* Acquisition augurs well for refinery strategy, but does not reduce
volatility- Shree Renuka (SRSL) recently announced acquisition of Vale Do
Ivai (VDI), a midsize sugar and ethanol company in Brazil with intent to
backward integrate its refineries in India. VDI can fulfill only ~20% of
requirement. More importantly, we believe VDI’s standalone performance
is more crucial as it will be part of consolidated statements (whether it
exports raw sugar to SRSL or otherwise), going forward. Moreover, VDI
may accentuate up-cycle/down-cycle impact as large portion of costs (like
cost of cane cultivation and overheads) are fixed in nature. We have not
modeled VDI performance as its financial and operational details are not
yet available.
* Higher cane prices largely off-set incremental cane sugar
realisations – We raise our sugar realisation estimate for FY10/11E by 20-
36% to Rs 28.8-26/kg respectively, in line with our outlook on sugar
prices. We think global and domestic sugar prices are likely to remain firm
as India’s production will lag consumption by 7mnt in FY10E and Brazil’s production is likely to start by Apr-May’10. However, post that, prices are
likely to soften as more clarity emerges on (a) sugarcane planting in India
and (b) Brazil’s ongoing production. We also raise our sugarcane price
assumption by 20-35% to Rs240-210/quintal for FY10/11E respectively as SRSL continues to follow its policy of sharing higher realisation with
farmers, leading to capped benefit of higher sugar realisation.
* Raise estimates for FY10/11E mainly driven by refinery EBITDA/volume- We raise our FY10/11E earnings by 148-92%
respectively to mainly reflect refinery performance. We increase our
refinery EBITDA assumption for FY10E by 187% to Rs9.4/kg (vs. Rs3.3/kg
earlier) led by higher sugar realisation, as SRSL has locked in raw sugar at lower levels. We increase our volume and margin estimate for FY11E by
48-27% respectively to reflect Mundra refinery operations.
* Raise target price, maintain Hold– We continue to value SRSL based on
1 year forward up- cycle multiple of 12x FY11EPS of Rs17.3 and arrive at
our Sep’10 (rolled forward from Sep’09) target price of Rs208 (from Rs142
earlier) and hence maintain Hold at current price (potential downside of
10%). We note that while stock price may track sugar prices in near term,
we think concerns over the longevity/severity of the cycle will eventually emerge, thus impacting valuation multiple. We believe key risks to our call are sugar/power realisation higher than our estimates and lower cane prices than our assumptions.
| NIFTY 
