Stock Review: SHREE RENUKA SUGARS

Shree Renuka Sugars (SRSL), the country's largest sugar refining company by revenue, reported a second consecutive decline in net profit in the March 2011 quarter. The poor performance is reflected in SRSL's stock price, which has declined 38% in the last six months.

During the March quarter, it underperformed its northbased peer group due to lower contribution from high-margin Brazilian operations. Its peers — Balrampur Chini Mills, Bajaj Hindusthan and Triveni Engineering — posted gains on the back of lower increase in raw material costs with average sugar realisation of . 30 in the quarter.

The firm's topline growth was a meagre 2.8% during the quarter due to lower realisation in the Indian market, besides lower operating profit from the overseas business. Moreover, despite increase in raw material costs — which account for close to half of its total expenses — being relatively lower, the company failed to improve its operating margin. This is because contribution from its high-margin Brazilian operations dwindled during the quarter. Since it accounts for more than half of the operating profit, operating margin dropped by 100 basis points to 20% from the year-ago level.

Mounting finance charges was another concern for SRSL. The debt-driven acquisition of Brazilian operations nearly two years ago has increased SRSL's interest outgo seven times, besides the five-fold increase in depreciation. As a result, the company's net profit almost reduced to three-fourth to . 58 crore from a year ago.

The current sugar season could feature a surplus sugar production for the second consecutive year. Indian sugar production is estimated to be 24.5 million tonne for the current season. This has resulted in a 3% drop in sugar prices in the last three months. The downward trend in sugar prices is likely to put pressure on operating margins of sugar producers in the coming quarters.

But with the expectation of better realisation from sugar sales at its Brazilian operation, besides a recovery in international sugar prices, SRSL is expected to post better results in the coming quarters. However, its higher debt is a major worry.