BSE SENSEX S&P CNX 16,219 4,924 1 June 2012 6QSY12 Results Update Sector: Sugar CMP: INR26 TP: INR45 Buy Bloomberg SHRS IN Equity Shares (m) 671.0 52-Week Range (INR) 76/23 1,6,12 Rel. Perf. (%) -10/-16/-45 M.Cap. (INR b) 17.7 M.Cap. (USD b) 0.3 A - Actuals; PA - Proforma Actuals; PE - Proforma Estimates For the quarter ending March 2012 (new year end), ' revenue fell 10% YoY to IRN16.6b. EBITDA margin was stable YoY at 15.3%. Adjusted PAT was down 53% YoY to INR3.4b. Forex loss of INR1b led to reported loss of INR719m. Standalone EBITDA stood at INR1.96b, EBITDA margin expanded to 20% v/s 15.1% in 5QFY12 and net adjusted PAT was INR563m (forex loss of INR508m). Consol PBT (ex forex loss) was negative INR257m, while standalone PBT (ex forex loss) was INR679m, implying Brazil operation PBT loss was INR936m. Standalone EBITDA margin expanded due to improvement in realizations in Cogen segment (EBIT of 73% v/s 50% in 2QFY12), while EBITDA margin in Brazilian operations dropped sharply to 3.1% v/s 25.6% due to negative margins at Renuka do Brasil on account of lower productivity during off-season and higher fixed costs (lower cane yield). The company expects refinery business to improve over next couple of quarters due to (1) favorable sugar spread, (2) lower raw sugar price (makes sourcing from Brazil viable), and (3) improvement in utilization. Ongoing and planned cane plantations coupled with better weather outlook would likely to revive productivity at Brazilian operations over 2HFY13. FY13 crushing target is 9.5mt. Net debt increased to ~INR100b due to the increase in working capital debt in Indian operations, net DER stood at concerning level of 4.6x. Key triggers for the stock's re-rating are: (1) turnaround in volumes and cane yield in Brazil, (2) upswing in global sugar prices, and (3) reduction in debt. The stock trades at 3.8x FY13E EPS of INR7, and EV/EBITDA of 4.6x FY13E. We continue to value SHRS at 6x EV/ EBITDA, with a lower target price of INR45 (10% cut, on account of higher debt). Sandipan Pal (Sandipan.Pal@MotilalOswal.com); +91 22 3982 5436
Geographic composition Sales mix: Domestic 65% (43% in 5Q) and Brazil 35% (57% in 5Q). EBITDA mix: Domestic 94% (31% in 5Q) and Brazil 6% (69% in 5Q). Crushing: Total crushing volume up by 3%/4% QoQ/YoY to 3.1mt. Domestic peak season (coupled with off-season in Brazil) accounted for almost entire crushing/ production volume. Geographical Sales Mix (INR m) India Brazil 6QFY12 2QFY12 % Chg. 5QFY12 % Chg. 6QFY12 2QFY12 % Chg. 5QFY12 % Chg. (YoY) (QoQ) (YoY) (QoQ) Net Sales 9,804 12,489-21 6,975 40.6 5,356 5,556-4 9,086-41.1 EBITDA 1,965 1,351 45 1,058 85.7 125 2,098-94 2,320-94.6 EBITDA (%) 20 11 85 15 32.1 2 38-94 26-90.9 Foreign exchange (508) 342 (240) 3,952 PAT 55 292-81 291-81.1 (1,048) 130-906 2,993-135.0 Sales proportion (%) 65 69 43 35 31 57 EBITDA proportion (%) 94 39 31 6 61 69 Crushing mix (mt) Production mix (mt) Key operating metrics Domestic Business 1QSY11 2QSY11 3QSY11 4QSY11 5QFY12 6QFY12 YoY (%) Sugarcane Crushed (t) 1,674,090 2,803,472 748,680-1,759,303 3,038,845 8 Raw Sugar Processed (t) 120,813 69,770 70,750 117,828 81,685 169,018 142 Recovery (%) 10.4 12.2 12.1-11.0 12.4 1 Sugar From Cane (t) 167,301 342,958 90,758-192,724 378,158 10 - Raw Sugar (t) - White Sugar (t) 167,301 342,958 90,758-192,724 378,158 10 Refined Sugar (t) 114,039 67,080 66,980 110,921 78,417 164,310 145 Total Sugar Produced 281,340 410,038 157,738 110,921 271,141 542,468 32 Ethanol Production (KL) 17,594 42,952 40,852 9,019 25,094 49,312 15 Realization (INR/Ltr) 28 28 27 29 29 28 2 Co-generation Exports (mm units) 108 150 81 19 79 154 3 Realizations (INR/Unit) 3.8 5.4 6.4 3.5 4.5 4.8 (12) 1 June 2012 2
