Sugar Sector Report - 7 Apr 2011

11001-Regent Chambers, Nariman Point, Mumbai

India Sugar

Long term sweetness eclipses near term bitterness

Spotting a diamond among crystals

Analyst:

Jehan Bhadha

[email protected]

INDIA

7th April 2011

INITIATION

Analyst:

Jehan Bhadha

[email protected]

+91-22-43022256

India Sugar


CONTENTS

Executive Summary 3

Domestic Analysis 4

Consumption to grow at 4-5% 4

SY11 Production to exceed consensus 5

- Acreage 6

- Yield 7

- Drawal Rate 8

- Recovery Rate 10

Production Derivation 11

Up-cycle may start post SY12E 12

Domestic Cycle ~ turning Shorter & Viscous 13

Global Analysis 14

Production Composition 14

Brazil ~ Structurally suited for increasing production 15

Projecting Global Production 17

Consumption Composition 18

Projecting Global Consumption 19

Long Term Outlook - BULLISH 20

Short to Medium Term Outlook – NEUTRAL to BEARISH 21

Recent Happenings that prevented the usual cyclical downturn 22

Current Rally – not a mere devaluation of the dollar 23

Domestic Price Projection 24

Deregulation 25

Concerns 26

Valuations 27

Business Model Comparison 29

Companies 30

Shree Renuka Sugars 30

- Shree Renuka Sugar’s long term appreciation potential 43

Bajaj Hindusthan 47

Balrampur Chini 57


EXECUTIVE SUMMARY

Global deficit is a structural problem with overdependence on Brazil; Inventories dwindling

Global sugar prices are poised for sustainable higher levels in the longer term owing to growing demand for the

commodity and inadequate supplies with overdependence on Brazil. In the 10 year period – 2001 to 2010 global sugar

production has exceeded consumption only in 3 years. Global inventory reduced from 58 mn ton in 2001 to 50 mn ton

in 2010 whereas consumption grew from 135 mn ton to 167 mn ton leading to a decline in inventory ratio from 43% to

28% over the same period. We estimate the inventory ratio to decline further to below 20% by 2016E.

Global production to continue to lag consumption

Global production has been unable to keep pace with rising consumption. Although we estimate Brazil to continue to

increase its production at a CAGR of 6% between 2011E-16E which has been the growth in production over 2001-11E,

we estimate global production to grow at a lower growth rate of 2.2% against 2.9% for consumption over 2016E.

2011E to witness surplus production globally after 2 years of deficit; Raw sugar prices to range between

20–30 cents/lb and average at 23 cents/lb in 2011E

2011E is expected to witness YoY production growth of 10%. The major contributors to this growth are the two largest

producers – India & Brazil. In 2011E, India is expected to witness a massive growth of 33% and Brazil’s estimate

provides for 19% growth. Thus we forecast prices to range between 20–30 cents/lb and observe a declining trend as we

progress into H2 2011E and expect it to average at 23 cents/lb for 2011E.

India’s production at 25 mn ton in SY11E; may peak at 28 mn ton in SY12E; Prices to average at INR 29/kg

in SY11E

We believe India will vault a production figure of 25 mn ton in SY11E. We forecast India’s production to peak at 28 mn

ton in SY12E. However we do not expect prices to soften substantially in the current year as exports of 1.2 mn ton have

already been shipped out under the advance license scheme. Further the government has recently permitted export of

0.5 mn ton under the open general license taking the total exports to 1.7 mn ton. This we believe has initiated the

process of establishing parity between domestic and international prices. Thus we expect domestic prices to hover

around INR 29/kg in SY11E and not fall much.

Deregulation could be a positive

The Indian sugar industry is highly regulated. In view of the high sugar cane production, the Indian government is

considering deregulating the sugar sector. It may consider measures such as rationalizing the cane pricing mechanism,

removing the levy quota, doing away with monthly sugar release mechanism and establishing a sustainable

import/export policy.

Done with price correction; Time correction to last atleast a year; SHRS – a diamond among crystals

We believe that sugar companies are trading at their trough valuations. However we do not recommend buying stocks

across the sector as we expect stocks to languish at current levels for atleast a year. We are extremely positive on

SHRS and would wait for further downside in BHL & BRCM before entering in order to increase our margin of safety in

this highly volatile sector. Our preference for SHRS emanates from its presence in Brazil where its profitability is far

better than those of Indian mills.

Summary Valuations

Fair EV/EBITDA P/BV ROE Companies CMP

Value Returns

SY11E SY12E SY11E SY12E SY11E SY12E Rating

SHRS 76 86 13% 4.3 5.0 1.5 1.2 29% 17% BUY*

BJH 82 73 -11% 11.9 16.3 0.7 0.7 -6% -12% HOLD

BRCM 75 65 -13% 6.8 10.2 1.6 1.6 12% 4% HOLD

* We expect returns of 4x in 4 years for SHRS Source: Darashaw


DOMESTIC SCENARIO

Consumption to grow at 4-5%

Indian sugar consumption has steadily grown at a CAGR of 4.6% between 2001 and 2009. GDP growth and substitution

of sugar in place of traditional sweeteners like gur and khandsari have proved to be the main factors in the steady rise

in consumption of sugar.

Going by the current consumption growth rate of 4.5%, India would require 30 mn ton by the year SY16E. India

currently has the capacity to just about achieve this figure however in the absence of a sustainable cane-pricing policy,

achieving the required cane output annually on a sustained basis could prove to be a concern.

Sugar Consumption & Production (mn ton)

5

10

15

20

25

30

35

SY95

SY97

SY99

SY01

SY03

SY05

SY07

SY09

SY11E

SY13E

SY15E

ConsumptionProduction

Source: Crisil, Darashaw

India’s per capita consumption stood at 19.1 kg as on SY08. The increase in per capita consumption is majorly driven

by a shift in consumption pattern from the traditional sweeteners like Gur & Khandsari to Sugar. This trend is expected

to continue as even today around 25% of the sugarcane produced goes into manufacture of Gur & Khandsari.

When compared with other countries, India falls in the low consuming category which again reiterates the scope for an

increase in per capita consumption.

Per Capita Consumption - Sugar v/s Gur & Khandsari

0

5

10

15

20

25

1960-61

1970-71

1980-81

1990-91

2000-01

2007-08

Kg /

Year

Sugar Gur & Khandsari

Per Capita Consumption (kg)

0 10 20 30 40 50 60 70

China

India

USA

EU

Russia

Brazil

Source: Cooperative Sugar Vol 40 (9) Source: WHO


SY11E Production to vault 25 mn ton

As per our analysis of the past decade, out of the 4 variables which determine sugar production namely – Acreage,

Yield, Drawal Rate and Recovery Rate, the variables – Acreage and Drawal Rate play a much larger role than the other

two variables in determining sugar production for any given year. We have demonstrated this phenomenon by deriving

the Coefficient of Variation of each of these variables based on data from the past decade.

Variables stacking up Production

(Data Derived from SY01 to SY10)

Mean Standard

Deviation

Coefficient

of

Variation

Change

in SY10

Change

in

SY11E

Acreage (mn ha) 4.4 0.5 12% -3% 20%

X

Yield (ton/ha) 66 3 5% 11% -4%

X

Drawal Rate 65% 10% 15% 18% 15%

X

Recovery Rate 10% 0.5% 5% 2% 0%

Production (mn ton) 19 6 29% 29% 33%


Coefficient of Variation for Acreage and Drawal Rate are substantially higher than that of Yield and Recovery Rate as

seen in the above table. The SY10 increase in sugar production of 29% is largely driven by an 11% increase in yield and

an 18% increase in Drawal Rate, while we expect SY11E production to increase by 33% on the back of a 20% increase

in Acreage and a 15% rise in Drawal Rate.

Causes for change in Sugar Production

10

14

18

22

26

30

SY09

Acr

eage

Yie

ld

Dra

wal

Reco

very

SY10

Acr

eage

Yie

ld

Dra

wal

Reco

very

SY11E

Mn

To

n

Source: ISMA, Darashaw


Acreage (A Major Variable)

Acreage under cane is determined by the ROI (Return on Investment) that a farmer derives by planting cane vis-à-vis

substitute crops. Thus, depending on the ROI, a farmer’s cultivable land is proportionately divided between:

- ‘Cane’ & ‘wheat + paddy’ in case of U.P

- ‘Cane’ & ‘wheat + jowar’ in case of Maharashtra (also bajra, maize, cotton)

The ROI fluctuates widely for sugarcane whereas it moves in a short range for wheat-paddy and wheat-jowar and is

thus more predictable for these crops. Going ahead for SY11E, we believe the farmer will be better off planting cane as

its ROI will be more than that of alternate crops.

Return on Investment

25%

50%

75%

100%

125%SY0

3

SY0

4

SY0

5

SY0

6

SY0

7

SY0

8

SY0

9

SY1

0

SY1

1

Cane Wheat + Paddy Wheat + Jowar

Source: Ministry of Agriculture, Companies, Darashaw estimates

Due to the spike in prices paid for cane in the past couple of years, the acreage under cane is expected to go up from

4.2 mn ha to 5.1 mn ha (an increase of 20%). This will be the highest ever acreage under sugarcane crop.

3.0

3.5

4.0

4.5

5.0

5.5

6.0

SY0

3

SY0

4

SY0

5

SY0

6

SY0

7

SY0

8

SY0

9

SY1

0

SY1

1E

SY1

2E

Acr

eage

(mn h

a)


Minimum Support Prices

Cane Growth Wheat Growth Rice Growth Cotton Growth Jowar Growth

SY05 107 13% 640 2% 575 2% 1960 2% 505 3%

SY06 115 7% 700 9% 585 2% 1980 1% 515 2%

SY07 118 3% 850 21% 635 9% 1990 1% 525 2%

SY08 110 -7% 1000 18% 760 20% 2030 2% 548 4%

SY09 155 41% 1080 8% 865 14% 3000 48% 610 11%

SY10 230 48% 1100 5% 1065 23% 3000 0% 850 39%

SY11 205 -11% 1120 2% 1010 -5% 3000 0% 890 5%

Source: Ministry of Agriculture, Darashaw


Yields (A Minor Variable)

Yields have ranged between +10% to -10% in the past decade on a YoY basis which results in a minimal impact on the

final sugar output when compared to other variables like acreage and drawal rates. The yields witnessed a low of 59

ton/ha in SY04 and a high of 71 ton/ha in SY07. We have assumed yields at 68 ton/ha for the next three years which is

the mean of the past five years.

56

60

64

68

72

SY02

SY03

SY04

SY05

SY06

SY07

SY08

SY09

SY10

SY11E

SY12E

SY13E

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Yield (Ton/hectare) YoY Change

Source: Crisil, ISMA, Darashaw

Rainfall – Not as big an event for sugarcane as made out to be

Contrary to popular belief that rainfall plays an important role in the yields of sugarcane, we find that there is no direct

correlation between rainfall and yields. This is visible in the diagram below. Having said that, we do conjugate that the

probability of yields being better in a year with sufficient rainfall stands true.

75%

80%

85%

90%

95%

100%

105%

110%

SY9

5

SY9

6

SY9

7

SY9

8

SY9

9

SY0

0

SY0

1

SY0

2

SY0

3

SY0

4

SY0

5

SY0

6

SY0

7

SY0

8

SY0

9

SY1

0

Rai

nfa

ll

58

60

62

64

66

68

70

72

Yiel

ds

Rainfall (% of Normal) Yields

Source: IMD, Crisil

In the past 15 years, we find an inverse correlation between rainfall and yields on one third of the occasions. Hence

rainfall alone isn’t a single reliable source for determining yields. There are other factors like climate and natural

calamities such as floods which also influence yields.


Drawal Rate (A Major Variable)

Almost two-third (65%) of the total cane produced in the past decade has been used for manufacture of sugar, whereas

the balance is used for manufacturing Gur & Khandsari (25%) and as seed (10%). Gur and Khandsari are used as

sweeteners by households in rural areas.

0

50

100

150

200

250

300

350

400

SY0

1

SY0

2

SY0

3

SY0

4

SY0

5

SY0

6

SY0

7

SY0

8

SY0

9

SY1

0

SY1

1E

SY1

2E

SY1

3E

mn

ton

sCaneProduction

Cane usedfor Gur,Khandsari,Seed


Drawal Rate rises during years of higher production and dips when the production is lower

Alternate sweeteners are mainly used by rural households as a cheaper alternative to sugar. During years of high sugar

production, the price of sugar falls, which establishes parity with the price of Gur & Khandsari and thus people prefer to

use sugar directly. Also many marginal producers of Gur shut their shops as its turns unviable for them to manufacture

when both Gur and Sugar prices are low. As can be seen in the below diagram, during SY07 & 08 cane usage for Gur &

Khandsari dipped with a fall in sugar prices. We expect a similar situation in SY11E & 12E.

Corelation between Sugar Prices & Cane used by Gur & Khandsari

40

60

80

100

120

140

SY04

SY05

SY06

SY07

SY08

SY09

SY10

SY11E

Cane u

sed f

or

Gur

&

Khandsa

ri

(mn t

on)

10

15

20

25

30

35

40

Sugar

Pri

ce (

INR

/kg) Cane

used forGur &Khandsari

SugarPrice(INR/kg)

Source: NCDEX, Crisil, Darashaw


Dynamics of Drawal Rate

Cane Production Scenario High Low

Sugar Price Trend Declining Increasing

Sugar Pricing As cheap as Gur Costlier than Gur

Resultant Gur Demand Low High

Gur Pricing Low High

Profitability for Gur manufacturer Low High

Ability to pay instant cash to Farmers No Yes

Farmers prefer selling to Gur manufacturers No Yes

Drawal Rate towards Sugar Mills High Low

Source: Industry, Darashaw

Alternate sweetener market’s demand for sugarcane in SY09 at 119 mn ton was the same in SY01 and has ranged from

70 – 130 mn ton over the past decade. We have estimated the alternate sweetener market’s demand for sugarcane at

72 mn ton for SY11E & 12E which is the average consumption of sugarcane by this segment in the years SY07 & 08

which represent similar dynamism to the current oncoming scenario in terms of rising sugar production and falling sugar

prices.

