>Shree Renuka Sugars Limited (MORGAN STANLEY)

Quick Comment: Maintain OW - We expect sugar companies in India to report record high earnings in F2010. Domestic sugar commodity prices have increased by around 30% over the past month even as sugar stocks trail domestic sugar prices, up 0-12% in the same period. The consensus – only thin coverage – is constructive toward the sector but the market seems skeptical. We are buyers of the sector as we think: 1) sugar production in India will surprise on the downside, 2) 2-3mn tons of incremental sugar will have to be imported – prices will likely rise further to discourage unmet demand, and 3) India will continue to import sugar in F11 – domestic prices are unlikely to collapse in the medium term.

1QF10: Strong Numbers; Best is yet to Come – OW

What's new: Shree Renuka Sugars (SHRS) reported 1QF10 results with consolidated revenues, EBITDA and PAT at Rs14.3bn, Rs3.6bn and Rs2.6bn, respectively. Revenue growth for the quarter was driven by a combination of higher realization across business segments, trading gains and strong operational performance of the refinery business. Interestingly SHRS has an imported white sugar inventory of 0.1mn tons at around Rs38,000/MT. The management seems to be preparing for intensifying sugar supply concerns in India around June-July 2010 as the country runs out of sugar or alternatively the government is forced to import sugar at high prices, in our view.

Value creation through ‘sugar trading’: An estimated 23% of the company’s standalone profits in 1QF10 are sugar trading profits. This is primarily on account of the company booking profits by selling some of the imported raw sugar inventory to other mills and entering into back-to-back contracts for fresh delivery in the futures market, thereby taking advantage of the sugar futures curve, which remains in steep backwardation. While this may be considered as one-off profits, it underpins our view on management’s focus on maximizing returns across business segments.

To read the full report: RENUKA SUGARS