Shree Renuka Sugars. CMP: INR41 TP: INR50 Buy

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1 BSE SENSEX S&P CNX 18,202 5,532 Bloomberg SHRS IN Equity Shares (m) Week Range (INR) 87/23 1,6,12 Rel. Perf. (%) 14/-39/-51 M.Cap. (INR b) 27.3 M.Cap. (USD b) February QSY12 Results Update Sector: Sugar CMP: INR41 TP: INR50 Buy ' (SHRS) reported 11% YoY growth in EBIDTA to INR3.3b for 5QFY12 (change in accounting year to April-March from October-September). Revenue declined 9% YoY to INR20.5b, while PAT surged 4x to INR3.4b due to forex gain of INR4.3b on USD/Real dominated liabilities. The forex gain was due to adoption of revised accounting standard to amortize change in long term foreign exchange liabilities over the tenor of the liability. Standalone EBITDA slipped by just 3% YoY, despite the huge 37% YoY decline in revenue (on account of lower sugar sales and trading revenue). Expansion in EBITDA margin is attributed to the improvement in realizations across all segments. The company expects its refinery business to improve over next couple of quarters due to (1) favorable sugar spread; and (2) substantial availability of domestic raw sugar. In Brazil, numbers remained steady on a YoY basis, although margins improved on account of higher sugar realization. However, higher realization was offset by lower volumes on account of adverse weather that impacted crushing volume of Renuka do Brasil (RDB). After the severe impact on cane yield in 4QSY11, the management expects yields to recover to ~65t/ha going forward. During 5QFY12, SHRS has achieved its plantation target of ~25,000 ha (20,045ha at RDB and 5,136ha at VDI). We expect re-plantation to lower average age of crops and improve productivity/yield. The company's net debt increased by ~INR7b to ~INR90b due to the increase in working capital debt in Indian operations. The management guided the divestment of co-gen business (138MW at Equipav) to be concluded by Feb-end. We believe this event would be a key trigger for the company's re-capitalization target. Going forward, key triggers for the stock's would be: (1) turnaround in volumes and cane yield of its Brazilian operations, (2) upswing in international sugar prices, and (3) reduction in debt. The stock trades at 5.8x FY13E EPS of INR7, and EV/EBITDA of 5.2x FY13E. We continue to value SHRS at 6x EV/ EBITDA, leading to a lower target price of INR50. Maintain Buy. Sandipan Pal (Sandipan.Pal@MotilalOswal.com); Tel:

2 Geographic composition Sales mix: Domestic 43% (56% in 4Q) and Brazil 57% (44% in 4Q). EBITDA mix: Domestic 31% (22% in 4Q) and Brazil 69% (78% in 4Q). Crushing: Total crushing dropped by 17%QoQ and 33% YoY to 3mt. The decline is largely attributed to the ~56% volume drop of the company's Brazil operations due to adverse weather impacting crop yield. India operations commenced the new crushing season with a 5% YoY jump in crushing. Lower crushing also led to ~44% YoY drop in sugar production in Brazil. Geographical Sales Mix (INR m) India Brazil 5QFY12 1QFY12 Chg.(YoY) 4QFY12 Chg.(QoQ) 5QFY12 1QFY12 Chg.(YoY) 4QFY12 Chg.(QoQ) Net Sales 6,975 11, , ,086 9, , EBITDA 1,058 1, ,320 2, , EBITDA (%) Foreign exchange 342 3, (5,558) PAT (573) , (6,452) Sales proportion (%) EBITDA proportion (%) Source: Company/MOSL Crushing mix (mt) Production mix (mt) Source: Company/MOSL Key operating metrics: Domestic Business 1QSY11 2QSY11 3QSY11 4QSY11 5QFY12 YoY (%) Sugarcane Crushed (t) 1,674,090 2,803, ,680-1,759,303 5 Raw Sugar Processed (t) 120,813 69,770 70, ,828 81,685 (32) Recovery (%) Sugar From Cane (t) 167, ,958 90, , Raw Sugar (t) - White Sugar (t) 167, ,958 90, , Refined Sugar (t) 114,039 67,080 66, ,921 78,417 (31) Total Sugar Produced 281, , , , ,141 (4) Ethanol Production (KL) 17,594 42,952 40,852 9,019 25, Realization (INR/Ltr) Co-generation Exports (mm units) (27) Realizations (INR/Unit) February

