Stock Review: Shree Renuka

 

Shree Reunka Sugars (SRSL), the country's largest sugar refinery by revenue, reported a triple-digit growth in the bottomline for the June 2011 quarter following the contraction of growth in the net profits in the two consecutive quarters.

The robust growth in profit can be attributed to the fact that this was the first quarter to fully reflect consolidation of SRSL's acquisition of VDI, a Brazilian sugar company in March 2009. In addition, a 9% decline in the raw material cost boosted its operating margin by 20% as compared to 10% a year ago.

The company has been able to survive the downturn in the sugar sector since the past two years due to its overseas acquisitions. This has helped the company to remain as an outperformer as compared to its pure domestic sugar player.

As per the latest estimates, the sugar production is estimated to be 26 million tonnes for the current sugar season (September'10-October'11) against the domestic consumption of 24 million tonnes. However, the expectation of the increase in the export quota from 0.5 million tonnes to 1.2 million tonnes has led to 3% rally in the sugar prices in the past three months. This could support the sugar companies with better operating margin and besides lower raw material cost in the current sugar season.

The international price of raw sugar is firm due to lower-than-expected sugar production in Brazil. A clear picture of actual production in both Brazil will be visible in the next four months, when sugar production will end.

SRSL scrip outperformed the 32-stock ET Sugar Index declining by 1% in the past three months compared to a 7% drop in the sugar benchmark index and a sharp correction in the broader capital market.

 
Sugar prices are expected to remain in the range of . 28-30 in the domestic market although volatility can be seen in international sugar prices. This could have an effect on SRSL since it derives close to half of its revenue from the international market. With the expectation of more revenue from the international market, the company's financial performance may vary from that of the domestic players in the coming quarters.