Figures in (mn ton) SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11E SY12E SY13E

Cane Production 233 236 281 345 340 280 300 346 380 361

Used for Sugar 132 124 189 277 265 163 206 274 309 286

Drawal Rate - % of Total Cane 57% 53% 67% 80% 78% 58% 69% 79% 81% 79%

Used for Gur, Khandsari, Seed 101 112 92 68 75 118 94 72 72 75

% of Total Cane 43% 47% 33% 20% 22% 42% 31% 21% 19% 21%

Sugar Price / kg 16 18 19 16 16 29 33 29 27 - Source: Crisil, Darashaw

We have projected the Drawal Rates for the oncoming years based on lower offtake of cane by the alternate sweetener

market owing to stable to lower sugar prices which will encourage rural households to buy sugar directly. Thus SY11E &

12E are expected to witness a higher Drawal Rate of almost 80%.

200

250

300

350

400

SY01

SY02

SY03

SY04

SY05

SY06

SY07

SY08

SY09

SY10

SY11E

SY12E

SY13E

40%

50%

60%

70%

80%

90%

Cane Production Drawal Rates



Recovery Rate (A Minor Variable)

Recovery Rates are primarily driven by the sucrose content in the sugarcane. The sugarcane crushed in early part of the

season (Oct to Dec) has lower sucrose content as the water content is higher when they are harvested immediately

after the monsoon season. Recovery rates have averaged at 10% over the past decade. However they were below their

average in SY09 & 10 due to untimely rainfall and floods. We have assumed recovery rates of 9.2% for the coming

years which was the case in SY09 & SY10 against the mean of 9.6% for the last decade.

Recovery Rates

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

SY01

SY02

SY03

SY04

SY05

SY06

SY07

SY08

SY09

SY10

SY11E

SY12E

SY13E



Production Derivation

SY02 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11E SY12E SY13E

Cane Price Paid (INR/Qtl) 95 95 95 107 115 118 110 150 230 205 215 225

Growth 6% 0% 0% 13% 7% 3% -7% 36% 53% -11% 5% 5%

Acreage (mn ha) 4.41 4.52 3.93 3.66 4.20 4.86 5.04 4.38 4.23 5.08 5.58 5.30

Growth 2% 2% -13% -7% 15% 16% 4% -13% -3% 20% 10% -5%

Yield (ton/ha) 67 64 59 65 67 71 68 64 71 68 68 68

Growth -2% -6% -7% 9% 4% 6% -5% -5% 11% -4% 0% 0%

Cane Production (mn ton) 297 287 233 236 281 345 340 280 300 346 380 361

Growth 0% -3% -19% 1% 19% 23% -2% -18% 7% 15% 10% -5%

Drawal (%) - 61% 68% 57% 53% 67% 80% 78% 58% 69% 79% 81% 79% Cane Crushed 180 194 132 124 189 277 265 163 206 274 309 286

Growth 2% 8% -32% -6% 52% 47% -4% -39% 27% 33% 13% -7%

Recovery 10.3% 10.4% 10.2% 10.1% 10.3% 10.2% 10.0% 9.1% 9.2% 9.2% 9.2% 9.2%

Sugar Production 18.5 20.1 13.5 12.6 19.5 28.3 26.5 14.7 19.0 25.2 28.4 26.3

Growth 0% 9% -33% -7% 55% 45% -6% -45% 29% 33% 13% -7% Source: Crisil, Darashaw

We estimate SY11E production at 25.2 mn ton. We foresee a similar situation which occurred in SY06 & 07 when the

acreage increased by 15% & 16% respectively on the back of an increase in cane prices by 13% & 7% in SY05 & 06.

Moreover, in the current scenario the increase in cane price is a massive 36% & 53% in SY09 & 10 which we believe

could well propel the production figure to 25 mn ton in SY11E.

Production to peak in SY12E

Moving into SY12E, we believe production will peak as seen in the above table. The higher cane price of INR 230 / qtl

paid in SY10 induced farmers to plant large areas of their lands with cane. As cane has a two year cycle, the cane

planted in SY10 will be harvested in SY11E (plant crop) and will again be harvested in SY12E (ratoon crop). Thus we

expect the SY12E production at 28.4 mn ton against 25.2 mn ton in SY11E, which is a 13% increase.

Poor past performance of Food Ministry’s forecasts on Sugar Production

The food ministry has seldom been right in projecting sugar production before the season starts i.e. its first estimate.

The average variation for the period between SY06 and SY10 has been 23%. This has resulted in exaggerated

movements in sugar prices and faulty cane pricing thereby hurting sugar companies.

Variance in Production

10

15

20

25

30

SY06 SY07 SY08 SY09 SY10

mn

to

ns

1st Estimate Actual

30%

31%

3%39%

14%

Source: Kingsman, Darashaw


Up-cycle to start beyond SY12E

Domestic Sugar Balance

S.Y.s Op.

Inventory Production Imports Exports Consumption Inventory

Inventory/ Ratio

Inventory (Months)

2002-03 11.2 20.1 0 1.5 17.1 12.7 74% 8.6

2003-04 12.7 13.5 0.0 0.0 17.7 8.5 48% 5.5

2004-05 8.5 12.7 2.1 0.0 18.5 4.8 26% 3.1

2005-06 4.8 19.3 0.5 1.1 18.5 5.0 27% 2.9

2006-07 5.0 28.3 0 1.7 21.0 10.6 50% 5.7

2007-08 10.6 26.3 0 5.0 22.5 9.4 42% 5.0

2008-09 9.4 14.6 4.2 0 22.5 5.7 25% 3.0

2009-10 5.7 19.0 4.6 0 23.0 6.3 27% 3.1

2010-11E 6.3 25.2 0 1.7 24.0 5.8 24% 2.8

2011-12E 5.8 28.4 0 2.0 25.1 7.1 28% 3.2

2012-13E 7.1 26.3 0 0 26.2 7.2 28% 3.2 Source: Crisil, Darashaw

We foresee sugar production peaking in SY12E at 28 mn ton and dropping in SY13E. We ascribe a high probability of

the sugar up-cycle resuming post SY12E.


Domestic Cycle ~ turning Shorter & Viscous

The average period for a sugar cycle has been decreasing over the last 15 years. The primary reason for shorter sugar

cycles emanates from the short term cropping pattern of farmers with respect to the widely fluctuating sugarcane prices

vis-à-vis steadily rising prices for other crops.

Cycles turning shorter

5

10

15

20

25

30

35

SY96

SY97

SY98

SY99

SY00

SY01

SY02

SY03

SY04

SY05

SY06

SY07

SY08

SY09

SY10

SY11E

SY12E

SY13E

Su

gar

Pri

ce

012345678910

Inven

tory

(M

on

ths)

Sugar Price Inventory (in months)

Cycle

Duration 7 Years 5 Years 4 Years

Source: Crisil, NCDEX, Darashaw

During the last up-cycle in SY09, inventory levels were at a low of 5.7 mn ton equivalent to 3 months of consumption

which resulted in sugar prices hitting their all time highs of INR 44/kg in January 2010, an increase of 230% from INR

13/kg in June 2007.

Cycle turning viscous

Sugar Price

10

20

30

40

50

Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

Source: CMIE


GLOBAL SCENARIO

Production Composition

Global Production Pie - 152 mn ton (2008-09)

10%

17%

10%

21%

5%

3%

3%

31%India

EU

China

Brazil

Thailand

Australia

Pakistan

Others

Source: International Sugar Organization

Based on our analysis, we observe that all the of the top 9 sugar producing regions namely India, EU, Thailand, China,

US, Mexico, Pakistan, Australia along with the rest of the world except for Brazil (accounting for almost 85% of global

sugar production) have witnessed stagnant production over the last 7 years. Brazil is the only significant contributor to

the increase in global production over the last 7 years.

Stagnating Production

0

5

10

15

20

25

30

2003 2004 2005 2006 2007 2008 2009

Mn

Ton

Australia

Pakistan

Thailand

India

EU

USA

Mexico

China

Production on the Upswing

15

20

25

30

35

2003 2004 2005 2006 2007 2008 2009

Mn

Ton

Brazil

Source: International Sugar Organization Source: International Sugar Organization

Brazil – Driving half of Global Production Growth

We believe that global production growth will continue to be driven by Brazil. More so, Brazil has been the saving grace

for global sugar consumers as it is the largest producer and exports 70% of its production. We have analyzed global

trends taking the end year as 2008 as it was the peak production year. 2009 global production at 152 mn ton would not

have given the true account of global growth in production as it witnessed a steep decline in production from 169 mn

ton in 2008.

2003

(mn ton)

2008

(mn ton) CAGR

Weight in Global

Production (SY03-08)

Contribution to

Global Growth

Brazil 19 30 9.2% X 15% = 1.3%

Others 116 121 1.2% X 85% = 1.0%

Global 150 169 2.3% 2.3%

Source: International Sugar Organization, Darashaw


Brazil ~ world’s sugar savior; structurally suited for increasing production

Exports from Brazil have single handedly catered to the incremental global demand for sugar since 2003 as export

growth of all other exporting nations has been stagnating. Brazil’s sugar production has grown at a CAGR of 9% since

1993 as against a mere 1% growth for global production (ex-Brazil).

Country-wise Net Exports

-5

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009

mn t

on

Brazil

India

Thailand

Mexico

Australia

Brazil Sugar Production

0

5

10

15

20

25

30

35

40

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

mn t

on

Source: International Sugar Organization, Darashaw Source: UNICA

Sugarcane Producing regions in Brazil Brazil – Growth Rates

0%

2%

4%

6%

8%

10%

12%

14%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Production Consumption Exports

Source: UNICA Source: UNICA

Center-South region accounts for 85% of

cane production


Brazil's growth as a sugar producer has been driven by

Conducive Regulatory Environment and

Structural Adjustment to rapid growth in fuel ethanol

Deregulation & Cost leadership

Sugar price controls in Brazil were eliminated in 1999-2000, which encouraged higher sugar production. Private

participation was encouraged for exports and the government mandated sugarcane prices were eliminated. Brazil is the

cost leader in sugar production, due to high mill and farm scale. Brazil has also adopted a dynamic management of

product mix between sugar and ethanol, which enables it to respond to global shifts in demand and supply. The rapid

modernization of its ports and investments in transport infrastructure have also been key drivers for low cost.

Sugar - Cost of Production

0

5

10

15

20

25

30

Brazil Thailand Australia India

20072008200920102011

Source: Kingsman

Proalcool programme

The nationwide ethanol programme reduced Brazil's dependence on oil imports, due to domestic ethanol production and

blending. The programme leveraged the sugar sector by developing alternative sugarcane based fuel. The introduction

of flex fuel vehicles in Brazil in 2003 added significant demand for ethanol. In 2008, 2.3 million flex fuel vehicles were

sold in Brazil, representing 91% of new vehicle sales in the country. As of April 2010, 83% of the Brazilian

automotive fleet consisted of vehicles that were produced prior to the introduction of flex fuel technology.

Thus we believe that the continuing sales of flex fuel cars will increase the demand for ethanol in Brazil in

the coming years. Although ethanol is approximately 25% less fuel efficient than gasoline, a significant number of

owners of flex fuel cars are currently opting to use ethanol because it costs substantially lower than gasoline.

Shift towards Flex Fuel Vehicles

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

1960

1970

1980

1990

2000

2001

2002

2003

2004

2005

2006

2007

2008

Gasoline

Ethanol

FlexFuel

Source: UNICA


Brazil to vault production of 44 mn ton by 2016E

As per UNICA, Brazil will continue to increase its production and produce 41 mn ton of sugar by 2016E. We believe this

is an understatement by UNICA as Brazil is the single largest provider of sugar to the world and we expect it to continue

to grow its production at a growth rate of 5.7% which it achieved in the last decade. Thus we forecast Brazil to produce

44 mn ton sugar by 2016.

Brazil - Sugar Production Forecast

1619

2325 27 26

30 3128

3436

3840

4244

0

10

20

30

40

50

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

2015E

2016E

Source: UNICA, Darashaw

Projecting Global Production

We have derived our projections till 2016E by dividing global production into three major geographies- Brazil, India and

rest of the world and have forecasted production for each of these segments. Brazil & India’s production has already

been discussed in this report. We have assumed the rest of the world’s production to continue to increase at a CAGR of

1.4% which has been the case historically.

Brazil India Rest of the World Global

SY04 23 14 106 142

SY05 25 13 103 141

SY06 27 20 104 150

SY07 26 28 112 166

SY08 30 27 112 169

SY09 31 15 107 152

SY10 28 19 110 157

SY11E 34 25 114 173

SY12E 36 28 116 180

SY13E 38 26 118 182

SY14E 40 21 119 180

SY15E 42 25 121 188

SY16E 44 26 123 193

Source: UNICA, ISMA, Darashaw


Consumption Composition

Global Consumption Pie - 164 mn ton (2008-09)

14%

9%

8%

45%

6%4%

14%

India

EU

China

Brazil

US

Russia

Others

Source: International Sugar Organization

Based on our analysis of the top 9 sugar consuming regions, we observe that all countries have been witnessing

consumption growth except for EU & US. This leads us to believe that consumption growth depends on the improvement

in the economics of any country and thus countries with low economic growth would witness lower consumption growth.