3 Key operating metrics: Brazil Business 1QSY11 2QSY11 3QSY11 4QSY11 5QFY12 YoY (%) Sugarcane Crushed (t) 2,779, ,662 3,359,838 3,600,790 1,229,294 (56) Raw Sugar Processed (t) Recovery (%) Sugar From Cane (t) 165,996 6, , ,075 93,201 (44) - Raw Sugar (t) 157,576 6, , ,075 93,076 - White Sugar (t) 8,420-53, (99) Refined Sugar (t) Total Sugar Produced 165,996 6, , ,075 93,201 (44) Ethanol Production (KL) 111,817 8, , ,210 39,561 (65) Realization (INR/Ltr) Co-generation Exports (mm units) Realizations (INR/Unit) (6.9) India operations: New crushing season commenced Sales declined 38% QoQ (-37% YoY) to INR7b driven by decline in sugar sales and trading revenue. Sugar sales dropped due to lower utilization of refinery on the back of unfavorable white-raw spread. EBIDTA margin expanded strongly to 15.2% from 9.8% in 1QSY12 due to improvement in realizations across segments. Crushing improved 5% YoY to 1.8mt; Recovery improved to 11% v/s 10.4% in 1QSY11. Sugar segment: EBIT margin improved to 9.8% from 9.1% in 1QSY12 and 2.8% in 4QSY11. The QoQ improvement is due to seasonal impact. Production declined 4% YoY to 0.27mt due to lower refinery volume on the back of unfavorable white-raw spread. Refinery volume stood at 0.08mt v/s 0.11mt in 4QSY11 and 1QSY11 against a capacity of 9,000t/day. Sugar sales volumes dropped 45% YoY to 1.6mt. Blended realizations declined 4% QoQ (flat YoY) to INR28.4/kg, due to lower proportion of export sales in sugar. Ethanol segment: Volumes increased 14% YoY and realizations rose 4% YoY; EBIT margin rose to 28.5% from 16.9% in 1QSY11. Ethanol blending program continues to drive demand. However, sales to oil marketing companies (OMCs) declined to 6ml v/s 18.8ml in 4QSY11. SHRS has received orders for the supply of 75ml to OMCs during the year Oct-11 to Sep- 12. Average ethanol realization in 5QFY12 was INR28.9/l (v/s INR29.1/l in 4QSY11). The company believes the proposal of linking ethanol price with domestic petrol prices is likely to boost realizations. The management also mentioned that given the current shortage of ethanol, world market could be supportive of ethanol exports in the near-term. 16 February

4 Co-generation: Volumes declined 27% YoY and realization increased 17% YoY; EBIT margin rose to 45.5% v/s 8% 1QSY11. Volumes fell to 70m units due to the lower utilization of the refineries and delayed crushing. Realization improved QoQ to INR4.5/unit. Operating margin improved due to lower cost of fuel, primarily as the company used its own bagasse. Sugar sales declined due to lower Lower export sales dented average QoQ movement of export and domestic refinery volume realization QoQ (mt) sugar prices Ethanol volume up YoY, QoQ performance in co-generation, Refinery volume (mt) impacted due so is realization realization up sharply to lower utilization Raw and White sugar price trend White-raw spread was unfavorable Domestic sugar price has been between (USD/t) (USD/t) INR2,800-3,300/quintal Source: Company/MOSL 16 February

