Shree Renuka Sugars: Sweetening the deal

If renegotiated, the Equipav acquisition would relieve some stress on valuations and the balance sheet.

The Equipav deal renegotiation will be a positive for Shree Renuka Sugars, as it will pay 25 per cent less for the acquisition. Also, the stress on its balance sheet will be lower now. Moreover, the valuation will become more rational and in line with industry trends.

The 51 per cent stake in the Brazilian sugar company’s 10.5-million-tonne capacity is likely to cost around Rs 1,150 crore, down from the earlier bid of Rs 1,530 crore. Operationally, Equipav has been on a strong footing, with two plants located near cane-crushing facilities. Moreover, cane supply comes from cultivation of 1,15,000 hectares land, of which two-thirds is farmed by the company, say analysts. For this, Shree Renuka was paying around $115 per tonne of cane crushing capacity, which was a tad expensive, considering some of the past deals. The new valuation is around $100 per tonne.

Analysts at HSBC Global Research reckon this as reasonable when compared to the going norm of $77-97 per tonne. Shree Renuka had earlier acquired Vale Do Ivai (VDI) at $77 per tonne. Similarly, Cosan SA acquired Nova America at $80 per tonne in January 2009. However, the company will have to raise debt of around Rs 450 crore (it has Rs 800 crore cash on its books) to fund the acquisition. Analysts estimate the consolidated net debt-to-equity to rise to two times from the present standalone net debt-to-equity of -0.1 times.

Moreover, with sugar prices crashing, realisations will not remain remunerative and the acquisition may not be earnings accretive in the current year. The trigger, say analysts at HSBC, could be from a possible hedging of sugar prices above 18 cents a pound. This will result in an operating profit of $15 per tonne. The company remains sensitive to sugar prices and a rupee per kilogram change has the potential to impact net earnings by 11 per cent during the current financial year.