Growimng Sugar Consumption

9

12

15

18

21

24

2003 2004 2005 2006 2007 2008 2009

mn

to

ns India

Brazil

China

Stagnating Sugar Consumption

5

10

15

20

25

30

2003 2004 2005 2006 2007 2008 2009

mn

to

ns

EU

USA

Source: International Sugar Organization Source: International Sugar Organization

Developing Economies Driving Global Consumption

We believe that global consumption growth will continue to be driven by all countries in the world except for those in

the developed regions like North America & EU. Thus developed regions accounting for 30% of the global consumption

have witnessed de-growth while that of the rest of the world has witnessed a CAGR of 4% over the past few years.

2003

(mn ton)

2009

(mn ton) CAGR

Weight in Global

Production (2003-09)

Contribution to

Global Growth

NA & EU 45 42 -1.0% X 30% = -0.3%

Developing Countries 96 122 4.0% X 70% = 2.8%

Global 141 164 2.5% 2.5%



Projecting Global Consumption

Projecting global consumption is easier as opposed to production, as consumption is steady and is unaffected by any

variable in a major way. We have used the historical growth rates of consumption and have forecasted by dividing the

global consumption between –

De-growth regions i.e. Developed Economies (EU and NA)

Growth regions i.e. Developing Countries (rest of the world)

EU + NA Developing Countries Global

SY03 45 96 141

SY04 44 101 145

SY05 47 100 147

SY06 46 106 153

SY07 45 112 157

SY08 44 119 163

SY09 42 122 164

CAGR -1.0% 4.0% 2.5%

SY10E 42 127 168

SY11E 41 132 173

SY12E 41 137 178

SY13E 40 143 183

SY14E 40 148 188

SY15E 40 154 194

SY16E 39 160 200



Long Term Outlook - BULLISH

Global Deficit is a Structural Problem with overdependence on Brazil

The global sugar scenario is poised for sustainable higher prices in the long run owing to growing demand for the

commodity and inadequate supplies with overdependence on Brazil. In the 10 year period – 2001 to 2010 global sugar

production has exceeded consumption only in 3 years. Global inventory reduced from 58 mn ton in 2001 to 50 in 2010

whereas consumption grew from 135 mn ton to 167 mn ton over the same period leading to a decline in inventory ratio

from 43% to 28%. Further, we estimate the inventory ratio to decline below 20% by 2016E.

130

140

150

160

170

180

190

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Pro

du

cti

on

& C

on

su

mp

tio

n

(Mn

To

n)

Production Consumption

50

70

90

110

130

150

170

190

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Mn

Ton

Consumption Inventory

Source: International Sugar Organisation, Darashaw Source: International Sugar Organisation, Darashaw

Production to continue to lag consumption; Inventory to drag down

Global production has been unable to keep pace with rising consumption. Although we estimate Brazil to continue to

increase its production at a CAGR of 6% between SY11E and SY16E which has been the growth in production over

SY01-SY11E, we estimate global production to grow at a lower growth rate of 2.2% against 2.9% for global

consumption for the same period.

(Figs. In mn ton)

Production Consumption Inventory Inventory

Ratio

Price (Raw)

(cents/lb)

2001 133 135 58 43% 10

2010 157 169 47 28% 23

CAGR 1.9% 2.5% -2.2%

2011E 173 173 47 27% 23

2016E 193 200 28 14% 30+

CAGR 2.2% 2.9%


120

140

160

180

200

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

2015E

2016E

mn

to

ns

0%

10%

20%

30%

40%

50%

Inven

tory

Rati

o

Production Consumption Inventory Ratio

0

5

10

15

20

25

30

35

40

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

2015E

2016E

Raw

Su

gar

Pri

ce c

en

ts/

lb)

10%

20%

30%

40%

50%

Inven

tory

Rati

o

Raw Sugar Price Inventory Ratio

Source: International Sugar Organization, Darashaw Source: Bloomberg, International Sugar Organization, Darashaw


Short Term Price Outlook – NEUTRAL to NEGATIVE

2011 to witness surplus production after 2 years of deficit

2011E is expected to witness YoY production growth of 10%. The major contributors to this growth are the two largest

producers – India & Brazil. In 2011E, India is expected to witness a massive growth of 40% and Brazil’s estimate

provides for 19% growth.

Production (Mn Ton)

India Var Brazil Var Others Var Global Var

2008 27 -6% 30 15% 112 0% 169 2%

2009 15 -45% 31 4% 107 -5% 152 -10%

2010 19 29% 28 -8% 110 3% 157 3%

2011E 25 33% 34 19% 114 4% 174 11%

2012E 28 13% 36 6% 116 1% 180 3% Source: UNICA, ISMA, International Sugar Organization, Darashaw

Inventory to stay low; Prices to hover average at 23 cents/lb (Raw) in 2011E

Inspite of the massive growth in production, we expect the surplus for 2010-11E at just 0.2 mn ton owing to the low

base of 2010 production. Thus the increase in inventory will not even be able to take care of the incremental

consumption of one year which would result in the inventory ratio remaining at lower levels of 27%. Thus we forecast

prices to range between 20–30 cents/lb and observe a declining trend as we progress into H2 2011E and expect it to

average at 23 cents/lb for 2011E.

Global Sugar Balance

Year Production Consumption Surplus/Deficit Inventory Inventory Ratio Raw Price

2001 133 135 -2 57 42% 9

2002 138 138 0 57 41% 8

2003 150 141 9 66 47% 7

2004 142 145 -2 64 44% 9

2005 141 147 -6 58 39% 12

2006 150 153 -2 55 36% 16

2007 166 157 9 64 41% 12

2008 169 162 6 71 44% 14

2009 152 164 -12 58 36% 20

2010 157 168 -11 47 28% 23

2011E 173 173 0.2 47 27% 23

2012E 180 178 2.1 49 28% 20 Source: International Sugar Organization, Bloomberg, Darashaw

5

10

15

20

25

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

cents

/lb

25%

30%

35%

40%

45%

50%

Raw Sugar Price Inventory Ratio Forward Contracts - Raw Sugar (Backwardation)

22

23

24

25

26

27

28

May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12

Cen

ts /

lb

Source: Bloomberg, Internationa Sugar Organization, Darashaw Source: Sugaronline.com


Recent Happenings that prevented the usual cyclical downturn

Raw Sugar (cents/lb)

5

10

15

20

25

30

35

Mar-93 Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11

Source: Bloomberg

Climate

Since May 2010, we have witnessed countries like Brazil, Thailand, China, EU, Australia and Pakistan cut their 2010-11

estimates in the range of 0-5%. While Brazil, Thailand, China and EU are facing a drought, Pakistan and Australia are

suffering from floods. This initiated the upmove in global raw sugar prices after hitting a low of 13 cents/lb in Mar 2010.

Export unavailability

Although there is availability of sugar meant for exports in Brazil, the monsoon weather in Brazil made it difficult for

shipping sugar to importer countries since the month of July 2010. Trade of nearly 4 mn ton of sugar got delayed due to

this reason which has impacted the sugar price. As on Dec 2010, a total of 106 ships were waiting to load sugar at

Brazil’s two biggest ports - Santos in Sao Paulo and Paranagua in Parana - up from 66 ships a year earlier. Brazil has

not invested adequately in ports in recent years which is likely to impact the global trade even in 2011.

Global Trade


Current Rally – not a mere devaluation of the dollar

The previous rally in sugar prices which occurred in H2 CY2009 was driven on the back of a depreciating USD scenario.

USD/BRL (Brazilian Real) stood at 2.31 BRL in Jan 2009 and a year later appreciated to 1.77, a 30% rise against the

USD. Thus, the previous rally in sugar prices was fuelled by a 30% depreciation of the USD v/s BRL.

Currency impact at 30% in previous peak

10

15

20

25

30

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

cen

ts /

po

un

d

Raw Sugar Raw Sugar (at Constant Currency)

30%

32%

34%

25%

USD/BRL

1.5

1.8

2.0

2.3

2.5

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

Source: Bloomberg, Oanda.com Source: Oanda.com

Current rally is almost entirely backed by fundamentals as there is no severe depreciation of the USD in recent months,

inspite of which the sugar prices are hovering near their previous highs set in Jan 2010.

Currency Impact is a mere 6% in the current rally

10

15

20

25

30

35

Jul-

10

Aug-1

0

Sep-1

0

Oct

-10

Nov-1

0

Dec-

10

Jan-1

1

Feb-1

1

Mar-

11

cents

/ p

ound

Raw Sugar Raw Sugar (at Constant Currency)

USD/BRL

1.4

1.5

1.6

1.7

1.8

1.9

2.0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

Jul-

10

Aug-1

0

Sep-1

0

Oct

-10

Nov-1

0

Dec-

10

Source: Bloomberg Source:Bloomberg


Domestic Price Projection

Domestic prices trailed international prices until Dec 2010

At the current juncture, domestic mills stand to gain marginally on exporting sugar owing to higher international prices.

With India allowing export of 1.7 mn ton in 2010-11E domestic prices have trailed global prices and have thus

established parity. This trend had commenced in the last few months whereby the international prices bottomed out in

June 2010 and started inching up however the domestic prices took cues from the international prices and started

inching higher only in August 2010. As we do not expect any further exports from India in the current season, we do

not see any impact of global prices on domestic prices going ahead.

Figs. per ton

Source: Darashaw

Source: NCDEX, Bloomberg

Domestic Prices to hover around INR 29 per kg in SY11E

Adverse climatic conditions have prevented the global sugar cycle from entering a prolonged downturn in 2010-11E.

However a higher than anticipated production in India and a higher production estimate for Brazil for 2011-12E will be

the key triggers for the international prices to average at 23 cents/lb in 2011E from their current levels of 27 cents/lb.

Global Sugar Balance

Year Production Consumption Surplus/Deficit Inventory Inventory Ratio Raw Price (cents/lb)

2008 169 162 6 71 44% 14

2009 152 164 -12 58 36% 20

2010 157 168 -11 47 28% 23

2011E 173 173 0 47 27% 23

2012E 180 178 2 49 28% 20 Source: International Sugar Organization, Bloomberg, Darashaw

With the government granting export of 1.2 mn ton under ALS (advance license scheme) and 0.5 mn ton under OGL

(open general license), the impact of higher production on prices would be restricted. We expect domestic prices to

average at INR 29/kg in SY11E.

Domestic Sugar Balance

S.Y.s Opening

Inventory Production Imports Exports Consumption Inventory

Inventory/ Ratio (%)

Cl. Stk. (Months)

Price INR/kg

2006-07 5.0 28.3 0.0 1.7 21.0 10.6 50% 5.7 16

2007-08 10.6 26.3 0.0 5.0 22.5 9.4 42% 5.0 16

2008-09 9.4 14.6 4.2 0.0 22.5 5.7 25% 3.0 24

2009-10 5.7 19.0 4.6 0 23.0 6.3 27% 3.1 33

2010-11E 6.3 25.0 0.0 1.7 24.0 5.8 24% 2.8 29

2011-12E 5.8 28.4 0.0 2.0 25.1 7.1 28% 3.2 27 Source: Crisil, Darashaw

White Sugar - USD 600 700 800

USD / INR 45 45 45

Landed Price at Port 27000 31500 36000

Transport Cost 2000 2000 2000

Export Realization 25000 29500 34000

Domestic Prices 29000 29000 29000

Benefit if Exported (4000) 500 5000

Globa & Domestic Prices

25

30

35

40

45

Jan-1

0

Feb-1

0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

Jul-

10

Aug-1

0

Sep-1

0

Oct

-10

Nov-1

0

Dec-

10

Jan-1

1

Feb-1

1

Mar-

11

Do

mesti

c P

rice (

INR

/ k

g)

10.0

15.0

20.0

25.0

30.0

35.0

Inte

rnati

on

al

Pri

ce

(cen

ts/

lb)

Domestic Price Global Price (Raw)


Deregulation

India’s policy on sugar provides for far more regulation than any other country. This acts as a disincentive for attracting

private participation in the sector. The government’s ploy of pleasing both the farmers (by giving them higher cane

prices) as well as the consumers (by taking steps to restrict price up-move) has resulted in poor performance of sugar

companies over the past years.

Regulation Australia Brazil China Thailand India

Command Area

Cane Pricing

Price intervention

International Trade

Source: KPMG

De-regulation is possible on the following counts –

Cane pricing: This measure is unlikely but could be a significant positive for the industry, especially U.P based sugar

companies. Sugar companies in India need to pay minimum support price for sugarcane, which is prescribed by the

government. In years of excess sugarcane production, sugar companies face declining sugar prices but fixed raw

material cost, which leads to losses. Instead of minimum support price, ISMA has suggested a variable sugar cane

pricing mechanism linked to sugar realizations.

Trade Policy - Change in import/export regulation: India does not allow free import or export of sugar. The

government, in view of domestic sugar deficit, had allowed free imports into India in SY09 and SY10. Further, the

government has approved exports of 1.2 mn ton under the advance license scheme, to be completed by March 2011

and recently allowed exports of 0.5 mn ton sugar under the open general license in anticipation of a surplus production

during the current season. Thus, under current circumstances companies have to base their decisions on government

mandates rather than capitalizing on arbitrage opportunities at any given point of time.

Release mechanism: Sugar mills currently sell sugar based on monthly sugar release orders from the government. If

sugar sale is deregulated, companies will be able to sell sugar based on their own assessment of sugar prices.

