Motilal Oswal recommends `Buy` on Shree Renuka Sugars

Motilal Oswal has recommended `Buy` on Shree Renuka Sugars (Q,N,C,F)* with a price target of Rs 119 as against the market price (CMP) of Rs 90 in its report dated Nov. 22, 2010.

The brokerage house gave the following investment rationale:

Emerging global giant: SRS is the only sugar/ethanol producer in the world with almost year-long cane crushing operations as it has operations in Brazil and India, which have complimentary cane crushing seasons. This allows it to maximize/plan inventory, benefit from price arbitrage between sugar/ethanol, raw/white sugar and play price arbitrage between India`s regulated sugar industry and liquid global markets. It also allows SRS to leverage on synergies, minimize risks and offer steady returns despite the cyclical nature of the industry.

Brazilian acquisitions a `game changer`: In FY10 SRS acquired 100% in Vale do Ivai (EV: USD 240 million) and 50.34% in Renuka do Brasil (the erstwhile Equipav) (EV: USD 1.42 billion), which propelled it from a leading Indian sugar company to among the largest integrated global sugar players. SRS now stands to benefit from the ongoing recovery in the global sugar industry. Brazilian acquisitions are characterized by (i) assured low cost cane availability for 6-12 years, and (ii) a settled balance sheet with debt at less-than-market costs and repayment over years. Cash flows from the Brazilian operations would be self sufficient to meet obligations and yield a surplus. We model a payback period of four years for VDI and seven for Renuka do Brasil. Renuka`s Brazil business (seventh largest by size) has potential to list and unlock value for Renuka shareholders in the medium term.

Resilience to down cycles: SRS`s integrated, diversified and flexible business model makes it more resilient to cyclical downsides. Over FY06-10, SRS grew from a relatively small domestic sugar play to a global giant, maintaining average RoE of 32.4% and EPS CAGR of 20% in a cyclical industry, which speaks volumes about its innovation, vision and capabilities.

Target price of Rs 119; Buy: SRS is the best proxy to play the global sugar industry recovery and is a direct play on rising sugar/ethanol prices. Strong cash flow visibility will allow it to de-leverage itself and address concerns regarding its high leverage. We expect SRS to post revenue and net profit CAGR of 19% and 20% respectively, over FY10- 12. We value SRS at Rs 119, based on EV/EBITDA of 6x FY12 EBITDA an upside of 32%. Initiate coverage with Buy.

source: myiris