>Shree Renuka Sugars Ltd. (MERRILL LYNCH)

Stocked for strong Apr-Sep09

■ Muted H1FY09 PAT on stock built up for a strong H2; Buy
Renuka sugar has reported only 7% PAT growth in H1FY09 (Oct08-Mar09) including 4% y-o-y growth in Q2FY09. In contrast to muted PAT, EBITDA grew 38% y-o-y in H1FY09 driven by (1) better margin and (2) higher sales volume. Increase in interest burden by 130% owing to 0.5mn tonne rise in sugar inventory is the key reason for flat earnings in H1FY09. We expect Renuka earnings to rise .6x in H2FY09 driven by (1) 70% rise in sugar sales (2) 140% jump in alcohol
sales (3) 96% jump in electricity sales and (4) higher prices for sugar and ethanol. Maintain Buy on strong earnings growth in H2FY09E and FY10E. Our PO of Rs120 is based on 6xFY10E EBITDA, stock is now at 5.06x FY10EBITDA.

■ Favourable outlook intact for 48% PAT growth in FY10E
We expect raw sugar imports to gather pace well into FY10E and we expect Renuka to sustain strong profitability and achieve higher volume given that it has dedicated raw sugar refinery having the lowest cost of production. India’s demand for imports is likely to rise to a total of 7.5mn tonnes including FY09 and FY10E due to a sharp drop in cane production. India so far has contracted to import only 1.5mn tonnes out of which 50% is by Renuka.

■ Key risk is govt intervention against price rise
Sugar prices in India fell 8% last week following a series of govt initiatives including close monitoring of stocks at the mills. Govt action follows over a 20% rise in sugar prices prior to last week. Further govt action could hurt the earnings outlook. Renuka’s earnings in FY10E could drop 2.6% for every 1% drop in sugar prices. However, our earnings estimate for FY10E is just 5% higher than current sugar prices and 8% below the recent peak in sugar prices.

To see full report: RENUKA SUGAR