Stock Review: Renuka Sugars

SUGAR refiner Shree Renuka Sugars (SRSL) fared better than its peers during the quarter ended June 30, 2010. The consolidation of its recent overseas acquisitions helped the company cushion the deteriorating performance of its domestic business. The company is expected to continue the momentum even in the next quarter given the benefit of consolidation for the next two quarters.

   The domestic sugar industry has been facing a downward pressure on prices. Sugar prices have shrunk by a third when compared with the peak in January this year. While this has adversely impacted other sugar companies, SRSL is the only company that is still churning profits helped by profits from its recently acquired Brazilian assets. SRSL reported a 16% increase in net profit during the June quarter buoyed by two-fold jump in consolidated revenue. Had it not been for the consolidation of the Brazilian subsidiary, SRSL would have reported a net loss. The domestic scenario for sugar prices has changed in the current sugar season that began in October 2009 and will end in September 2010. In the current sugar season, volumes are strong but higher cost of raw material and declining sugar prices have impacted bottomlines. This was, however, not true for SRSL. It posted double-digit growth in operating profit buoyed by earnings of its Brazilian firm Vale Do Ivai Acucar E Alcool (VDI) since the March 2010 quarter. VDI accounted for 35% of its consolidated operating profit. Further, VDI's lower cost of operation contributed significantly to the consolidated operating margin. VDI had operating margin of 50% that helped SRSL report consolidated operating margin of 11% for the three months ended June.

   But VDI has relatively low net margins explained by the debt on its books which resulted in single-digit growth in consolidated net profit to 90 crore for the June quarter over the year-ago period. SRSL has unique business model that focuses more on refining sugar. It has also moved up in the value chain from being a pure sugar player to an integrated bio-fuel firm. It also has an advantage compared to Uttar Pradesh-based peers such as Bajaj Hindusthan. In Karnataka, where SRSL operates, cost of operations is less with respect to access to raw material besides other positives like proximity to ports. Given this, outlook for the quarter ending September looks bright. This is also because SRSL will consolidate earnings of its other bigger Brazil company Equipav that it acquired early this year. Equipav is going to account for close to half of the consolidated revenues. This means SRSL's topline is secured against the bleak domestic scenario. However, whether the company will continue to make profits will depend on how significantly raw material cost increases in India, besides interest and depreciation for its overseas business.