Stock Review: Shree Renuka Sugars (SRSL)

THE country's largest sugar company, Shree Renuka Sugars (SRSL), seems to have started reaping the benefits of its contrarian move to acquire two overseas sugar companies when sugar prices were close to their peaks. However, it needs to be seen whether the company will truly emerge as an outlier among domestic sugar firms all of whom are in losses as the commodity price cycle has turned unfavourable since January this year. A lot will depend on its ability to navigate through poor price scenario amidst rising raw material cost in the domestic market and the operations in Brazil that accounts for a little less than half of its total revenues.

   There are concerns that there will be lower-than-expected sugarcane production in Brazil, the world's largest producer of sugar, which can affect volume growth for the overseas subsidiaries of SRSL. But, the Brazilian units could yet generate better realisation, as international prices recently hit a 30-year high before moderating over the past few weeks after the Chinese government released sugar reserves to cool down inflation.

   A similar prospect has built up in India where local sugarcane production is projected to be below the previous consensus estimates. Domestic sugar prices are still down by a fifth over the year-ago period, but there has been a gradual 9% price rise since August.

   But SRSL is already showing signs of outperforming the rest of the sugar pack. The company's scrip has risen 43% since July compared with just 19% return clocked by 10-stock benchmark ET Sugar Index. This is partly due to positive numbers for the quarter and the year ended September 30. SRSL has almost doubled its revenues to . 7,854 crore and it consolidated net profit increased nearly three fold to . 715 crore for the financial year ended September 30, largely due to contribution from the Brazilian arms. It has fared better than its domestic peers, all of whom have either swung into losses or have seen profits crumbling with year-onyear decline in prices. SRSL also saw margins improve significantly with consolidation of numbers of its Brazilian units that enjoy better profitability compared with Indian sugar-makers, who have to deal with a heavily regulated local market.

   Sugar prices could remain volatile, although some global research houses have projected further rise in international prices. The impact on SRSL's financials may differ from other local firms. While the company's topline performance should continue to grow for at least two quarters due to the consolidation of numbers of its overseas firms, the growth of net profit will depend on sugar prices and how the company manages its debt pile.