>SHREE RENUKA SUGARS LIMITED: Sweetened acquisition

■ Reduced acquisition cost & sugar price stability raises hope: Renuka has finally completed acquisition of 50.34% stake in Brazil’s Equipav for US$250m and at 25% discount to the cost agreed upon in Feb. The deal will be funded by existing cash of about Rs4.5bn and draw down of Rs6.5bn from cash credit account at 8.5% cost. Post acquisition net debt of Renuka could rise to Rs45bn in FY10e and net debt to equity will rise to 1.8x. Acquisition at reduced\ cost along with signs of stability in sugar price globally augurs well for Renuka.

■ Brazil investment could yield 15% return if sugar rises 25%+: Renuka sugar has invested a total of US$330mn in acquiring sugar mills in Brazil in the last six months. Including Equipav, total cane crushing capacity attributable to Renuka stands at 8.5mtpa in Brazil and 7mtpa in India. We estimate that the Brazil mills will breakeven at raw sugar price of UScent16.5 per pound. Thus Renuka could start getting a 15% return on investment in Brazil if the international sugar price rises by 25% from its current level to UScent20/lb.

■ Recent sugar price rise globally suggests good deal timing: The international raw sugar price bottomed out at UScent13.7/lb in early May 2010 after falling by 55% from the Jan2010 peak. The price is already up 20% from the low led by concerns of lower than estimated production in Brazil this year along with the prospect of a production decline next year. The key reason for the supply shortfall in Brazil, in our view, is very dry weather in recent months and lack of new investment.

■ Maintain Buy owing to lower cost and attractive valuation: We maintain Buy as Renuka could limit its ROE decline in the current down cycle yet again to 17% driven by (1) 3x jump in distillery volume owing to jump in molasses availability; (2) 60% increase refining volume led by commissioning of 1mt Mundra refinery in Dec10. Our PO of Rs80 is at 1.8xFY11e P/B.

To read the full report: RENUKA SUGARS