>Shree Renuka Sugars Ltd. (MERRILL LYNCH)

■ PAT of Rs2.24bn up 7x y-o-y, but 10% lesser on FX loss
Renuka Sugars reported PAT of Rs2.24bn in Mar 2010 quarter, up 7x y-o-y and down 14% q-o-q. Profit growth was driven by (1) sugar price increase of 78% y-oy to Rs33.6/kg; (2) volume increase of 96% y-o-y to 239mn kg; and (3) inventory gain on low cost materials contracted in anticipation of sugar price rise. The company’s profit, however, came in 11% lower than our estimate as the company had translation loss in its international subsidiaries owing to rupee appreciation.

■ 1mt sugar inventory at Rs25/kg is cheaper and profitable
At the end of Mar 2010 Renuka had total sugar stock of 1mt including 0.6mt white and 0.4mt raw. Average cost of the inventory is Rs25/kg compared to current sugar price of about Rs27/kg can yield Rs2bn EBIT in H2FY10, while most of its peers will have losses owing to higher cost of inventory.

■ Balance sheet is in good shape and can add Equipav
Renuka’s net debt to equity increased to 0.8x at the end of Mar 2010 compared to 0.5x at the end of Sep 2009. Increase in net debt to Rs15bn is primarily due to consolidation VDI of Brazil. Net debt to equity is likely to go up to 1.7x following consolidation of Equipav. However, we are not concerned about this debt level as there is three year moratorium on debt payment by its Brazil subsidiaries.

■ Buy Renuka on diversified business and ethanol price hike
We maintain Buy as Renuka could limit its ROE decline yet again in this downcycle to 17% driven by (1) 3x jump in distillery volume owing to jump in molasses supply in addition to 29% increase in ethanol price as decided by govt recently; (2) around 60% increase refining volume led by commissioning of 1mt Mundra refinery in Dec10; and (3) 2x jump in power sales driven by higher
utilization. Our PO of Rs80 is at 1.8xFY11e P/B owing to 17% trough ROE.

To read the full report: SHREE RENUKA SUGAR