Levy quota: Currently sugar mills have to give 10% of their production to the government at INR 18.5/kg which is

much below their cost of production of INR 27/kg. Sugar mills are demanding that the government should buy sugar at

market price, subsidize, and supply the same through public distribution system (PDS).

DEREGULATION

Cane Pricing

Release Mechanism

Trade Policy

Levy Quota

Command Area

Command Area Reservation:

Currently sugar mills are required

to buy all sugar cane grown in

their reserved area. This does not

provide any incentive for farmers

to ensure high quality. If the

reservation system goes farmers

will be incentivized to take better

care of their crops to realize high

prices from the sugar mills.


Concerns

Low rate of increase in MSPs of alternate crops

As farmers seek to maximize their returns, they divert a larger portion of their land towards crops which yield them

better returns. Incase the MSPs for competing crops like wheat, paddy, cotton and jowar are raised at a lower rate than

sugarcane in the coming seasons, there would be an increase in sugarcane cultivation.

Cane Growth Wheat Growth Rice Growth Cotton Growth Jowar Growth

SY07 118 3% 850 21% 635 9% 1990 1% 548 4%

SY08 110 -7% 1000 18% 760 20% 2030 2% 610 11%

SY09 155 41% 1080 8% 865 14% 3000 48% 850 39%

SY10 230 48% 1100 5% 1065 23% 3000 0% 850 0%

SY11 205 -11% 1120 2% 1015 -5% 3000 0% 890 5%

Source: Ministry of Agriculture, Darashaw

Substantial increase in Brazilian production in coming years

Brazil has increased its production at a CAGR of 6% over the last decade. We have estimated Brazil to increase its

production at the same rate. Any further increase in Brazil’s growth rate could result in a global surplus. However, we

believe that our estimate of Brazil’s production growth trajectory (44 mn ton in 2016) is ahead of estimates of UNICA

(41 mn ton) and thus we do not foresee Brazil’s production growing far above our estimates.

Countries not going for restocking; learning to live with lower levels of inventory

Over the years, we observe that global inventory has been receding and countries have begun to maintain lower

inventory. This does not augur well for the commodity.

Inventory Ratio

20%

25%

30%

35%

40%

45%

50%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010



Valuation

We have valued stocks on book value based multiples

We note that DCF is very difficult to employ due to the cyclical nature of the industry. EV/EBITDA another valuation

metric, is not applicable in the current scenario as EBITDA diminishes substantially during a downturn thereby rendering

the metric unserviceable. Therefore, we use one year forward P/BV valuation metric at which the companies traded

historically.

We prefer SHRS as the company has gained superior market intelligence in this highly cyclical industry. SHRS is the

only company in the world to have presence in both the world’s largest sugar producer – Brazil and the world’s largest

consumer – India. We estimate global demand to outpace global supply over the next 4-5 years and hence expect

global sugar prices to tread higher in coming years. However we expect supply to exceed demand in 2010-11E and

2011-12E and hence do not expect prices to tread higher till the 2011-12E season.

BJH BRCM SHRS

SY12E Book Value 26,305 12,389 39,016

Target P/BV (x) 0.5 1.4 1.5

Implied Book Value 14,249 16,807 57,369

No of Shares 228 257 670

Value / Share 73* 65 86

CMP 82 75 76

Returns -11% -13% 13%

Valuations are based on Quality of Earnings (SY11 Figs.)

PAT Margin -5% 7% 9%

Asset Turnover 0.4 1.1 1.1

Equity Multiplier (Assets/Equity) 3.2 1.7 2.7

DuPont ROE -6% 12% 29%

Net Debt / Equity 2.1 x 0.6 x 1.6 x

Target P/BV (x) 0.5 1.4 1.5

* Indicates INR 10/share included from power foray of BJH Source: Darashaw


Valuation Bands

SHRS

2

4

6

8

10

12

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

EV/EBITDA Mean

0.0

1.0

2.0

3.0

4.0


P/BV Mean

Source: Darashaw Source: Darashaw

BRCM

4

6

8

10

12

14

16


EV/EBITDA Mean

0.0

1.0

2.0

3.0

4.0


P/BV Mean


BJH

4

8

12

16

20

24

28


EV/EBITDA Mean

0.0

0.5

1.0

1.5

2.0

2.5


P/BV Mean



Business Model Comparison

(All figures are taken for SY11E)

Brazilian

Operations

Sugar -

India

(from Cane)

Refining Trading Market

Intelligence

Distillery

Integration

(Ltrs/TCD)

Cogeneration

Integration

(Units/TCD)

Revenue

Share 36% 16% 25% 15%

Degree of

Integration 27 35,791

SHRS

Dynamics

2/3rd of cane is

from owned

farms whereby

cane costs are

fixed

Lower exposure

lowers risks as

losses are

incurred during

down-cycles

Import raws, refine

& re-export to

Asian countries and

capture arbitrage

profits of USD

30/ton

Indulging in

opportunistic

trading across

geographies

and within

India

Superior;

Excellent

global and

domestic

exposure

Comments

Higher integration leads to better

performance during down-cycles as

raw materials are available in

abundant supply at lower costs

Revenue

Share 0% 73% 10% 0%

Degree of


BJH

Dynamics

High exposure

leads to losses

during down-

cycles, besides

BJH’s cost of

production is the

highest

Not a core activity

for the company. A

one off event.

Average;

Domestic

focus

Comments

BJH has not expanded its non-sugar

businesses enough to keep the

company in black during a downturn

Revenue

Share 0% 70% 9% 0%

Degree of


BRCM

Dynamics

High exposure

leads to losses

during down-

cycles.

Not a core activity

for the company. A

one off event.

Average;

Domestic

focus

Comments

BRCM too has not expanded its non-

sugar businesses enough to keep the

company in black during a downturn


INVESTMENT RATIONALE

Brazilian acquisitions to drive the next phase of growth

Through these acquisitions, SHRS has gained superior market intelligence in this

highly cyclical industry. Its backward-integrated Brazilian assets should earn an

EBITDA of USD 315 mn, equating to USD 25/ton cane assuming raw sugar price

of 20 cents/lb in SY12E. Over the next 3-4 years during the next major global up-

cycle, we foresee an annual EBITDA of USD 800 mn for the consolidated company

with the share of its Brazilian assets at USD 600 mn. Thus we believe that the

market is focusing on the short term cyclical scenario and ignoring the long term

earnings potential of SHRS.

Buoyant Global prices to help in the deleveraging process

SHRS has become the largest sugar producer in the country and seventh largest

in Brazil after the acquisition of Vale Do Ivai and Renuka Do Brasil. We believe

SHRS will consolidate its operations in Brazil after these two significant

acquisitions. Positive cash flows from operations would result in considerable

deleveraging for the company.

Expansion of Non-Sugar businesses to act as a cushion during downturn

SHRS is well geared for the oncoming downturn in the domestic prices over the

next couple of years owing to (A) 2.5x jump in distillery volume on the back of

jump in molasses supply in addition to 26% increase in ethanol price. (B) 50%

increase in refining capacity led by commissioning of 1 Mn ton refinery at Mundra

in H2 CY2011.

Re-rating on the cards

We expect SHRS to get re-rated as the market starts to appreciate its

unique positioning, long term earnings potential and the likely superior

performance than its Indian peers. In the longer term, in the midst of the

next major sugar bull-run (that we anticipate in 2013/14), we foresee

the company giving returns of 4x from its CMP.

RISK TO OUR TARGET PRICE

Downturn in the sugar cycle

The only negative factor that could depress the company’s profitability is

significantly higher production in SY12E in Brazil and India which could propel a

significant decline in sugar prices.

Summary Financials

Source: Darashaw Estimates

Rating BUY

Date 7 APR’10

CMP INR 76

Price Target INR 86

Upside +13%

COMPANY DATA

Industry Sugar

Equity (INR mn) 670

Face Value 1

KEY MARKET DATA

BSE Code 532670

BSE Group A

NSE Code RENUKA

Bloomberg Code SHRS IN

Mkt Cap. 52 bn

52 Week high/low 108 / 52

Daily Turnover 74.8 mn

SHARE HOLDING PATTERN (Dec’10)

Promoters 38%

MF’s, FI’s, Banks 11%

FII’s 22%

Others 29%

PRICE PERFORMANCE

Returns (%) Abs Rel.*

3 Month (20) (17)

6 Month (12) (7)

12 Month 8 (1)

* Benchmark Sensex

Analyst Jehan Bhadha

Contact No +91-22-43022256

Email ID [email protected]

INR Mn.

Sales YoY EBIDTA Margin PAT Margin EPS YoY RoE P/E P/BV

SY09 28224 33% 4,720 17% 2235 8% 3.3 93% 15% 10.8 1.6

SY10 78516 178% 13,575 17% 7034 9% 10.5 215% 30% 7.2 2.2

SY11E 101388 29% 22,582 22% 7329 7% 10.9 4% 29% 7.0 1.6

SY12E 103194 2% 19,905 19% 5806 6% 8.7 -21% 19% 8.8 1.3

Shree Renuka Sugars Ltd


COMPANY BACKGROUND

SHRS History

1998 Acquisition of assets of Nizam Sugars Ltd and transfer to Munoli

2000-02 Commencement of 11.2 MW co-generation plant, 60 KLPD distillery & 250 TPD refinery

2004 IPO

2005-06 Acquisition of two mills in Karnataka

2007 Acquisition of KBK Chemical Engineering

2008 Commissioning of 2,000 TPD port based refinery at Haldia

2009-10 Acquisition of two sugar mills in Brazil having combined crushing capacity of 60,400 TCD

2011 Commissioning of 3,000 TPD port based refinery at Mundra

Source: Company

SHRS (SY11)

India

Brazil

Dubai

Sugar Crushing 35,000 TCD

Sugar Refining 9,000 TPD

Distillery 1230 KLPD

CoGen 173 MW

Sugar Trading

KBK Chemical Engineering

Sugar Crushing 60,000 TCD

Distillery 5310 KLPD

Renuka Commodities

DMCC Trading

CoGen 203 MW



Largest & the fastest growing sugar company backed by superior promoter cum management

SHRS is India’s largest sugar producer in SY10. It achieved this feat in only 11 years since the company's inception.

Increase in its cane crushing capacity since SY05 has been driven by acquisitions and its leasing strategy. It is the only

sugar company in India to possess assets in Brazil, the largest sugar producer and garners half of its profits from Brazil.

Sugar production scale-up over the past 5 years

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

mn

to

ns

BRCM

BJH

SHRS

SY05 SY06 SY07 SY08 SY09 SY10

Source: Companies, Darashaw

We attribute growth of SHRS to its promoters who also head the management team. The promoters acquired a sick mill

with a capacity of 1250 TCD in 1998 and today have built India’s largest sugar company.

Ms. Vidya Murukumbi (Executive Chairperson) has been the president of Indian Sugar Mills Association in the

past. She was also a member of the Tuteja committee which was set up by the government of India in 2004

for industry revitalization.

Mr. Narendra Murukumbi (Managing Director) completed his post graduation from IIM-A in 1994. He won the

Economic Times recognition “Entrepreneur of the Year” award in 2010.

The mother-son pair heading SHRS was also featured by Forbes in the 100 richest Indians (2009) ranking #93. The

healthy financial status of the promoter augurs well for SHRS.


DOMESTIC OPERATIONS

SHRS has 8 cane crushing mills spread across Karnataka and Maharashtra with a total crushing capacity of 35,000 TCD

of which 7,750 TCD is leased. It also has a 2,000 TPD port based sugar refining plant in Haldia, WB and is in the

process of setting up a 3,000 TPD port based refinery in Mundra, Gujarat.

Source: Company

Highest level of integration among peers

SHRS has a unique business model as it has preferred to expand significantly more than any of its peers into the

distillery, power and refining businesses. This augurs well for the company during down-cycles in sugar as the

contribution of non-sugar businesses improves owing to increase in availability of raw materials at lower costs. Raw

materials such as molasses and bagasse which are used for producing ethanol/alcohol and power respectively are found

in abundance during years of higher sugarcane production. Thus during a down-cycle, this acts as a cushion for

companies having integrated plants. The higher the level of integration, the better is the ability to wither the downturn.

Distillery (Ltrs) / TCD

0 10 20 30

BRCM

BJH

SHRS

Power (units) / TCD

0 10000 20000 30000 40000

BRCM

BJH

SHRS

Refining as % of Crushed Capacity

0% 5% 10% 15% 20%

BRCM

BJH

SHRS

Source: Companies Source: Companies Source: Companies

Unit Sugarcane

(TCD) Co-gen (MW)

Distillery (KLPD)

Refinery (TPD)

Owned

Munoli (Kar) 7,500 35.5 150 1,000

Athani (Kar) 8,000 38 300 2,000

Havalgah (Kar) 8,000 40.5 150 1,000

Pathri (Mah) 1,250 30

Gokak (Mah) 2,500 14

Dhanuka (Mah) 300 Leased

Aland(Mah) 1,250

Arag (Mah) 4,000 15

Raibag (Kar) 2,500

Refineries

Haldia (WB) 15 2,000

Mundra (Guj) 15 3,000

Total 35,000 173 930 9,000

Source: Company

Domestic Capacity Details


Port based refineries to add to profitability

SHRS has pioneered the business strategy of setting up port based refineries in India. This is an extremely well thought

out plan by SHRS as a port based refinery saves the company on transport cost which amounts to almost INR 2/kg if we

consider any sugar mill located in the interior parts of the country. Further, the refinery will enable SHRS to capitalize

on the spread between raw and white sugar by importing raws and re-exporting white. SHRS is commissioning a 3,000

TPD refinery near Mundra port which is expected to commence operations in July/Aug 2011. This will increase its overall

port-based sugar refining capacity to 1.6 mn ton from 0.7 mn ton now. SHRS already has a 2,000 TPD port based

refinery in Haldia, WB. Further SHRS has 4,000 TPD of cane crushing capacity spread between Havalgah, Munoli and

Athani which is also capable of refining raw sugar. However they are feasible only when the port based capacities are

fully utilized and there exists an opportunity after considering the higher inland transportation cost.

