Shree Renuka Sugars: Sell

The stock of sugar producer, Shree Renuka Sugars, has gained over 25 per cent in the last one month on hopes of reform measures by the new Government. But given the company’s weak fundamentals, investors may be better off selling the shares in the market.

Even as the increase in raw sugar export subsidy from ₹2,277 a tonne to ₹3,300 a tonne may provide some relief, the expected hike in import duty from the current 15 per cent to 40 per cent is a negative for Shree Renuka.

This is because the company is one of the leading importers of raw sugar with annual refining capacity of about 1.7 million tonnes.

Meanwhile, the company’s financial performance has deteriorated sharply with losses mounting due to weakness in the domestic and global sugar industry and debt ballooning in 2013-14. In February 2014, the Asian agri major, Wilmar International (through its subsidiary Wilmar Sugar Holdings), agreed to acquire stake in Shree Renuka.

As part of the deal, Shree Renuka made a preferential issue to Wilmar. Following this, Wilmar and Shree Renuka have made an open offer to acquire 26 per cent of the outstanding shares from the public at ₹21.89 a share.

The open offer will close on June 20 and is priced at over 17 per cent discount to Friday’s closing price, making it unattractive to tender shares in the offer.

While Wilmar’s proposal to infuse about ₹1,242 crore through a combination of preferential and rights issue is a positive, challenges remain.

Though the preferential issue proceeds of ₹517 crore will be used to retire a portion of Shree Renuka’s long-term debt, the benefit may not be substantial given the large amount of debt on its balance sheet (₹7,890 crore as of March 2014).

The company’s total debt is about 4.4 times its current market capitalisation of around ₹1,790 crore.

The company shelled out ₹959 crore as interest on loans in 2013-14, higher than the ₹869 crore paid in 2012-13. Further, the 37 per cent dilution in equity base following the preferential issue may negate the benefit for per share earnings arising from lower interest outgo.

The proposed rights issue of ₹725 crore, when it happens, will lead to an additional 36 per cent dilution in equity (assuming that non-promoter shareholders don’t subscribe), and eat into equity shareholders’ earnings.

In addition to debt woes, high cane prices in India, lower sugar realisations and supply glut in the global market over the last two years have impacted Renuka’s profitability.

As a result, Shree Renuka’s losses have swelled from ₹374 crore in 2012-13 to ₹1,478 crore in 2013-14.

Profit margins across trading, co-generation and ethanol segments also remained weak in 2013-14.

The profit margin in the co-generation power business slipped to about 6 per cent in 2013-14 from 27 per cent in 2012-13. Likewise, margin in ethanol business fell to a little over 20 per cent in 2013-14 from 25 per cent in 2012-13.

Though a reversal in the domestic sugar cycle and government push for higher ethanol blending may provide some respite over the next two years, a turnaround in Brazilian operations will be critical for the company’s return to health.

Shree Renuka’s loss from overseas operations stood at ₹1,012 crore in 2013-14 — arrived at by computing the difference between the losses in its consolidated and standalone books.

This is more than twice the ₹466 crore loss reported in the company’s standalone operations. Higher losses in 2013-14 have led to Shree Renuka’s net worth as on March 2014 turning negative (₹497 crore) compared with a positive ₹1,460 crore as on March 2013.