5 Standalone segmental performance Y/E September FY11 FY12 QoQ YoY INR m 1Q 2Q 3Q 4Q 1Q (%) (%) Sugar 8,368 6,981 8,493 5,994 4,517 (25) (46) Cogeneration 725 1, (5) Trading 2,085 4,274 1,931 4,166 1,984 (52) (5) Ethanol , (58) 20 Others (30) 17 Total 11,562 13,545 12,226 11,664 7,652 (34) (34) Less: Intersegment Rev , Total Revenue 11,014 12,489 12,072 11,273 6,970 (38) (37) Segmental PBIT Sugar (42) Cogeneration (15) 314 LTP 441 Trading Ethanol (31) 102 Others (1) (5) 27 5 (1) (120) - Total 930 1,433 1, Segmental PBIT Margin (%) Sugar Cogeneration (3.7) 45.4 Trading Ethanol Brazilian operation: End of crushing season Sales and EBITDA steady: Sales during the quarter were flat at INR9.1b, while EBITDA improved 11% YoY. Sales comprise (a) INR6.4b (down 15%YoY) from Renuka do Brasil (RDB) and (b) INR2.7b (up 67%YoY) from Vale do Ivai (VDI). EBITDA margin improves: EBIDTA margin was 25% v/s 25% in 1QSY11; RDB's EBITDA margin contracted to 23% from 25% in 1QSY11 due to adverse weather which resulted in a sharp drop in yield in Sao Paulo state. VDI's margin improved to 32% from 24% in 1QSY11. Crushing was impacted due to adverse weather conditions (drought in Sao Paulo state) with total crushing of 8.3mt (6mt in RDB and 2.3mt in VDI) over last season, including 1.2mt in 5QFY12 v/s 2.8mt in 1QSY11 (56% YoY decline). Recovery improves: ATR was 133.7kg/t v/s 129.7kg/t in 1QSY11 and 138kg/t in 4QSY11. With better sugar prices, higher proportion (58.7%) of juice was diverted towards sugar production (v/s 48.3% for the industry). Planting target achieved: During 5QFY12, the company achieved its plantation target of ~25,000 ha (20,045 ha at RDB and 5,136 ha at VDI). We expect this to lower the average age of its crops and improve productivity/yield for next crushing season. Sugar realizations down QoQ at 24.4c/lb: The company achieved average sales price of 24.4c/lb (hedged floor price of 23c/lb) v/s 26c/lb in 4QSY11 on 0.18mt sold during the quarter. YoY improvement in sugar realization (~37%) was offset by lower volumes. 16 February

6 Brazilian Subsidiary Performance (INR m) Renuka do Brasil Vale do Ivai Brazil Operations 5QFY12 1QFY12 Chg. (YoY) 5QFY12 1QFY12 Chg. (YoY) Consolidated Net Revenue 6,379 7, ,707 1, ,086 EBITDA 1,466 1, ,326 % EBITDA PAT 2, ,993 Management's outlook and guidance: Expect high production phase in India nearing end; co-gen divestment to conclude soon Focus remains on reviving Brazilian operation and de-leveraging. Near-term sugar pricing outlook is range-bound on account of higher beet sugar production in Europe and surplus sugar production in India and Thailand. Despite higher volumes, pricing outlook to remain strong due to (a) re-stocking demand from major importing countries, (b) strong unmet ethanol (flexi-fuel car) demand in Brazil; and (c) lack of sustainability of European sugar production in a low-price scenario given average cost of production of ~25c/lb Divestment of co-gen business (138MW at Equipav) is likely to be concluded by Feb-end. We believe this to be a key trigger for de-leveraging target. RDB is expected to operate at 65t/ha yield for going forward. Indian operations have registered the best- ever recovery rate and could touch ~12% in the current crushing season against 11.5%. Refinery vertical to see USD60/ton of EBITDA based on current spread. Domestic raw sugar availability renders strong visibility of refinery production of ~0.5mt over next couple of quarters. Indian sugar cycle is expected to see high production phase, given a) arrear building in north India and b) cane area in South India and Maharashtra being saturated with availability of water, lowering the likelihood of area increase. Valuation and view: Progress in co-gen divestment and turnaround in Brazil operations are the key catalyst SHRS is the only sugar/ethanol producer in the world with almost year-long cane crushing activity as it has operations in Brazil and India, which have complementary crushing seasons. This allows it to: (1) manage inventory, (2) benefit from price arbitrage between sugar/ethanol, raw/white sugar, (3) play price arbitrage between India's regulated sugar industry and liquid global markets, and (4) leverage synergies, and offer steady returns despite cyclical nature of the industry. Adverse weather that impacted production volume and margins at its Brazilian operations, coupled with lower production expectation in refinery business, have taken a huge toll on the stock performance post 4QSY11. Its high leverage level also remains a huge near-term overhang on the stock. However, going forward, we believe with (a) progress in co-gen divestment (a trigger for de-leveraging), (b) re-plantation improving productivity/yield in Brazilian subsidiaries, (c) robust domestic outlook, the stock could see meaningful upside. The stock trades at 5.8x FY13E EPS of INR7, and EV/EBITDA of 5.2x FY13E. We continue to value SHRS at 6x EV/EBITDA, leading to a lower target price of INR50. Maintain Buy. 16 February

7 Shareholding pattern (%) Dec-11 Sep-11 Dec-10 Promoter Domestic Inst Foreign Others Stock performance (1 year) Shree Renuka Sug Sensex - Rebased 20 Feb-11 Ma y-11 Aug-11 Nov-11 Feb February

8 Financials and Valuation 16 February

9 N O T E S 16 February

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