Sweet season ahead for Renuka Sugars

The sugar industry is set to see better days ahead. Experts foresee a favourable demand supply dynamics in sugar season (SS) 2009 and 2010 leading to an increase in sugar prices. This is on the back of expected fall in production in SS2008 and 2009. A sugar season lasts typically from October to September.

Among all sugar players, one of the best bets is, Belgaum based, Shree Renuka Sugars (SRSL). Apart from sugar, the company also has interests in power, ethanol and bio-fertilisers. Interests in various businesses help the company de-risk its business model.

Consolidated revenues of the company grew by 174.5% in the June 2008 quarter over June 2007 to Rs 701 crore on account of higher trading revenues. However, higher interest costs and forex loss lead to a flat net profit growth at Rs 36.5 crore.

SRSL recently signed a memorandum of understanding (MOU) with Hindustan Petroleum Corporation (HPCL) to form a joint venture (JV) for setting up an integrated sugar and ethanol plant in Maharashtra.

This is likely to augur well for the company.

Analysts maintain that the JV will help is decreasing the purchase of molasses and substitute it sugarcane. Molasses happens to be relatively costly than sugarcane. Further, marketing of ethanol becomes easy if HPCL decides to use the entire output (55 million litre) processed at the Mumbai refinery for 10% blending.

The approval of 20% biofuels blending in all auto fuel by 2017 by the Union Cabinet augurs well for SRSL. Experts foresee that the HPCL and SRSL JV will divert major portion of sugar production to produce ethanol.

At Rs 102.85, the stock trades at 9.9 times its estimated earnings for 2009. Higher sugar and ethanol prices are expected to add substantially to the earnings of SRSL. In order to capitalise on rising sugar prices, the company has planned to expand its sugarcane crushing capacities to 35,000 tonnes crushing per day (TCD) by 2009 from 25,250 TCD in 2007.