>Shree Renuka Sugars Limited (MERRILL LYNCH)

More to come

■ Raise PO to Rs293 on higher sugar price, 50% upside
Renuka Sugar remains our top sector pick owing to its low-cost sugar refinery. We raise our PO from Rs198 to Rs293 driven by an 86% upgrade in FY10E EPS owing to a higher sugar price. However, we have cut our PO basis from a FY10E EV/EBITDA of 7.5x to 6x as FY10E profit includes a non-recurring inventory gain of Rs6bn. The stock is trading at a trough FY10E EV/EBITDA of 4.7x.

■ Ample stock and rising sugar price driving up FY10E EPS
We expect FY10E EPS to grow 257% driven by (1) a 113% jump in sugar volume and (2) a 34% rise in sugar price. We raise FY10E EPS by 86% driven by a 25% higher sugar price. The sugar price increase is directly impacting the bottom line given that the 1.75mn tonnes of sugar to be sold in FY10E includes white sugar stock of 0.3mn tonnes and raw sugar stock of 1.2mn tonnes.

■ Brazil sugar mill acquisition could yield further upside
Renuka Sugar is looking to acquire a sugar mill in Brazil to hedge its sugar refining from volatile raw sugar costs. We believe a successful acquisition could be value accretive as (1) Brazil sugar mills are trading at around US$90-110/t of cane crushed, which is about 10-15% cheaper than Indian mills, and (2) the Brazil mill could help Renuka’s raw sugar refinery benefit from backward integration and yield a lower cost structure.

■ Flood to delay crushing, but will not hurt sales significantly
Renuka has all its cane crushing mills in Maharashtra and Karnataka and is thus exposed to the possible adverse impact of flooding in these areas in October 2009. Consequently, we cut our assumption for the amount of cane to be crushed in FY10E by 11%. The flood is also likely to delay crushing by 15 days. However, we expect the higher sugar price and refinery throughput to compensate.

To see the full report: SHREE RENUKA SUGARS LTD