Stock Views on SKS MICROFINANCE, SHREE RENUKA SUGARS

MACQUARIE on SHREE RENUKA SUGARS

Macquarie maintains `Outperform' rating on Shree Renuka Sugars (SHRS) and raises the target price to 115. Domestic sugar volume increased 36% Y-o-Y and average realisation grew 8% to 26.7/kg. However, sugar EBIT declined 74% due to the sale of high-cost inventory. Ethanol sales volume declined 75% Y-o-Y but realisations improved 85%. Cogeneration revenue growth was driven by a 67% increase in units supplied to grid, which was partially offset by lower merchant rates. SHRS has hedged its raw sugar sales in Brazil at $20.5c/lb through the purchase of put options. This reduces the impact of global price volatility on SHRS' realisation. Management has guided for 11.5 mt sugarcane crushing at its newly acquired Brazilian assets. Given favourable global sugar fundamentals and better realisations and operational efficiency in Brazil, Macquarie maintains the positive view on SHRS.

JP MORGAN on SKS MICROFINANCE

JP Morgan maintains `Underweight' rating on SKS Microfinance and reduces the target price by 30% to 700. They believe that the headwinds for SKS and the MFI industry are still not over. The stock is still expensive at the 1-year forward price to book of 2.6x, and the issues with the sector are quite deep. JP Morgan's key earnings changes capture the AP (Andhra Pradesh) situation on multiple fronts:

 

a) a drying up of disbursements in the state

b) margin pressures from rising fund costs, lower yields and negligible securitisation,

c) higher credit costs from one-time losses in AP and

d) lower opex.

 

The microfinance business model is being challenged in public debates on multiple fronts - efficacy in poverty alleviation, impact of high interest rates on borrowers, existence of over leverage among borrowers, to name a few. JP Morgan thinks SKS is still very expensive at 2.6x 1-year forward PB - and the risk reward still favours the private banks given better scalability and earnings visibility.