Source: Company

SHRS will import raw sugar, refine and re-export white sugar to neighboring countries in Asia from these port based

refineries. The sugar future market indicates a spread of about USD 100/ton to last atleast till Dec 2011 between Raw &

White sugar. The forward contracts indicate the white premium average at USD 100-120/ton. Thus if we consider the

spread of USD 100/ ton, SHRS can make a profit of USD 30/ton on taking conversion cost at USD 30/ton and transport

cost at USD 40/ton.

White & Raw - Sugar Prices

300

400

500

600

700

800

900

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

US

D /

To

n

WhiteRaw

Forward Contracts - White Premium

60

80

100

120

May-11 Aug-11 Nov-11 Feb-12

US

D/

To

n

Source: Bloomberg Source: Bloomberg


Sugar Model SY09 SY10 SY11E SY12E

Cane - Sugar

Cane Crushed (mn ton) 3.5 4.0 5.0 5.6

Recovery Rate 10.7% 11.2% 11.2% 11.2%

Sugar Production (mn ton) 0.38 0.45 0.56 0.63

Sales Volume (mn ton) 0.42 0.32 0.56 0.63

Sugar Realizations (INR/kg) 19.3 28.0 25.2 23.4

Blended Realizations (INR/kg) 20.9 31.5 27.0 25.0

Revenue (INR bn) 9511 10931 15251 15791

Cane Cost (INR/ton) 1750 2800 2400 2400

Transport Cost (INR/ton) 200 200 200 200

Conversion Cost (INR/ton) 445 350 350 350

Total Cost (INR bn) 22321 30045 26457 26457

PBIT (INR bn) 975 1828 -291 -853

PBIT Margin 10% 17% -2% -5%

Imported Raw - Sugar


Realization (INR/ton)

22.9 31.5 27 23 Revenue (INR mn)

8702 25200 27000 27600 PBIT (USD/ton)

44 60 30 30 PBIT (INR mn)

760 2160 1350 1620 Source: Company, Darashaw


Ethanol and Power segments to provide cushion during downturn

Distillery segment’s contribution to improve

Recent government approval to oil marketing companies to purchase ethanol at INR 27/ltr compared to INR 21/ltr will

benefit SHRS the most. Currently SHRS has 630 KLPD primary distillation capacity and 300klpd secondary distillation

capacity. SHRS can produce 270 mn ltr of ethanol from its primary distillery and another 90mn ltr from its secondary

distillery at full capacity. Inadequate availability of molasses owing to sharp reduction in cane output restrained ethanol

production to 83 mn ltr in SY09 and 76 mn ltr in SY10. SHRS will have adequate molasses in SY11E and SY12E and thus

we expect the company to produce 105 mn ltr in SY11E and 122 mn ltr in SY12E at a cost of INR 15/ltr.

Distillery Model SY09 SY10 SY11E SY12E

Cane Crushed (mn tons) 3.5 4.0 5.0 5.6

Molasses Recovery (%) 4.5% 4.5% 4.5% 4.5%

Internal Molasses Obtained (mn tons) 0.16 0.18 0.23 0.25

% of alcohol realized 22% 22% 22% 22%

Internal Alcohol Produced (mn ltrs) 35 40 50 56

External Molasses Bought (mn tons) 0.22 0.17 0.25 0.30

External Alcohol Produced (mn ltrs) 48 36 55 66

Total Alcohol Produced (mn ltrs) 83 76 105 122

Alcohol Sold (mn ltrs) 65 51 135 122

Realization (INR/ltr) 25.8 27.7 26.8 25.5

Revenue (INR mn) 1676 1418 3621 3104

Molasses cost (INR/ton) 2250 2800 2520 2268

Molasses Cost (INR mn) 845 970 1201 1256

Conversion Cost (INR/ltr) 6.0 5.5 5.0 5.0

Conversion Cost (INR mn) 209 219 249 279

Operating Cost (INR mn) 1054 1189 1451 1536

PBIT 622 229 2171 1569

Margins 37% 16% 60% 51%

Source: Company, Darashaw

Cogen profitability to improve

SHRS’s saleable electricity capacity is likely to increase from 90 MW in SY10 to 115 MW in SY11E and 135 MW in SY12E.

Capacity utilization is likely to improve and cost likely to decline owing to increase in availability of bagasse. Hence, we

expect EBIT of cogen segment to rise from INR 507 mn in SY10 to INR 1,224 mn in SY11E and INR 1,601 mn in SY12E.


Cogeneration Model SY09 SY10 SY11E SY12E

Cane Crushed (mn tons) 3.5 4.0 5.0 5.6

Bagasse Recovery (%) 29% 35% 33% 33%

Bagasse Obtained 1.0 1.4 1.7 1.9

Power generated 378 825 615 689 Realization (INR/unit) 7.8 4.8 4.5 4.5

Revenue (INR mn) 2946 3944 2768 3100 Bagasse cost (INR/ton) 1030 1150 300 250

Bagasse Cost (INR mn) 1051 1622 499 465

Conversion Cost (INR/unit) 2.2 2.2 1.7 1.5


Operating Cost (INR mn) 1882 3437 1544 1499 PBIT 1064 507 1224 1601

Margins 36% 13% 44% 52%

Source: Company Darashaw

KBK Engineering – Steady Business

KBK is an engineering company, primarily engaged in providing turnkey solutions in the field of distilleries, ethanol

plants and bio-fuels. SHRS had acquired a 54% stake in KBK Chemicals with INR 370 mn in SY07. SHRS increased its

stake to 80% in KBK in SY10. The subsidiary has PBIT margins of around 4% and is expected to show steady growth.

KBK Assumptions SY09 SY10 SY11E SY12E

Revenue 2426 2224 2446 2569

Growth 62% -8% 10% 5%

PBIT 100 87 96 100

Margins 4% 4% 4% 4%


Trading – Capturing Arbitrage Opportunities

SHRS is also involved in taking advantage of arbitrage opportunities prevailing between sugar prices in different states

in India as well as internationally. To cater to the international trading business SHRS has set up a subsidiary Renuka

Commodities DMCC in Dubai. The trading revenues fluctuate annually as they depend on the prevailing opportunities

during that year between different markets. SHRS has managed to clock healthy PBIT margins ranging between 6% and

21% over the past five years.

Trading Assumptions SY09 SY10 SY11E SY12E

Revenue 5090 16643 10969 10278

Growth -52% 227% -34% -6%

PBIT 1087 1550 1022 957

Margins 21% 9% 9% 9%



Brazilian Acquisitions to drive future growth

After its recent acquisition of VDI and Equipav, SHRS now has the seventh largest operating capacity of 13.6 mn ton of

sugarcane crushed in Brazil. SHRS is currently focusing on increasing the sugar mix of its mills to 70%. We believe the

company’s main focus would be to de-leverage VDI and Equipav books in the next couple of years, which would result

in lower interest cost and higher profitability.

VDI (Vale Do Ivai)

SHRS acquired VDI in Nov 2009. VDI is located in the state of Parana and is at a distance of 550 km from the port of

Paranagua which is a distinct advantage. VDI owns equity in four logistics companies which makes it very competitive

for export logistics. It has two mills with combined crushing capacity of 3.1 mn ton (16,000 TCD) and has a cane

cultivation area of 18,000 Ha on long term lease which amounts to 85% of cane crushed.

Acquisition Details

SHRS valued VDI at an EV of USD 240 mn and paid USD 82 mn for 100% stake, while the balance amount was

assumed as debt repayable over eight years where the first three years is the moratorium period and 5 years is the

principal repayment. Acquisition of VDI has added about INR 7.2 bn in debt.

Renuka Do Brasil S/A (erstwhile Equipav AA)

Equipav is one of the largest sugar and alcohol producers in Brazil with cane crushing capacity of 10.5 mn ton (44,000

TCD) in the state of Sao Paulo and co-generation capacity of 203 MW (138 MW saleable). Equipav has easy access to

main ports of Santos and Parangua. Equipav plans to expand its cane crushing capacity to 12 mn ton and cogeneration

capacity to 295 MW at a cost of USD 122 mn over next the 18 months, funded through proceeds from this deal. Equipav

has about 1.15 lac hectares of land, of which 2/3rd (85,000 Ha) is currently used for own cane cultivation. This is

sufficient to the extent of 67% of its total current cane requirement.

Acquisition Details

SHRS acquired Equipav in June 2010. SHRS acquired 50.34% stake for USD 250 mn however it paid only USD 130 mn

as upfront payment which would be utilized towards repayment of debt and enhancement of working capital. The

balance USD 120 mn will be assumed as repayable debt. At the time of acquisition, Renuka Do Brasil had an

outstanding net debt of USD 650 mn. Based on the upfront payment and outstanding net debt, we arrive at EV of USD

1147. No recourse is available to the parent company for Renuka Do Brasil’s outstanding debt.

Funding

SHRS funded these acquisitions through –

recently concluded QIP where it raised INR 5 bn,

proceeds of INR 2 bn from warrant conversion by promoters

and internal accruals.

Payments –

USD 82 mn / INR 3.7 bn - for VDI

USD 130 mn / INR 5.85 bn - for Renuka Do Brasil


Profitability of Brazilian mills is far superior

Unlike India, Brazilian mills have the freedom of owning farms and thereby secure cane availability at fixed

costs. Thus any upmove in sugar realizations adds up to profits with only minimal variable costs incurred for

manufacturing.

Further, with respect to outsourced cane, Brazilian mills are governed by the regulations of its governmental

body “Consecana” which has prescribed a revenue sharing formula linked to sugar realizations at 60:40

between farmers and mills. This provides for equitable distribution of profits between farmers and mills.

Thus, profitability of Brazilian mills is far superior to those in India.

We have compared the profitability of SHRS’s mills in India with its mills in Brazil. We have converted the Brazilian

subsidiaries’ currency and unit measurements into INR and Kg respectively to benchmark against the Indian operations.

India VDI RDB

Sugar Realizations (INR/Kg) 27 27 27

Cane from Own Land 0% 85% 67%

Outsourced Cane 100% 15% 33%

Cane Cost (INR/Kg) 21.5 8.2 9.5

Other Costs (INR/Kg) 3.1 7.7 8.3

PBIT (INR/Kg) 2.4 11.1 9.2

PBIT Margins 9% 41% 34%


SHRS is now the 7th largest sugar company in Brazil.

Capacity (mn ton)60

37 36

2117 16 14 13 13 13

0

10

20

30

40

50

60

70

Cosa

n

ETH

-B

renco

Louis

Dre

yfu

s

Guara

ni

Usa

acu

sar

Bunge

SH

RS

Linco

lnJu

nqueir

a

Sao

Mart

inho

Coru

ripe

Source: Company


Renuka Do Brasil Vale Do Ivai Sugar Model SY11E SY12E SY11E SY12E

Total cane crushed (Mn Ton) 9.3 9.7 2.7 3.0

Cane utilised for sugar 55% 55% 70% 70%

Cane utilised for ethanol 45% 45% 30% 30%

Captive Cane % 67% 67% 85% 85%

Own cane (Mn Ton) 6.2 6.5 2.3 2.5

Bought out (Mn Ton) 3.1 3.2 0.4 0.4

Own cane cost (BRL / Ton) 37 37 37 37

Bought out cane cost (BRL / Ton) 74 65 74 65

Blended cane cost (BRL / Ton) 49 46 43 41

Revenue

Recovery(%) 14% 14% 14% 14%

Sugar Production(Mn tonnes) 72% 75% 0.26 0.29

Sugar Realisations (Cents/Pound) 23 20 23 20

INR / USD 45 45 45 45

Sugar Realisations (INR/Ton) 22813 19838 22813 19838

Sugar Revenues (INR Mn) 16337 14817 6036 5774

Cost

Cane Cost (BRL/Ton of Sugar) 352 329 304 294

Processing Cost (BRL/Ton) 110 110 110 110

Other Cost BRL/Ton 120 120 120 120

Total Cost BRL/Ton 582 559 534 524

Total Cost INR/Ton 14662 14085 13445 13183

Total Cost INR Mn 10470 10543 3563 3842

PBIT (INR Mn) 5866 4274 2474 1932

PBIT Margin 36% 29% 41% 33% Source: Company, Darashaw


Renuka Do Brasil Vale Do Ivai Ethanol Model SY11E SY12E SY11E SY12E

Revenue

Recovery Rate (Ltrs / Ton of Cane) 80 80 80 80

Production Volume ('000L) - Direct Route 334800 349200 64800 71280

Production Volume ('000L) - from Sugar Div 102300 106700 29700 32670

Total Production ('000L) 437100 455900 94500 103950

Share of Hydrous Ethanol 33% 33% 60% 60%

Share of Anhydrous Ethanol 67% 67% 40% 40%

Hydrous Production ('000L) 144243 150447 56700 62370

Hydrous Realisation – Net (BRL/Ton) 541 514 541 514

Hydrous Realisation (INR/Ton) 13623 12942 13623 12942

Hydrous Revenue (INR Mn) 1965 1947 772 807

Anhydrous Production ('000L) 292857 305453 37800 41580

Anhydrous Realisation (BRL/Ton) 1165 1107 1165 1107

Anhydrous Realisation (INR/Ton) 29330 27863 29330 27863

Anhydrous Revenue 8589 8511 1109 1159

Revenue Rs Mn 10555 10458 1881 1966

Direct Ethanol Cost Cane Cost to Ethanol (BRL / '000 Ltrs) 616 576 532 514

Process Cost (BRL / '000 Ltrs) (150-130) 150 150 150 150

Other Cost (BRL / '000 Ltrs) (45-30) 45 45 45 45

Total Cost (BRL/'000 Ltr) 811 771 727 709

Total Cost (Rs/ Ltr) 20 19 18.3 17.8

Total Cost Rs Mn 6841 6783 1186 1272

Indirect (Sugar Div) Ethanol - Cost Conversion Cost (INR/Ltr) 6 6 6 6

Conversion Cost 614 640 178 196

EBITDA (INR Mn) 3100 3035 517 498

EBITDA Margin 29% 29% 27% 25% Source: Company, Darashaw

Ethanol realizations are positively correlated with crude oil prices as demand for ethanol is driven by its ability to

substitute gasoline.

