and Loss A/C (Consolidated): Value(Rs. in million) 30-Jun Sep Dec Mar-10E Description 3m 3m 3m 3m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Minority Interest Net Profit Equity Capital Face Value Total No. of Shares EPS

13 Charts Net sales & PAT P/E Ratio (x) 13

14 P/BV (X) EV/EBITDA(X) 14

15 One year Comparative Graph Shree Renuka Sugars BSE SENSEX Outlook and Conclusion At the market price of Rs , the stock is trading at 9.17 x and 8.31 x for FY10E and FY11E respectively. On the basis of EV/EBDITA, the stock trades at 6.32 x for FY10E and 6.41 x for FY11E. Price to book value of the company is expected to be at 2.68 x for FY10E and 2.02 x for FY11E respectively. EPS of the company is expected to be at Rs and Rs for the earnings of FY10E and FY11E respectively. The company has inked definitive agreements with Grupo Equipav to acquire majority stake in the latter's Brazilian unit Equipav S.A. The company will acquire 50.79% stake in Equipav S.A. for $329 million or Rs 1,530 crore. The company is setting up a refinery to process and refine raw imported sugar near Kandla Port in Kutch district of Gujarat. 15

16 The company board has approved a bonus issue in the ratio of 1:1, i.e. one free share for every shareholder holding a share. The company is looking to acquire promoter s stake in the second largest sugar producer of the country - Balrampur Chini Mills. Credit rating agency, ICRA has assigned a short-term rating of A1+ to the Rs 1 billion Commercial Paper programme of Shree Renuka Sugars (SRSL). The company has bought 5% stake in India's second largest and most recognized commodities exchange, National Commodity & Derivatives Exchange (NCDEX) for Rs 36.50crore. The company will expand its existing sugar refining capacity at its Athani unit in Karnataka from 1,000 tpd to 2,000 tpd and set up sugar refining capacity of 1000 tpd at its Havalga unit also in Karnataka. The company has hiked equity stake in one of its Pune based subsidiary companies, KBK Chem-Engineering (KBK) from 54% to 80.28%. Sugar being a Seasonal Industry, the performance of the Company varies from quarter to quarter. We recommend BUY this stock with a target price of Rs for medium to long term. Industry Overview India is the largest consumer and second largest producer of sugar in the world (Source: USDA Foreign Agricultural Service). The Indian sugar industry is the second largest agro-industry located in the rural India. The Indian sugar industry has a turnover of Rs. 500 billion per annum and it contributes almost Rs billion to the central and state exchequer as tax, cess, and excise duty every year (Source: Ministry of Food, Government of India). It is the second largest agro-processing industry in the country after cotton textiles. With 453 operating sugar mills in different parts of the country, Indian sugar industry has been a focal point for socio-economic development in the rural areas. About 50 million sugarcane farmers and a large number of agricultural laborers are involved in sugarcane cultivation and ancillary activities, constituting 7.5% of the rural population. Besides, the industry provides employment to about 2 million skilled/semi skilled workers and others mostly from the rural areas. (Source: ISMA Website.) 16

17 The industry not only generates power for its own requirement but surplus power for export to the grid based on byproduct bagasse. It also produces ethanol, an ecology friendly and renewable energy for blending with petrol. The sugar industry in the country uses only sugarcane as input, hence sugar Companies have been established in large sugarcane growing states like Uttar Pradesh, Maharashtra, Karnataka, Gujarat, Tamil Nadu, and Andhra Pradesh. These six states contribute more than 85% of total sugar production in the country; Uttar Pradesh and Maharashtra together contribute more than 57% of total production. Indian sugar industry has grown horizontally with large number of small sized sugar plants set up throughout the country as opposed to the consolidation of capacity in the rest of the important sugar producing countries, where greater emphasis has been laid on larger capacity of sugar plants. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 17

18 Firstcall India Equity Research: B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Automobile Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s, Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions (domestic and cross-border), divestitures, spin-offs, valuation of business, corporate Restructuring-Capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and Other international stock exchanges. For Further Details Contact: 3rd Floor, Sankalp, The Bureau, Dr.R.C.Marg, Chembur, Mumbai Tel.: / / Telefax: info@firstcallindiaequity.com 18

Apollo Tyres Limited BUY. V.S.R. Sastry Vice President Equity Research Desk

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