New terms better, but sugar outlook not sweet

About four months after the initial announcement, Shree Renuka Sugars announced on Wednesday the details of the re-negotiated terms for the acquisition of Equipav SA of Brazil. While the new terms indicate a saving that is equivalent to about nine per cent of Renuka’s market value of Rs 4,554 crore as on Tuesday, the company will also benefit from the relaxation of Equipav’s debt obligations.

The markets, however, didn’t seem to be excited, perhaps due to the news about the renegotiation happening at a 25 per cent lower price. After scaling an intra-day high of Rs 70.10, Renuka’s stock closed at Rs 68, reflecting a decline of 1.09 per cent over Tuesday’s closing compared to the Sensex’s gain of 0.04 per cent.

New terms, slightly better
According to the revised agreement for acquiring a 50.34 per cent stake in sugar and ethanol producer Equipav, Renuka will be investing $250 million (or Rs 1,151 crore) as against $339 million (about Rs 1,550 crore) earlier for 50.79 per cent. The reduced outgo will mean lower stress on its balance-sheet, given that Renuka’s consolidated debt-equity ratio stood at 1.21 as on March 2010.
 

BITTER SUGAR
In Rs crore	FY10E	FY11E
Net Sales	6381	5782
Net Profit	731	410
EPS (Rs)	12.6	7.3
P/E (x)	5.4	9.3
E: Estimates for year ending September, excluding Equipav   Source: Bloomberg

Notably, the company expects to fund the deal from internal accruals and cash balances (about Rs 700 crore as on March 2010), which should keep a tab on its existing debt level. About half of the $250 million will go towards repaying loans and providing working capital needs, which should also help lower Equipav’s current total debt of $840 million. Also, the new terms indicate that Renuka will have to repay this debt over a period of 10 years, as against eight years earlier.

For the remaining $120 million, the company will use it to enhance Equipav’s cane crushing capacity from 10.5 million tonnes (mt) to 12 mt and power co-generation capacity from 203 Mw to 295 Mw. Of the latter, about 100 Mw is estimated to be sold to third parties, and will help earn revenues. Overall, the Equipav acquisition takes Renuka closer to becoming an integrated global sugar and ethanol producer besides partly mitigating the vagaries of the regulated domestic sugar market.

At an enterprise value of $1.147 billion (Rs 5,311 crore), the deal is valued at $109 a tonne, including about $30 towards power capacity and $79 a tonne for crushing capacity. Analysts say this is in line with Brazilian deals done at $75-95 a tonne in the recent past. Even Renuka’s acquisition of Brazil-based VDI at $77 a tonne suggests the Equipav deal is fairly valued.

Near-term outlook, not so sweet
Renuka’s VDI operations are expected to deliver healthy performance as it has booked its sugar (fully) and ethanol (partly) production for the current year at fixed prices. Equipav, too has booked sales of sugar output for the current year. However, while it may not add to Renuka’s consolidated earnings in the current year ending September 2010, expect substantial contribution thereafter.

On the domestic front, sugar players are expected to report a loss in the business due to the high cost of inventories consequent to high cane prices and lower sugar prices. Analysts, however, expect companies to do well in the next year. Meanwhile, global sugar prices are up 25-30 per cent from lows and are expected to remain steady at current levels, while ethanol prices are also likely to stay firm. This should prove helpful for Renuka.

Given its integrated operations and diverse revenue (sugar manufacturing and trading, co-generation and ethanol) and geographical mix, the impact of the fall in sugar prices is expected to be relatively lower. Most analysts have a ‘hold’ rating on the stock.