Key operating metrics Brazil Business 1QSY11 2QSY11 3QSY11 4QSY11 5QFY12 6QFY12 YoY (%) Sugarcane Crushed (t) 2,779,552 170,662 3,359,838 3,600,790 1,229,294 42,535 (75) Raw Sugar Processed (t) - - - - Recovery (%) 129.7 106 117 138 134 134 26 Sugar From Cane (t) 165,996 6,790 167,124 289,075 93,201 2,830 (58) - Raw Sugar (t) 157,576 6,790 113,336 289,075 93,076 2,830 - White Sugar (t) 8,420-53,788-125 - Refined Sugar (t) - - - - - Total Sugar Produced 165,996 6,790 167,124 289,075 93,201 2,830 (44) Ethanol Production (KL) 111,817 8,548 129,519 118,210 39,561 1,018 (88) Realization (INR/Ltr) 32 38.1 47 37 35 34.4 (10) Co-generation Exports (mm units) 120 40.0 95 123 187 49 23 Realizations (INR/Unit) 4.6 4.5 4.1 4.1 4.3 2.6 (41) India operations: Peak crushing season Sales up 41% QoQ (-22% YoY) to INR9.8b. YoY declined is owing to 36%YoY decline in sugar sales. Sugar sales dropped due to 19%/6%YoY drop in volume/realizations, although production is up by 32%. EBITDA margin expanded strongly to 20% from 10.9% in 2QFY12 due to improvement in realizations in Cogen segment (EBIT of 73% v/s 50% in 2QFY12). Crushing improved 8% YoY to 3mt; Recovery rates improved to 12.4% v/s 11% in 5QFY11. Sugar segment: Volume up QoQ, while realizations declined Production up 32% YoY to 0.54mt - refinery volume witnessed strong growth to 0.16mt due to favorable white-raw spread (capacity of 9,000t/day). With domestic sugar stocks finishing, the company is expected to source Brazilian raw sugar for refinery purpose post June-12 (lower raw sugar price and favorable spread makes it viable) New Crushing season refinery volume stood at 0.24mt as against estimates of 0.58mt till Sep-12. Despite improvement in production volume sales were down by 19%YoY to 0.19mt. Blended realizations down 5% QoQ (6% YoY) to INR27/kg. Ethanol segment: Volumes/Realizations declined 6%YoY; EBIT margin rose to 35% from 26% in 2QSY11. Ethanol blending program continues to drive demand. Sales to oil marketing companies (OMCs) stood at 30ml v/s 6ml 5QFY12. The company has received orders for the supply of 75ml to OMCs during the year Oct-11 to Sep- 12. Average ethanol realization in 6QFY12 was INR28.2/l v/s. INR28.9/l 5QSY11. The company believes the proposal of linking ethanol price with domestic petrol prices is likely to boost realizations, although no decision has been taken yet. The management also mentioned that given the current shortage of ethanol, world market could be supportive of ethanol exports in the nearterm (export realizations of INR38/l). Co-generation: Volumes/realizations up 3% YoY; EBIT margin rose to 73% v/s 50% 2QSY11. Realization improved QoQ to INR4.8/unit. Operating margin improved due to lower cost of fuel, primarily as the company used its own bagasse. 1 June 2012 3
