Shree Renuka Sugars

Recent flip-flops in sugar policy have battered the prices of sugar stocks, making this a good opportunity for investors to buy the stock of Shree Renuka Sugars, one of the most attractive long-term investments in the sector. At its current market price of Rs 90, the stock trades at a price earnings multiple of just 8.7 times its trailing 12-month earnings and 7 times its estimated earnings for 2010-11. That is at a steep discount to players such as Balrampur Chini and Bajaj Hindusthan (over 10 times). Yet, with its locational advantages, integrated model and bright prospects for its Brazil operations, Renuka Sugars appears best placed among Indian companies to capitalise on the improving outlook for global sugar prices. Having rebounded 40 per cent in three months, global sugar prices look set to hold firm over the next year aided by factors such as tight global supplies, recent flooding in Australia and rising crude oil prices (which prompts cane diversion to ethanol). Renuka Sugars is the leading sugar/ethanol producer in India with a cane crushing capacity of 35,000 tcd across locations in Karnataka and Maharashtra and refining capacity for 6000 tpd, with a 930 kilolitre/day distillery. Its advantages arise from presence in the southern and western regions, where cane prices tend to be more flexible than in the northern States with limited State Government intervention. Renuka's differentiated model of operating integrated sugar plants with refining capacity enables it to extend production and gain immunity from the ups and downs of the sugar cycle. The company has scaled up its revenues nearly eightfold (from Rs 950 crore to Rs 7,669 crore) with profits keeping pace (Rs 83 crore to Rs 692 crore) over just the past three years; testimony to the success of this model, as also its ability to execute on expansion and inorganic growth. Renuka's acquisition in 2009-10 of two large Brazilian sugar mills – Vale Do Ivai and Equipav – have added a larger Brazilian leg (45,000 tcd) to its Indian operations. While policy curbs on cane cultivation and pricing as well as sugar exports/imports limit profitable opportunities for Indian sugar mills, Brazilian producers have access to vast tracts of cultivated cane area, flexible mills that switch between sugar and ethanol and the freedom to capitalise on global sugar shortfalls through exports. This is why Renuka's acquired Brazilian operations enjoy a 30 per cent operating profit margin, well over twice the level managed by its Indian mills. The high level of debt on the Brazilian subsidiaries' balance sheets were a concern during the acquisition. However, the sharp improvement in the global sugar and ethanol outlook suggest that their cash flows could expand enough to enable a quick pay-down of that debt. In India, the frequent policy changes on sugar, with the export curbs and recent Customs duty impost, do pose a threat to the profitability of the company's operations this year. Given inflation concerns, export curbs may remain a worry even as the import duty on sugar could well be reviewed. However, lower cane prices and better realisations would at least partly offset these risks from an earnings perspective.