Correlation between Ethanol & Crude Oil

200

400

600

800

1000

1200

1400

1600

1800

2000

Mar-

09

Jun-0

9

Sep-0

9

Dec-

09

Mar-

10

Jun-1

0

Sep-1

0

Dec-

10

Mar-

11

Eth

an

ol

(BR

L/

ton

)

40

50

60

70

80

90

100

110

120

Cru

de O

il (

US

D) Anhydrous

Ethanol

HydrousEthanol

Crude(Brent)

Source: Bloomberg


Renuka Do Brasil Vale Do Ivai Cogeneration Model SY11E SY12E SY11E SY12E

Revenue

Total Capacity MW 203 203 - -

Bagasse Recovery from cane 30% 30%

Bagasse Obtained (Mn Ton) 2.8 2.9

Percent of Units realised from Bagasse 36% 36%

Total Power generated (Mn Units) 1004 1048

Captive Consumption (Mn Units) (@40%) 402 419

Surplus (Mn Units) 603 629

Realisation BRL/MWhour 100 100

Realisation INR/Unit 4.8 4.8

Total Revenue INR Mn 2887 3011

Cost

Conversion Cost (INR / Unit) 1.9 1.9

Conversion Cost (INR Mn) 1896 1908

EBITDA (INR Mn) 979 1021

EBITDA Margin 34% 34% Source: Company, Darashaw

Contribution from other segments

The Brazilian mills also generate revenue from sale of surplus molasses, steam and power especially in the case of Vale

Do Ivai which does not have a cogeneration plant. Thus these income streams contribute a higher proportion of total

revenue in case of Vale Do Ivai at around 20% and around 5% in case of Renuka Do Brasil.


Significant profit potential in the next sugar up-cycle; Stock can appreciate 4x over the next 4 years

In order to ascertain the quantum of EBITDA generating capacity of SHRS in the next sugar up-cycle, we have made

certain bullish assumptions and estimated the likely EBITDA for SHRS under such a scenario. We have assumed an

average raw sugar price of 26 cents/lb and domestic sugar price at INR 32/kg for the year SY14E and modeled SHRS.

(Figs. In INR Mn)

BULL CASE - Assumptions India BULL CASE - Assumptions Brazil

Cane - Sugar Cane - Sugar Cane Crushed (Mn tons) 4.36 Cane Crushed (Mn tons) 14.9 Sugar Realization (INR/kg) 32 Sugar Realization (cents/lb) 26 Cane Price (INR/Quintal) 290 Sugar sold (mn tons) 1.38 Cane-Sugar sold (mn tons) 0.49 Cane Cost (BRL/ton) 53 EBITDA 2307 EBITDA 15149

Ethanol / Alcohol Ethanol Alcohol Sold (Mn ltrs) 109 Hydrous Sold (Mn Ltrs) 221 Alcohol Realization (INR/unit) 28 Hydrous Realization (BRL/ton) 753 Cost (INR/ltr) 20 Anhydrous Sold (Mn Ltrs) 346 EBITDA 1332 Anhydrous Realization (BRL/ton) 1414 Blended Realization (BRL/ton) 1156 Cogeneration Cost (BRL/ton) 828 Surplus Power (Mn units) 323 EBITDA 5725 Cogen Realization (INR/unit) 4.0

Cost (INR/unit) 3.5 Cogeneration EBITDA 316 Surplus Power (Mn units) 732 Cogen Realization (BRL/unit) 100 Refined Sugar Cost (INR/unit) 66 Refining Volumes (Mn tons) 1.4 EBITDA 1189 Refining Margin (USD/ton) 30

EBITDA 3702 Yeast, Molasses & Others EBITDA 5214 Trading Trading Volumes (Mn tons) 5.4 Trading EBITDA Margins 9%

EBITDA 1611

KBK Chemical EBITDA 196

Less: Unallocable Expenditure 791

India - EBITDA 8674 Brazil - EBITDA 27277 Source: Darashaw Estimates

Consolidated EBITDA: INR 36 bn (USD 800 mn)

As per our estimates, there is high potential for SHRS to generate the above detailed profitability during the next major

sugar up-cycle which may occur over the next 3-5 years. We have further tried to derive the likely upside potential for

SHRS assuming our bull case scenario holds true in SY14E (four years from today).

Bull Case Value (SY14E)

Target Multiple (x) 6.0

SY14E EBITDA 35,951

EV 215,707

Net Debt (15,964)

Implied EV 199,742

No of Shares 670

Fair Value 298

CMP 76

Returns 4x

Source: Darashaw


VALUATION

We value SHRS using P/BV multiple-based methodology owing to the ongoing sugar down-cycle.

Peer Comparison

Source: Darashaw

Valuations are based on Quality of Earnings (SY11E Figs.)

BJH BRCM SHRS






Target P/BV (x) 0.5 1.4 1.5

Source: Darashaw

From the above tables, we infer that SHRS should be valued at an EV/EBITDA multiple of 6-7x during an up-cycle and

at a P/BV multiple of 1.5x during a down-cycle. Based on the down-cycle target multiple and our SY12E BV, we arrive at

a fair value of INR 86 for SHRS.

Fair Value Calculation

Target Multiple (x) 1.5

SY12E Book Value 39,016

Implied Book Value 57,369

No of Shares 670

Fair Value 86

CMP 76

Returns 13%

Source: Darashaw

Price PE (x) EV/EBITDA (x)

(BRL) SY11E SY12E SY11E SY12E Year End

Brazilian Companies

Cosan Ltd 21.4 10.0 13.7 6.2 8.1 Mar

Cosan SA 26.2 15.5 15.4 7.1 7.7 Mar

Sao Martinho 24.0 22.3 17.6 6.0 6.0 Mar

Average 15.9 15.6 6.4 7.3 Mar

Price PE (x) P/BV (x)

(INR) SY11E SY12E SY11E SY12E Year End

Indian Companies

SHRS 70 7.0 8.8 1.6 1.3 Sep

BRCM 69 12.7 37.6 1.6 1.6 Sep

BJH 72 NA NA 0.7 0.7 Sep

Average - - 1.3 1.2 Sep


2

4

6

8

10

12


EV/EBITDA Mean

0.0

1.0

2.0

3.0

4.0


P/BV Mean


Darashaw vs Consensus Estimâtes (INR Bn)

Consensus Darashaw Vs Consensus

Revenue

SY11E 88.5 101.2 14%

SY12E 97.6 102.9 5%

EBITDA

SY11E 17.7 22.6 28%

SY12E 19.9 19.9 0%

PAT

SY11E 6.4 7.3 16%

SY12E 6.8 5.8 -15%

Price Target 102 86 -16%

Total Consensus Calls : 20 BUY: 15 HOLD: 4 SELL: 1

Source : Bloomberg, Darashaw


Profit & Loss SY09 SY10 SY11E SY12E Balance Sheet SY09 SY10 SY11E SY12E

Net Sales 28,160 76,694 101,156 102,939 Equity 317 670 670 670

Change in stock 0 0 0 0 Reserves & Surplus 14779 22808 31674 38464

VoP 28160 76694 101156 102939 Networth 15302 23479 32344 39134

Other operating inc 64 1822 231 254

Income 28224 78516 101388 103194 Debt 13427 65080 56221 49748

Expenditure 23,504 64,941 78,805 83,289 Sources of Funds 28877 88710 88722 89043

Raw Materials 16,276 37,283 42,326 46,167

Employee 571 1,067 1,407 1,432 Application of Funds 28877 88710 88722 89043

SG&A 2,729 5,267 6,947 7,070

Gross Fixed Assets 15704 82466 105283 113358

EBIDTA 4,720 13,575 22,582 19,905 Less Acc. Depreciation 1555 17629 23735 30310

Net Fixed Assets 14149 64837 81548 83048

Depreciation 675 2,457 6,106 6,575

Capital WIP 2585 7027 0 0

EBIT 4045 11118 16476 13330

Investments 477 1189 1189 1189

Interest 1,077 2,377 3,673 3,477

Non-Operating income 0 0 0 0 Other Current Assets 718 881 881 881

Extra-ordinary income 0 0 0 0 Inventories 10721 17711 19949 20288

Extra-ordinary exp 0 0 0 0 Debtors 1762 5226 6893 7014

Cash 4912 6019 4318 3423

PBT 2,968 8,741 12,803 9,853 Loans & Advances 4518 17342 20662 20904

Current Assets 22631 47179 52702 52510

Tax 728 1,703 3,329 2,562

Current Liabilities 9157 34954 41481 43536

PAT 2240 7038 9474 7291 Provisions 1014 3278 4018 3094

Minority Interest 5 4 2146 1486 Current Liabilities & Prov 10172 38232 45500 46630

PAT after Min Int 2235 7034 7329 5806

Dil EPS 3.3 10.5 10.9 8.7 Non-Current Liabilities 826 1391 1335 1191

Misc. Expenditure 28 117 117 117


Ratios SY09 SY10 SY11E SY12E FCFF SY09 SY10 SY11E SY12E

Sales Growth 33% 172% 32% 2% EBIT 4,045 11,118 16,476 13,330

Income Growth 33% 178% 29% 2% Less Adj. Taxes 992 2,166 4,284 3,466

EBIDTA Growth 77% 188% 66% -12% NOPLAT 3,053 8,953 12,192 9,864

Adj. PAT Growth 93% 215% 4% -21% Inc / (Dec) in WC 4,618 (6,422) (2,111) (1,473)

EPS Growth 93% 215% 4% -21% Operating Cash Flow (1,566) 15,374 14,303 11,338

Raw Materials 58% 47% 42% 45% Inc / Dec in other op assets (186) 237 56 144

Employee 2% 1% 1% 1% Net Capex 3,820 63,350 1,756 1,644

SG&A 10% 7% 7% 7% Net Investment 8,438 56,928 -355 171

EBIDTA margin 17% 17% 22% 19%

Depreciation rate 4% 3% 6% 6% Free Cash Flow to Firm (5,385) (47,976) 12,547 9,693

EBIT margin 14% 14% 16% 13%

Non-Operating cash flow 0 0 0 0

Other income to PBT 0% 0% 0% 0%

Tax Rate 25% 19% 26% 26% Cash flow to investors (5,385) (47,976) 12,547 9,693

Adj. Pat Margin 8% 9% 9% 7%

Finaning Cash Flow (5,385) (47,976) 12,547 9,693

PAT / Sales 8% 9% 9% 7% Dividend (adj for inc/dec in prov) 65 371 782 652

Sales / Assets 1.0 0.9 1.1 1.2 Equity buyback/(issue) (5,178) (1,882) 0 0

Assets / Equity 1.9 3.8 2.7 2.3 After-tax Interest 813 1914 2718 2573

Dupont RoE 15% 30% 29% 19% Debt Repayment/(issue) (4,636) (52,657) 10,098 6,474

Inc/(Dec) in Non-op Investments 0 0 0 0

RoE 15% 30% 29% 19% Inc/(Dec) in Excess Cash 1,973 (1,017) (1,046) 0

RoCE 14% 17% 15% 12% Inc/(Dec) in Non-op L&A 1192 5300 0 0



Positive impact on Distillery division

The ethanol price declared by the government at INR 27/kg against the earlier

price of INR 21.5/kg is a big positive for BJH. Further, higher cane production

would have a positive impact on sales volumes. Thus PBIT of the distillery

segment is expected to increase from INR 230 mn in SY10 to INR 785 mn in

SY11E.

Cogen profitability to improve

Cogen segment too is expected to witness increased volumes on the back of

greater availability of bagasse in SY11E. We expect cogen segment to register a

PBIT of INR 1545 mn in SY11E against INR 1226 mn in SY10.

Valuations starting to get attractive

We value BJH on P/BV basis as we anticipate sugar prices to decline going into

SY12E. Owing to the inferior return ratios and highly leveraged balance sheet of

BJH vis-à-vis its peers, we value BJH at P/BV ratio of 0.54x and arrive at our

fair value of INR 73/share. Any steep corrections in the stock should be used as

buying opportunities with a perspective of holding on until the next major

domestic sugar up-cycle resumes.

CONCERNS

Sugar division to remain subdued

Sugar division is expected to post subdued performance in SY11E inspite of

lower cane prices as the company has huge inventory which would account for

42% of its sugar sales volumes in SY11E.

