Brazilian acquisitions may sweeten Renuka Sugars' bottomline in Q2

Sugar-refiner Shree Renuka Sugars (SRSL) fared better than its peers in the June 2010 quarter. The consolidation of its recent overseas acquisitions helped the company cushion the deteriorating performance of its domestic business. The company is expected to continue the momentum even in the next quarter given the benefit of consolidation for the next two quarters.

The domestic sugar industry has been facing a downward pressure on prices. Sugar prices have shrunk by a third compared with the January peak this year. While this has adversely impacted other sugar companies, SRSL is the only company that is still churning profits helped by earnings from its recently acquired Brazilian assets.

SRSL reported a 16% rise in profit in the June quarter buoyed by a two-fold jump in consolidated revenue. Had it not been for the consolidation of the Brazilian subsidiary, SRSL would have reported a net loss. The domestic scenario for sugar prices has changed in the current sugar season ending September 2010.

Till last year, sugar prices were firm given the shortage of sugarcane crop. This helped sugar companies earn better profits even though production volume was low. In the current sugar season, volumes are strong but the higher cost of raw material and declining sugar prices have impacted the bottomlines of companies.

This was however not true for SRSL. It posted a double-digit growth in operating profit buoyed by earnings from its Brazilian company Vale Do Ivai SA Acucar E Alcool (VDI) since the March 2010 quarter. VDI accounted for 35% of its consolidated operating profit.

Further, VDI’s lower cost of operation contributed significantly to the consolidated operating margin. VDI had an operating margin of 50% that helped SRSL report consolidated operating margin of 11% for the June quarter. But VDI has low net margins which is explained by the debt on its books which resulted in single-digit growth in consolidated profit to Rs 90 crore for the quarter over the year-ago period.

SRSL has a unique business model that focuses more on refining sugar. It has also moved up in the value chain from being a pure sugar player to an integrated bio-fuel firm. It also has an advantage compared to Uttar Pradesh-based peers such as Bajaj Hindusthan, in Karnataka where SRSL operates, as the cost of operations is less with respect to access to raw material besides other positives such as proximity to ports.

The outlook for the quarter ending September looks bright. This is also because SRSL will consolidate earnings of its other bigger Brazil company—Equipav that it acquired early this year. Equipav is going to account for close to half of the consolidated revenues. This means SRSL’s topline is secured against the bleak domestic scenario. However, whether the company will continue to make profits will hinge on how significantly raw-material cost increases in India besides interest and depreciation for its overseas business.

source: ET