Stock Review: Shree Renuka Sugars

THE going hasn't been very good for Shree Renuka Sugars over the last two quarters. Its profitability has fallen and debt has ballooned after it acquired a company in Brazil last year. The stock has been hit due to poor results, increased debt and a peak off in global sugar prices. Consequently, analysts cut earnings per share by 30 per cent for the financial year ending September 2011. However, the price target for the stock has also been revised to `100.

On the face of it, Shree Renuka is an interesting story, as it is the second-largest manufacturer of sugar in India and largest trader of sugar. However, what has not worked for the company is the high level of debt on its book.

With the interest rates rising, payouts, too, have increased for the company. It had a gross debt of `7,200 crore, as of December 2010, and a liability of `3,800 crore, as of September 2010, says a foreign brokerage house report. After the acquisition in Brazil, depreciation provisioning has increased from `19.5 crore to `168 crore in the financial year starting October.

The cost of interest increased drastically from `29.4 crore to `116.5 crore due to the large debt on the Brazilian subsidiary's books. Gross debt to equity is at three times, which is fairly risky in a rising interest rate scenario. This, coupled with volatile sugar prices, may spell trouble for the company. Analysts feel the company can mitigate this risk by signing long-term contracts.

Despite the concerns stemming from high debt and interest costs, analysts like the stock. It has manufacturing bases in Maharashtra and Karnataka, close to the western coast of India. The company is also the largest manufacturer of ethanol blended with gasoline. Renuka is the only company with sugar mills in India and Brazil, with 60 per cent of its crushing capacity in Brazil and the rest in India.

A foreign brokerage report, says, "We believe Renuka Sugar — with the largest raw sugar refining capacity, distillery and mills in Brazil — to be the best placed to benefit from the robust prices of sugar and ethanol over the next two years. It is likely to see strong earnings growth from June 2011, after a gap of four quarters, which, in turn, will drive rerating."