>SUGAR SECTOR: Q2SY12 Result Preview

We expect the profitability of sugar companies to remain under pressure impacted by higher sugarcane costs. The Uttar Pradesh government increased the SAP (State Advised Price) for Sugarcane to Rs240/quintal for SY12 against Rs205/quintal in SY11. Though, we expect Triveni Engineering and Bajaj Hindusthan to report profits in the quarter, we believe that these companies will incur losses in SY12E. In the quarter, we expect Shree Renuka Sugars to report losses mainly due to higher depreciation costs and interest expenses. Average sugar price (M grade Mumbai) during the quarter declined 0.9% QoQ to Rs30.4/kg. Going forward, we believe that the increase in sugar production to 25.5mt in SY12E against 24.2mt in SY11 will lead to an increase in inventory levels, which in turn, will put pressure on domestic sugar prices leading to subdued profitability of companies. Though, we have a Buy rating on Shree Renuka Sugar (after assigning benefits of potential hive off of the power business in Brazil) and Triveni Engineering considering historic valuations and its 21.8% stake in Triveni Turbine Ltd, the stocks could be under pressure in the near-term because of pressure on domestic realizations. We maintain Sell rating on Bajaj Hindusthan. The triggers for upside would be a) building up of cane arrears in this crushing season b) higher than expected sugar price and c) decline in area under sugarcane cultivation for next crushing season.


■  Sugar price declines on a sequential basis: Sugar price (M grade Mumbai) during the quarter declined 0.9% QoQ to Rs30.4/kg (up 5.9% YoY). Current sugar price (M grade Mumbai) is at Rs30.7/kg. Going forward, we believe that sugar price will be under pressure due to higher estimated sugar production in SY12E.


■  Export of 2mt allowed during the quarter: The government allowed 2mt of sugar exports under OGL (Open General License) quota in this quarter, which will help the companies generate additional profits.


■  Increase in global sugar price on a sequential basis: Global sugar price increased 5.4% QoQ to US$628 during the quarter. On a YoY basis, global sugar price declined by 7.1% YoY. The sequential improvement in global price was driven by the expectation that the Brazilian sugar production will be under pressure in the next year.


■  Valuations attractive though near-term challenges persist: We have a Buy rating on Shree Renuka Sugar (after assigning benefits of potential hive off of the power business in Brazil) and Triveni Engineering considering historic valuations and its 21.8%] stake in Triveni Turbine Ltd. However, these stocks could be under pressure in the near-term because of our expectation of pressure on domestic realization considering higher sugar production in SY12E. We maintain Sell rating on Bajaj Hindusthan. The triggers for upside would be a) building up of cane arrears in this crushing season b) higher than expected sugar price and c) decline in area under sugarcane cultivation for next crushing season.

Bajaj Hindusthan (Sell, Target Price: Rs30, CMP: Rs31.3)
■ We expect the company to sell 2.4 lakh tonnes of sugar in the quarter with an average
realization of Rs28.8/kg. Net sales of the company is expected to decline 34.1% YoY (but,
increase 47.7% QoQ) to Rs8.5bn.


■ EBITDA is expected to decline 24.2% YoY (but, increase 268.4% QoQ) to Rs2.3bn. EBITDA margin in the quarter is expected to be 27.5% against 24.6% in Q2SY11 and 11.4% in Q1SY12.


■ Profit is expected to decline 38% YoY to Rs452mn. In Q1SY12, adjusted loss of the company was Rs444.3mn.


Shree Renuka Sugars (Buy, Target Price: Rs46, CMP: Rs31.4)
■ Consolidated revenue is expected to increase 9.4% YoY (but, down 13.7% QoQ) to Rs20.1bn in the quarter.


■ EBITDA is expected to increase 24% YoY and (3.9% QoQ) to Rs3.5bn mainly because of higher realizations in Indian markets and higher income from the sugar refinery segment.


■ EBITDA margin is expected to be 17.1% vs. 15.1% in Q1FY12 and 16.2% in Q5FY12. The
company has changed its year-end from October to March in FY12.


■ We expect the company to report loss of Rs314mn in the quarter against adjusted profit of
Rs594in Q1FY12 and adjusted loss of Rs854mn in Q5FY12. 


Triveni Engineering (Buy, Target Price: Rs23, CMP: Rs15.5)
■ The company is expected to sell 1 lakh tonnes of sugar in the quarter at an average realization of Rs28.8/kg. Revenue is expected to increase 5.1% YoY (and 12.6% QoQ) to Rs4.8bn.


■ EBITDA is expected to decline 5.9% YoY (but, go up 138.4% QoQ) to Rs511mn. EBITDA margin in this quarter is expected to be 10.7% against 11.9% in Q2SY11 and 5.1% in Q1SY12.


■ Adjusted PAT is expected to decline 13.8% YoY to Rs179mn. In Q1SY12, adjusted loss of the company was Rs108mn.





RISH TRADER