Bitter outlook for Renuka Sugars

May post loss on rising debt, higher costs, subdued realisations; turnaround may take some time.

Shree Renuka Sugars has seen its share price tank from Rs 52 on November 11 to Rs 28.55 currently. While high debt and firm sugarcane (raw material) prices are hurting earnings, there is expectation that sugar prices could fall in the event of higher domestic production and further hit its financials. While downgrading the stock from buy to underperform, Sanjaya Satapathy of DSP Merrill Lynch, in his note on the company last month, had projected a loss of Rs 4.3 per share in 2011-12 (18 months ending March 2012) as compared to a profit of Rs 9.5 per share in the earlier financial year. The concerns are reflecting in the stock’s valuation of one times the 2011-12 estimated book value or 0.6 times its replacement value (lowest in five years). However, these low valuations does not mean the share price will not correct further, especially considering the company’s rising debt levels and issues dogging the industry.

Realisation, supply concern
The biggest issue is the subdued outlook for the domestic sugar industry due to an increase in supply. The closing stock for the sugar season (12 months) ended September 2011 was four million tonnes. In season 2011-12 (ending September), domestic production is pegged at 26.5 mt; with the closing stock, this would take sugar availability to 30.5 mt. Domestic consumption is about 23 mt. This is also why prices did not move much till the government approved export of a million tonnes, which has eased some supply pressure.

HIGH ON DEBT
Rs  crore	SS12*	FY12E**	FY13E
Sales	8,662	12,262	10,065
Ebitda margin (%)	12.0	14.8	16.0
Net debt/equity (x)	4.0	4.0	3.5
Interest cover (x)	1.6	0.6	1.4
Net profit	-308	-288	225
EPS (Rs )	NA	NA	3.4
PE (x)	NA	NA	9.2
E: Estimates Adjusted net profit stood at Rs  262 crore for trailing 12 months to Sept’ 2011 * for October 2010-September 2011 sugar season **For 18 months ended March 2012 Source: BofA Merrill Lynch report (dated Nov 13)

However, except from the volume perspective, the move did not prove helpful for companies like Renuka Sugars. For, after the move, international sugar prices have dropped. Earlier, at 25 cents per pound, international prices were fetching about Rs 32-33 per kg (ex-mill) to producers. Since the drop, even if the impact of the recent depreciation in the rupee is taken into account, export realisations are near domestic prices, at Rs 31 a kg. Internationally, too, the sugar surplus is pegged at about 4.5 mt, which means not much scope for realisations to improve soon. While soft realisations are hurting, the recent rise in sugarcane prices (about 10 per cent) will check its profit margins at home.

Brazil, debt
Shree Renuka generates about 40 per cent from domestic operations. The remaining revenues are contributed from operations in Brazil, also in the news for decline in cane yield and realisation. “Renuka do Brasil (its Brazil subsidiary) has suffered one of the worst effects of the drop in yields. Our yields are cumulatively down by 30 per cent,” said Narendra Murkumbi, vice-chairman and managing director, Shree Renuka Sugars, in a conference call last month.

Further, the management has lowered its sugarcane crushing expectation to about 8.3 mt in 2011-12 against the earlier 10 mt for the Brazilian subsidiary. This is one reason analysts believe the next few quarters would see moderate revenue growth and pressure on margins. Apart from operational pressure, analysts are also worried about the company’s high debt. As on September, consolidated debt was Rs 8,612 crore, a debt-equity ratio of 4.02. “High debt remains an overhang on the stock, as the company continues to suffer due to higher interest outgo,” says Shishir Goenka, analyst at B&K Securities.

For FY12 (18 months ending March 2012), analysts expect the debt-equity ratio to remain high, with interest payments estimated at Rs 980 crore. The latter is fairly large compared to last year and interest outgo for the trailing 12 months to September was Rs 657 crore, up 177 per cent compared to the year-ago period. Despite high estimated operating profits in FY12, this would keep profitability under pressure. Broadly, while analysts expect the company to end the current financial year with a loss, any turnaround may happen only in the next one. The management is open to divesting some stake in the co-gen power business (138 Mw) or sell stake in one of the Brazilian facilities. If this happens, it would help lower debt.