Standalone Segmental Performance (INR m) Y/E September FY12 QoQ YoY 1Q 2Q 3Q 4Q 5Q 6Q (%) (%) Sugar 8,368 6,981 8,493 5,994 4,517 4,498 (0) (36) Cogeneration 725 1,363 877 407 692 1,753 153 29 Trading 2,085 4,274 1,931 4,166 1,984 4,031 103 (6) Ethanol 378 910 895 1,087 452 870 92 (4) Others 6 17 30 10 7 10 43 (41) Total 11,562 13,545 12,226 11,664 7,652 11,162 46 (18) Less: Intersegment Rev. 548 1,056 154 391 682 1,359 99 29 Total Revenue 11,014 12,489 12,072 11,273 6,970 9,803 41 (22) Segmental PBIT Sugar 758 341 459 169 442 241 (45) (29) Cogeneration 58 679 382 (15) 314 1,286 310 89 Trading 51 181 88 65 67 13 (81) (93) Ethanol 64 237 395 186 129 308 139 30 Others (1) (5) 27 5 (1) 6 (700) (220) Total 930 1,433 1,351 410 951 1,854 95 29 Segmental PBIT Margin (%) Sugar 9.1 4.9 5.4 2.8 9.8 5.4 Cogeneration 8.0 49.8 43.6 (3.7) 45.4 73.4 Trading 2.4 4.2 4.6 1.6 3.4 0.3 Ethanol 16.9 26.0 44.1 17.1 28.5 35.4 Sugar sales declined despite higher production Average realization dropped QoQ (mt) QoQ movement of export and domestic sugar prices Ethanol volume up QoQ, realization stable 1 June 2012 4
Strong co-generation, volume/price up sharply Refinery volume (mt) up with favorable White-raw spread Raw and White sugar price trend (USD/t) White-raw spread was favorable (USD/t) Domestic sugar price has been between INR2,800-3,000/quintal Brazilian operation: Off-season muted volume Sales and EBITDA deteriorated due to lower productivity: Sales were down 40% QoQ to INR5.4b, while EBITDA margin dropped sharply to 3.1% v/s 25.6% due to negative margins at Renuka do Brasil on account of lower productivity during offseason and higher fixed costs (lower cane yield). 1 June 2012 5
Revenue Break-up (INR m) EBITDA Break-up (INR m) Planting target achieved: During 5QFY12, the company achieved its plantation target of ~25,000 ha (20,045ha at RDB and 5,136 ha at VDI). We expect productivity to improve over 2HFY13 with ongoing cane plantations (25,000ha done in FY12, and another 24,000ha planned in FY13). Sugar realizations down QoQ at 24.5c/lb: Sugar realizations stood at 24.2-24.9/lb (hedged floor price of 23c/lb) on the back of declining trend of international price. Brazilian Subsidiary Performance (INR m) Renuka do Brasil Vale do Ivai Cons.Brazil 6QFY12 2QFY12 Chg. (YoY) 6QFY12 2QFY12 Chg. (YoY) Operations Net Revenue 4,600 5,257-12.5 836 271 208 5,436 EBITDA -101 1,966-105.1 270 162 67 169 EBITDA (%) -2.2 37.4 32.3 59.8 3.1 PAT -1,056 51-2171 142 103 38-914 Valuation and view: Progress in co-gen divestment and turnaround in Brazil operations would be key catalysts 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 cane 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, minimize risks 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 4QFY12. Its high leverage level also remains a major near-term overhang on the stock. However, going forward, we believe the stock could see meaningful upside 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. Key triggers for the stock's re-rating are: (1) turnaround in volumes and cane yield in Brazil, (2) upswing in global sugar prices, and (3) reduction in debt. The stock trades at 3.8x FY13E EPS of INR7, and EV/EBITDA of 4.6x FY13E. We continue to value SHRS at 6x EV/EBITDA, with a lower target price of INR45 (10% cut, on account of higher debt). 1 June 2012 6
Financials and Valuation 1 June 2012 7
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