* 4Q09 profits lower than estimates, despite significant trading
profits surprise- Shree Renuka (SRSL) reported 4Q09 adjusted profit of
Rs1.01bn vs. our estimate of Rs1.65bn. Trading profits of Rs0.68bn (vs.
our est of Rs0.15bn) off-set substantially lower profits in sugar, cogeneration
and distillery segments. Sugar sales came in 25% lower than
our estimate on account of 9% lower volume (as SRSL holds 0.30mnt of
white sugar vs. our estimate of 0.18mnt) and 17% lower realisation.
Management acknowledged lower realisation (vs. market prices) was on
account of incorrect timing of sales. This coupled with (a) sugar inventory
valuation at Rs21/kg vs. Rs23/kg our est. (b) lower co-generation and
distillery sales due to lower volumes and (c) forex loss Rs57mn (vs. our est
of Rs148mn of income) led to disappointment in results.
* Cane price guidance surprises, cut our gross spread on cane sugar
by 16-17% in FY10/11E– In line with management guidance, we raise
our sugar realisation assumption by 6% for FY10E to Rs33-34/kg (non-levy
sugar) and cane price assumption by 13% to Rs270/quintal for FY10E. This
leads to gross spread (sugar realisation-cane price) of Rs5.4/kg vs.
Rs6.6/kg earlier. SRSL expects sugar production in India to increase by
~40%, leading to some softness in sugar prices. Therefore, we assume 7-
11% drop (YoY) in sugar and cane prices in FY11, curtailing our gross
spread assumption from Rs6.9/kg to Rs5.8/kg (still reflect higher than
FY10E). We believe inventory gains and higher refinery EBITDA could offset
the cut in cane sugar profitability.
* Raise estimates by 7% for FY10E to reflect inventory profits- We
increase inventory EBTIDA gains for FY10E by Rs2.15bn to Rs3.9bn on
account of higher inventory volume and realisation than our earlier
estimates. We increase our refinery EBITDA assumption by 8-15% for
FY10/11E to reflect higher sugar realisation. We note our current estimates
do not factor in SRSL’s Brazilian acquisition Vale Do Ivai (VDI) in current
estimates as operational and financial details are not yet disclosed.
* Raise target price marginally, maintain Hold– We continue to value
SRSL based on 1 year forward up- cycle multiple of 12x FY11EPS of Rs17.6
and arrive at our Sep’10 target price of Rs210 (from Rs208 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. Key risks to our recommendations are
higher sugar realisation and lower cane price than our assumptions.
| NIFTY 