Leverage continues to be high

BJH’s high leverage will likely remain a concern in view of its deteriorating

profitability outlook and its capex for setting up a 450 MW and two 1,980 MW

green field power projects where it will hold a 26% stake. BJH has high debt-to-

equity ratio of 2.2x as on SY10. We expect it to rise to 2.8x by SY12E.

Summary Financials

Source: Darashaw Estimates

Rating HOLD

Date 7 APR’11

CMP INR 82

Price Target INR 73

Upside -11%

COMPANY DATA

Industry Sugar

Equity (INR mn) 221

Face Value 1

KEY MARKET DATA

BSE Code 500032

BSE Group B

NSE Code BAJAJHIND

Bloomberg Code BJH IN

Mkt Cap. 18.9 bn



SHARE HOLDING PATTERN (Dec’11)

Promoters 35%

MF’s, FI’s, Ins 7%

FII’s 14%

Others 44%

PRICE PERFORMANCE


3 Month (31) (28)

6 Month (40) (35)

12 Month (40) (49)

* Benchmark Sensex


Contact No +91-22-43022256


INR Mn.


SY09 22,993 58% 6948 30% 629 3% 2.7 48% 3% - -

SY10 34,441 103% 6526 19% 433 1% 1.9 200% 1% - 0.5

SY11E 30,301 39% 5881 19% -2144 -7% -9.4 23% -8% - 0.7

SY12E 29,476 31% 5241 18% -3197 -11% -14.0 40% -12% - 0.7

Bajaj Hindusthan


COMPANY BACKGROUND

BJH is the India's second largest integrated player in the sugar sector. The company along with its subsidiary has 14

sugar plants spread across Uttar Pradesh (UP), with an aggregate sugarcane crushing capacity of 136,000 TCD, alcohol

capacity of 800 KLPD and 428 MW power capacity.

Key Milestones –

1931 Set up 400 TCD crushing unit

2004 Addition of 7,000 TCD taking total capacity to 24,000 TCD

2005-08 Aggressive capacity expansion by 4x to 136,000 TCD. Expansion of Distillery to

800 KLPD & Cogeneration to 428 MW.

2008 Established Bajaj Ecotec Poducts, to manufacture Boards out of Bagasse.

2010-12 Expanding into Thermal power generation of 450 MW

BHL

Standalone BHSIL Consolidated

Sugar Crushing (TCD) 96,000 40,000 136,000

Distillery (KLPD) 640 160 800

Cogeneration (MW) 340 88 428

Boards (m cube) 130,000* 80,000* 210,000*

* indicates inclusion in the subsidiary – Bajaj Ecotec Products Source: Company, Darashaw

Plants Sugar - TCD Distillery – KLPD Cogen - MW

Standalone

Golagokarannath 13,000 100 30

Kinauni 12,000 160 35

Palia Kalan 11,000 60 40

Khambarkhera 10,000 160 35

Bilai 9,000 - 35

Thanabhavan 9,000 - 35

Budhana 9,000 - 40

Gangnauli 9,000 160 25

Barkhera 7,000 - 35

Maqsoodapur 7,000 - 30

Total in Standalone 96,000 640 340

BHSIL

Kunderki 15,000 - 43

Utraula 12,000 - 21

Rudauli 7,000 160 16

Pratappur 6,000 - 8

Total in BHSIL 40,000 160 88

Total 136,000 800 428

Source: Company


Sugar division to remain subdued in SY11E

The high cost inventory held by BJH at the beginning of SY11E will lead the company to post poor performance on the

sugar segment in SY11E. The inventory of 0.7 mn ton constitutes 42% of its SY11 estimated sales volumes.

Operating Cost / kg

10

15

20

25

30

35

SY08 SY09 SY10

BJHBRCMSHRS

Source: Darashaw


Cane - Sugar

Cane Crushed (mn ton) 6.73 8.75 10.50 11.76

Recovery Rate 9.0% 9.2% 9.2% 9.2%

Sugar Production (mn ton) 0.61 0.81 0.97 1.08


Sugar Realizations (INR/kg) 24 33 29 27

Blended Realizations (INR/kg) 22 29 27 25

Revenue (INR bn) 17640 23535 23689 27743

Cane Cost (INR/ton) 1451 2266 2016 2116

Transport Cost (INR/ton) 152 152 152 152

Conversion Cost (INR/ton) 715 465 350 350

Total Cost (INR bn) 2318 2883 2518 2618

PBIT (INR bn) 1347 1292 1019 -911

PBIT Margin 7% 5% 4% -3%


Sugar Produced (mn ton)

Sales Volume (mn ton) - 137000 140000 -

Realization (INR/ton) - 33 29 -

Revenue (INR mn) - 4521 4060 -

PBIT (INR/ton) - 5000 1000 -

PBIT (INR mn) - 685 210 -


BJH’s Operating Cost / kg has been

the highest among the top tier

sugar companies thereby making it

an inefficient player among its

peers.


Cogen profitability to improve; however revenue to be subdued compared to peers

BJH’s cogen segment is expected to witness increased volumes on the back of greater availability of bagasse in SY11E.

We expect cogen segment to register a PBIT of INR 1803 mn in SY11E against INR 1226 mn in SY10.

The power division has total installed capacity of 428 MW with external saleable capacity of 105 MW or 25% of installed

capacity. BRCM has total installed capacity of 180 MW and external saleable capacity of 126 MW or 70% of installed

capacity. Thus, it is apparent that BJH has high internal power consumption resulting in lower external sale of power.

BJH BRCM SHRS

Total Capacity (MW) 428 180 164

Surplus Capacity (MW) 105 126 90

Surplus as % of Total 25% 70% 55%

Source: Companies, Darashaw


Cane Crushed 6.7 8.8 11.8 9.8


Bagasse Obtained 2.1 2.7 3.6 3.0

Bagasse transferred to BEP 1.2 1.3 1.7 1.4

Bagasse used for co-generation 0.9 1.5 2.0 1.6

Power generated

Realization (INR/unit) 3 4 4.0 5.0

Revenue (INR mn) 788 1752 2402 2013

Bagasse cost (INR/ton) 150 150 150 150





PBIT 278 1226 1754 1280

Margins 35% 70% 73% 64%



Power Foray

The Bajaj family as promoters are setting up 5 x 90 MW of coal based power plants to be commissioned on March 2012

where BJH will be holding a 26% stake. The company will set up these 5 plants at its existing sugar plants where it had

surplus land attached. This company has entered into an agreement with UPPCL to sell 90% of the new capacity it is

setting up at a price of INR 4/unit.

Thermal Power Valuation

Capacity (MW) 450

Capex (INR mn) 22500

Equity (INR mn) 6750

BV Multiple 1.2

BV of Plants (INR mn) 8100

BJH’s stake 26%

BJH’s BV of Plants (INR mn) 2106

BJH – No of shares (mn) 215

BV / Share (INR) 10

Source: Company, Darashaw & Co.

BJH has signed an MOU with UPPCL to undertake additional 1980 MW (660x3) power projects at Lalitpur to be

commissioned in 2015 where it will again hold a 26% stake with the rest held by the Bajaj family. The land

acquisition process is currently ongoing and the construction work is expected to start in Jan 2011. The total

investment for this would be around INR 100 bn. Under the agreement to be signed, 90% of the power

generated would be sold to the state government at the rates approved by the electricity regulatory body and

the promoters would be free to sell the remaining 10% wherever they deem fit.

Further BJH has also signed an MOU with the Government of UP for setting up one more power project of 1980

MW (660x3) at Bargarh, UP. The cost for this project will again be around INR 100 bn and BJH proposes to

have a 26% stake with the balance held by the Bajaj family.

450 MW

405 MW Sale to UPPLC @ INR 4/unit

45 MW Sale in Open Access @ INR 5/unit

Power Economics – FY13

Capacity (MW) 450

PLF 80%

Generation (mn units) 2851

Blended Realization (INR) 4.1

Revenue (INR mn) 11690

Coal required (mn ton) 1.46

Landed Cost of Coal / ton (INR mn) 5625

Total Coal Cost 8197

Conversion Cost (@ INR 0.5/unit) 1426

Operating Cost (INR mn) 9623

INR mn

PBIT 2067

Interest 189

PBT 1878

Tax 639

PAT 1240

PAT Share of BJH (26% stake) 322

Source: Company, Darashaw & Co.



Recent government approval to oil marketing companies to purchase ethanol at INR 27/ltr compared to INR 21.5/ltr will

benefit BJH. Currently BJH has 800 KLPD distillery capacity. Inadequate availability of molasses owing to sharp

reduction in cane output restrained ethanol production to 49 mn ltr in SY09 and 65 mn ltr in SY10. BJH will have

adequate molasses in SY11E and SY12E and thus we expect BJH to sell 109 mn ltr and 123 mn ltr of alcohol

respectively at a cost of INR 20/ltr.


Cane Crushed 6.7 8.8 11.8 9.8

Molasses Recovery (%) 5.0% 5.0% 5.0% 5.0%

Molasses Obtained (mn ton) 0.3 0.4 0.6 0.5


Alcohol Produced (mn liters) 53 78 104 84

Alcohol Sold (mn liters) 49 65 104 84

Realization (INR/ltr) 24 25 27 27

Revenue (INR mn) 1190 1657 2765 2232



Conversion Cost (INR/ltr) 3 6 6 7



PBIT (17) 230 740 496

Margins (1%) 14% 27% 22%


Bajaj Eco-Tec Products

Bajaj Eco-Tec (BEC), the 100% subsidiary of BJH, is involved in the manufacture of wood substitute products including

particle boards (PB) and medium density fibre boards (MDF) from sugarcane bagasse. BEP was set up with at an

investment of INR 3150 mn. BEP has three plants with a combined capacity of 210,000 meter cube per annum. The

plant commenced operations in April 2008. The management expects this subsidiary to break-even in SY12E.

BEP Assumptions SY09 SY10 SY11E SY12E

Revenue 464 1546 2050 2554

Growth 233% 33% 25%

PBIT (738) (330) (120) 255

Margins - - - 10%



VALUATIONS

As the company and the sector is undergoing a down-cycle, we use the P/BV methodology for valuing BJH. At the CMP,

BJH is trading at 0.66x its SY12E BV. We feel that 0.54x is the fair multiple for BJH based on its inferior earnings quality

and higher debt levels vis-à-vis its peers and historical trading ratios during past down-cycles.


BJH BRCM SHRS






Target P/BV (x) 0.5 1.4 1.5

Source: Darashaw

4

8

12

16

20

24

28


EV/EBITDA Mean

0.0

0.5

1.0

1.5

2.0

2.5


P/BV Mean




Revenue

SY11E 40.8 33.6 -18%

SY12E 39.2 34.3 -13%

EBITDA

SY11E 5.7 6.7 18%

SY12E 5.7 5.6 -2%

PAT

SY11E (0.1) (1.6) -270%

SY12E 0 (3.0) NA




Fair Value - SY12E - P/BV Methodology


P/BV Multiple (x) 0.54


No of Shares 228

Target 62

Thermal Power – BV/share 11

SY12E Fair Value 73

CMP 82

Returns -11%

Source: Darashaw


Profit & Loss SY09 SY10 SY11 E SY12 E Balance Sheet SY09 SY10 SY11 E SY12 E

Net Sales 20,259 33,048 33,587 34,262 Equity 177 191 228 228


VoP 20,259 33,048 33,587 34,262 Networth 21135 28838 28491 26305

Other operating inc 2,734 1,393 1,415 1,444 651 2030 2030 2030

Income 22,993 34,441 35,002 35,705 Debt 40563 63498 61218 72671

Expenditure 16046 27915 28348 30152 Sources of Funds 62348 94365 91738 101006

Raw Materials 12208 22204 22368 23863

Employee 1653 1839 2045 2275 Application of Funds 62348 94365 91738 101006

SG&A 2184 3872 3935 4014


EBIDTA 6948 6526 6654 5554 Less Acc. Depreciation 10598 11098 15505 20414

Net Fixed Assets 42353 57570 72469 77561

Depreciation 3457 3440 4408 4909


EBIT 3833 2052 2247 645

Investments 0 694 694 694

Interest 2781 3681 4619 4959

Non-Operating income 342 0 200 200 Inventories 9564 19674 19462 21656

Extra-ordinary income 0 0 0 0 Debtors 499 1529 1554 1585

Extra-ordinary exp 0 (1940) 0 0 Cash 1273 5258 777 826

Loans & Advances 18594 14351 12763 14390

PBT 1,393 311 -2,173 (4114) Current Assets 29930 40812 34555 38457

Tax 787 (93) -571 (1081) Current Liabilities 9027 17492 20628 21833

Provisions 1951 1932 1330 932

PAT 606 404 (1602) (3033) Current Liabilities & Prov 10978 19423 21957 22765

Adj. PAT 629 433 (1602) (3033) Non-Current Liabilities 486 839 268 (814)

Adj. EPS 2.7 2 (7) (13)




Sales Growth -9% 63% 2% 2% EBIT 3833 2835 3155 3918

Income Growth 4% 14% 21% -7% Less Adj. Taxes 2166 641 713 886

EBIDTA Growth 223% -6% 2% -17% NOPLAT 1667 2,194 2,441 3,032

Adj. PAT Growth (124%) (31%) -470% 89% Inc / (Dec) in WC (446) 6586 571 1081

EPS Growth (122%) (33%) -496% 89% Operating Cash Flow (3858) 3801 8639 (5727)

Raw Materials 53% 64% 64% 67% Inc / Dec in other op assets (446) 6586 571 1081

Employee 7% 5% 6% 6% Net Capex 1606 29561 6163 6174

SG&A 10% 11% 11% 11% Net Investment 7132 29009 342 8868


Depreciation rate 7% 5% 5% 5% Free Cash Flow to Firm (5465) (25760) 2475 (11901)

EBIT margin 17% 6% 6% 2%

Non-Operating cash flow 149 1940 200 0

Other income to PBT 25% 0% -9% -5%

Tax Rate 57% (30%) 26% 26% Cash flow to investors (5316) (23820) 2675 (11901)

Adj. Pat Margin 3% 1% -5% -8%

Finaning Cash Flow (5315) (23820) 2675 (11901)

PAT / Sales 3% 1% -5% -8% Dividend (adj for inc/dec in prov) 99 (23) 156 (448)

Sales / Assets 0.37 0.36 0.38 0.35 Equity buyback/(issue) (7250) (8132) (150) (0)


Dupont RoE 3% 1% -6% -12% Debt Repayment/(issue) 1574 (22277) 1624 (11453)


RoE 3% 1% -6% -12% Inc/(Dec) in Excess Cash (971) 3207 (3574) 0

RoCE 3% 4% 3% -3% Inc/(Dec) in Non-op L&A 0 0 0 0



Sugar profitability to be subdued till SY12E

Higher sugar production in SY12E is expected to put pressure on margins in the

sugar segment. Although operating profit/kg is expected to increase in SY11E

against SY10, it will witness a loss in SY12E. However, increased cane supply will

result in ample availability of molasses and bagasse which will partially offset the

poor performance of sugar segment.

