We met Mr. K.K. Kumbhat, CFO, Shree Renuka Sugars (SHRS) to take an update on their business and the sugar industry as a whole. Key highlights of the meeting are:

- Expecting lower sugar production in India during SS13: Domestic sugar industry is likely to witness lower sugar production of 22m MT during the sugar season (SS) 2013 v/s SS12 of 25.8m MT owing to deficient rainfall across India.

India could see its sugar opening stock, consumption and closing stock at 5.5m-6.0m MT, 23.5m MT and 4.5m-5m MT, respectively in SS13 (v/s 5.5m MT, 22.7m MT and 5.6m MT in SS12). Government is unlikely to allow sugar export in the next season i.e. SS13, considering lower sugar production v/s 3m MT in SS12. Expectation of lower sugar production has resulted in sharp increase in domestic sugar prices over the past two months (from Rs29/kg to Rs35/kg); Sugar Prices have recently softened a bit by Rs1-2/kg. Company expects domestic sugar price at around Rs35/kg in the next 3-4months. If the domestic rainfall situation worsens, going forward, it could lead to an upward movement in domestic sugar prices in the future.

- Karnataka (KN) and Maharashtra (MH) are likely to drag production in SS13: Largest sugar producing state i.e. MH is likely to witness lower sugar production at 7m MT in SS13 v/s 9.2m MT in SS12 (in-line with MH government estimate), primarily on account of drought situation in some of its districts. KN is expected to see production of 3m MT in SS13 v/s 3.8m MT in SS12 owing to deficient rainfall. Management believes that KN sugar production estimate could fall further due to the extensive damage to sugarcane crops in the state and it is based on peak sugar recovery rate. Uttar Pradesh and other states (like Tamil Nadu, Gujarat, Bihar, Punjab and Haryana) are likely to see sugar production of 6.5m MT and 5.5m MT in SS13, respectively (v/s 6.8m MT and 6m MT in SS12).

- Brazil - sugarcane crushing picked up in Jul-Aug: Sugarcane crushing in Brazil, world's biggest sugar exporter, has finally commenced after a one-month delay i.e. May 2012. Further, heavy rains in June affected sugarcane crushing, thus, it was lower by 29% YoY during Apr-Jun'12. Consequently, global sugar prices have increased from c19.5/lb to c24/lb (raw sugar) during Jun/Jul. However, sugarcane crushing has picked up considerably in the month of Jul/Aug which lowered the sugarcane crushing gap from 29% to 13% YoY. It led to a fall in global raw sugar prices from c24/lb to c19.5/lb in the past one month. Management believes that global sugar prices are unlikely to go below c19/lb because ethanol price parity stood at around c20-c21/lb.

SHRS will declare Q1FY13 consolidated results (incl. Brazilian operation) in the next 2-3weeks. We believe that performance of Brazilian subsidiaries could disappoint during Q1FY13 due to lower-than-expected sugarcane crushing, inline with the Brazilian sugar industry. However, the company has indicated that sugarcane crushing has significantly improved in Jul/Aug.

- Maintaining its sugarcane crushing guidance: SHRS is maintaining its sugarcane crushing guidance of 4-4.2m MT and 9.5-10m MT in India and Brazil, respectively during FY13 (v/s 4.9m MT and 8.2m MT in FY12). Management expects that company could refine higher raw sugar v/s guided in Q1FY13 post result conference call (i.e. 0.85m-0.9m MT) in FY13. Company has a consolidated debt of Rs98bn (India - Rs50bn, Brazil - Rs48bn) as on June 30, 2012, with the average rate of 6.5%. Company expects that consolidated debt will come down considerably in the next two quarters. Brazilian subsidiaries VDI and RDB's debt repayment will start from Oct 2012 and Apr 2013 to the tune of BR$50-60m PA and BR$200-220m PA, respectively. Company is not expecting any policy reforms in India in the near term.

- Outlook and Valuation: We believe that domestic demand and supply situation still looks comfortable despite lower sugar production by 3m-4m MT in SS13 because the shortfall is likely to get compensated by lower sugar exports by the government. We expect that domestic sugar prices may stay at the current levels in the next 2-3 months considering tight sugar supply situation due to festive season In India. We will adopt a wait-and-watch approach towards the domestic sugar market in the next couple of months.

SHRS' stock price has seen a steep correction post Sept-11 quarterly results on account of downward revision in earnings due to impact of adverse weather in Brazilian operations. We believe that Brazilian operation could see a sharp turnaround in the next 18-24months considering normal weather/yield condition. It would lead to generation of substantial cash and ultimately, step towards reduction in debt burden. We maintain our 'Accumulate' rating on the stock, with a TP of Rs38 (2xFY13E BV). Slow turnaround in Brazil could lead to postponement of our earnings.

Source: Equity Bulls


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