Higher cane production to have a positive impact on Alcohol

The ethanol price declared by the government at INR 27/kg against the earlier

price of INR 21.5/kg is a big positive for BRCM. Further, higher cane production

and large inventories of molasses would have a positive impact on volumes which

are expected to double. Thus PBIT of the distillery segment is expected to

increase from INR 226 mn in SY10 to INR 970 mn in SY11E.

Cogen profitability to improve substantially

The cogen segment is also expected to witness better performance resulting from

increase in availability of bagasse. which will lower costs and improve margins.

We expect cogen segment to register a PBIT of INR 1196 mn in SY11E against

INR 828 mn in SY10.

Valuations starting to get attractive

We value BRCM at its historical down-cycle P/BV ratio of 1.4x and arrive at our

fair value of INR 65/share. Any steep corrections in the stock should be used as

buying opportunities with a perspective of holding on until the next major

domestic sugar up-cycle resumes.

RISK TO OUR TARGET PRICE

Higher than estimated domestic / global production in SY12E

A production figure higher than our SY11E of 25.2 mn ton along with

government’s reluctance to allow further exports could trigger a downward spiral

in sugar prices which could impact the stock negatively. Further, our SY12E

production estimate is at 28.4 mn ton and thus we expect prices to decline by INR

2 in SY12E over SY11E. Higher global production will prevent India from exporting

in case the global prices are below domestic prices, thereby keeping a lid on the

domestic prices.

Summary Financials

Source: Darashaw

Rating HOLD

Date 7 APR’11

CMP INR 75

Price Target INR 65

Upside -13%

COMPANY DATA

Industry Sugar

Equity (INR mn) 257

Face Value 1

KEY MARKET DATA

BSE Code 500038

BSE Group B

NSE Code BALRAMCHIN

Bloomberg Code BRCM IN

Mkt Cap. (INR bn.) 19.7



SHARE HOLDING PATTERN (Dec 10)

Promoters 38%

MF’s, FI’s, Ins 16%

FII’s 25%

Others 21%

PRICE PERFORMANCE


3 Month (15) (12)

6 Month (20) (15)

12 Month (17) (26)

* Benchmark Sensex


Contact No 022 43022256


INR Mn.


SY09 17,553 7% 4556 35% 2097 12% 8.2 214% 19% - -

SY10 19,859 13% 2517 52% 267 1% 1.0 -87% 2% 72.1 1.7

SY11E 22,947 16% 4004 42% 1520 7% 5.9 468% 13% 12.7 1.6

SY12E 21,173 -8% 2750 34% 513 2% 2.0 -66% 4% 37.6 1.6

Balrampur Chini Mills


COMPANY BACKGROUND

BRCM is the third largest and one of the oldest sugar producers of India. The company is based in eastern part of UP.

BRCM is one of the efficient players in UP with a conservative approach.

Key Milestones –

1975 Incorporated on taking over a sugar mill in Eastern UP

1979 IPO

1995 Diversified into distillery operations

2003 Further diversification into co-generation

2006-08 Expansion leading to almost doubling of capacities across all segments

2010-11 Coal based generation of power (40 MW)

Plants Sugar - TCD Distillery – KLPD Cogen - MW

Balrampur 12,000 160 25

Babhnan 10,000 60 3

Rauzagaon 8,000 - 26

Gularia 8,000 - 31

Mankapur 8,000 100 34

Kumbhi 8,000 - 20

Akbarpur 7,500 - 18

Tulsipur 7,000 - -

Haidergarh 5,000 23

Maizapur (Indogulf) 3,000 - -

Total 76,500 320 180

Source: Company

BRCM

Sugar

76,000 TCD

Distillery 320 KLPD

Co-generation

181 MW


Sugar profitability to be subdued till SY12E

BRCM has 10 cane crushing mills spread across eastern U.P with a total crushing capacity of 76,500 TCD. It also has a

1,200 TPD sugar refining capacity of which it intends to run 500 TPD capacity during offseason. BRCM has already sold

70,000 ton of sugar from a total of 110,000 ton which it had imported as raw sugar. Out of the balance quantity 20,000

ton are under re-export obligation and the balance is to be sold domestically.


Cane - Sugar

Cane Crushed (mn ton) 4.8 5.4 6.7 7.5 Recovery Rate 9.1% 9.2% 9.2% 9.2% Sugar Production (mn ton) 0.4 0.5 0.6 0.7 Sales Volume (mn ton) 0.7 0.6 0.6 0.6 Free Suga Realizations (INR/kg) 23.7 32.5 29.0 27.0 Blended Realizations (INR/kg) 21.8 28.8 27.0 25.2 Revenue (INR bn) 15.2 17.4 16.9 17.2 Cane Cost (INR/ton) 1379 2386 2016 2116 Transport Cost (INR/ton) 150 150 150 150 Conversion Cost (INR/ton) 355 355 350 350 Total Cost (INR bn) 12.0 16.8 16.1 18.2 PBIT (INR bn) 3.1 0.5 0.8 -0.9 PBIT Margin 21% 3% 5% -6%


Sales Volume (mn ton) - 0.02 0.09

-

Realization (INR/ton) - 32.5 29.0

-

Revenue (INR mn) - 650 2610

-

PBIT (INR/ton) - 1000 1000

-

PBIT (INR mn) - 20 90

-



Cogen profitability to improve substantially

BRCM has successfully increased its revenue from cogeneration over the years and was thus able to withstand the last

downturn even when the sugar segment posted losses. Power will now also contribute during off-season. 50% of the off

season power can be sold in open access at merchant rates. BRCM has converted its boilers at Haidergarh and

Mankapur into multifeed boiler (20 MW each) which are capable of running on coal as well at a meager cost of INR 150

mn in order to benefit from this regulation.

Increasing contribution of Cogen in EBIT

0%

20%

40%

60%

80%

100%

SY06 SY09 SY10 SY11E SY12E

CogenDistillerySugar



Cane Crushed 4.8 5.4 6.7 7.5


Bagasse Obtained (mn ton) 1.7 1.8 2.3 2.6

% Units realized from Bagasse 31% 29% 29% 29%

Bagasse - Power (mn Units) 514 518 666 746

Realization (INR/unit) 3 4 4.00 4.04

Revenue – Season (INR mn) 1834 2051 2664 3014

Coal - Power (mn units) - 73 130 130

Realization (INR/unit) 0.0 5.1 5.0 5.0

Revenue – Off season (INR mn) 0 375 642 642

Total Cogen Revenue 1834 2426 3306 3655

Bagasse Cost / Ton 160 250 225 200




Coal Based Cost (INR/unit) 0 4.0 4 4

Coal based Cost (INR mn) 0 294 518 518


PBIT 796 828 1196 1528

Margins 43% 34% 36% 42%




Recent government approval to oil marketing companies to purchase ethanol at INR 27/ltr compared to earlier price of

INR 21.5/ltr will benefit BRCM. Owing to increased availability of molasses in the next two seasons, we expect BRCM to

increase its alcohol sales from 38 mn liters in SY10 to 70 mn liters in SY11E owing to higher molasses availability in the

current season and a large inventory of molasses being carried forward from last year. Due to the combined effect of

increase in ethanol realizations and increased production volumes, we expect the distillery segment to register PBIT

margins of 52% in SY11E against 24% in SY10.


Cane Crushed 4.8 5.4 6.7 7.5

Molasses Recovery (%) 5% 5% 5% 5%

Molasses Obtained (mn ton) 0.24 0.27 0.33 0.37


Alcohol Sold (mn liters) 51 38 70 78

Realization (INR/ltr) 26 25 27 27

Revenue (INR mn) 1308 940 1852 2075



Conversion Cost (INR/ltr) 7.4 4.5 5.0 5.0



PBIT 498 226 970 1161

Margins 38% 24% 52% 56%



VALUATIONS

As the company and the sector are undergoing a down-cycle, we use the P/BV methodology for valuing BRCM. We value

BRCM at a P/BV multiple of 1.4x based on its historical down-cycle trading range and the company’s performance vis-à-

vis its peers. Thus our fair value for BRCM is at INR 65.


BJH BRCM SHRS






Target P/BV (x) 0.5 1.4 1.5

Source: Darashaw

4

6

8

10

12

14

16


EV/EBITDA Mean

0.0

1.0

2.0

3.0

4.0

Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

P/BV Mean




Revenue

SY11E 27.4 22.9 -16%

SY12E 25.1 21.1 -16%

EBITDA

SY11E 3.5 4.0 14%

SY12E 4.7 2.8 -40%

PAT

SY11E 0.7 1.5 117%

SY12E 2.2 0.5 -77%




Fair Value - SY12E - P/BV Methodology


P/BV Multiple (x) 1.4


No of Shares 257

SY12E Fair Value 65

CMP 75

Returns -13%

Source: Darashaw


Profit & Loss SY09 SY10 SY11 E SY12 E Balance Sheet SY09 SY10 SY11 E SY12 E

Net Sales 17,471 19,814 22,902 21,128 Equity 257 257 257 257


VoP 1447 2935 4280 5525 Networth 11338 11383 12139 12394

Other operating inc 82 45 45 45

Income 17,553 19,859 22,947 21,173 Debt 9906 9467 8543 9074

Expenditure 12997 17342 18943 18423 Sources of Funds 21244 20850 20681 21468

Raw Materials 10640 14879 16096 15797

Employee 946 991 1145 1056 Application of Funds 21244 20850 20681 21468

SG&A 1411 1472 1702 1570


EBIDTA 4556 2517 4004 2750 Less Acc. Depreciation 6656 7792 8990 10253

Net Fixed Assets 18233 18561 18811 19061

Depreciation 1160 1136 1198 1263


EBIT 3396 1381 2806 1487

Investments 1222 1222 1222 1222

Interest 1068 906 842 824

Non-Operating income 0 0 0 0 Inventories 3511 3078 3335 3187

Extra-ordinary income 0 33 0 0 Debtors 171 651 816 753

Extra-ordinary exp 0 0 0 0 Cash 342 475 519 404

Loans & Advances 2398 2062 2216 2128

PBT 2,328 508 1,964 663 Current Assets 6422 6267 6886 6471

Tax 231 208 444 150 Current Liabilities 1622 2804 3028 2958

Provisions 1057 419 1296 489

PAT 2097 300 1520 513 Current Liabilities & Prov 2679 3222 4325 3448

Adj. PAT 2097 267 1520 513 Non-Current Liabilities 2039 1983 1918 1844

Adj. EPS 8.2 1.0 5.9 2.0




Sales Growth 17% 13% 16% -8% EBIT 3396 1381 2806 1487

Income Growth 7% 13% 16% -8% Less Adj. Taxes 337 578 634 336

EBIDTA Growth 43% (45%) 59% -31% NOPLAT 3,059 802 2,171 1,151

Adj. PAT Growth 214% (87%) 468% -66% Inc / (Dec) in WC (1,681) (1,451) 127 (32)

EPS Growth 214% (87%) 468% -66% Operating Cash Flow 4,740 2,253 2,044 1,183

Raw Materials 61% 75% 70% 75% Inc / Dec in other op assets 581 56 65 74

Employee 5% 5% 5% 5% Net Capex (555) 306 315 324

SG&A 8% 7% 7% 7% Net Investment (2,236) (1,145) 442 291


Depreciation rate 5% 4% 4% 4% Free Cash Flow to Firm 5,295 1,947 1,729 859

EBIT margin 19% 7% 12% 7%

#DIV/0! #DIV/0! Non-Operating cash flow 0 33 0 0

Other income to PBT 0% 7% 0% 0%

Tax Rate 10% 41% 23% 23% Cash flow to investors 5,295 1,980 1,729 859

Adj. Pat Margin 13% 19% 16% 16%

Financing Cash Flow 5,295 1,980 1,729 859

PAT / Sales 12% 2% 7% 2% Dividend (adj for inc/dec in prov) 149 901 134 764

Sales / Assets 0.8 1.0 1.1 1.0 Equity buyback/(issue) (107) (2) 0 0


Dupont RoE 18% 3% 12% 4% Debt Repayment/(issue) 3,800 569 943 (542)


RoE 18% 3% 12% 4% Inc/(Dec) in Excess Cash (0) (23) 0 0

RoCE 16% 7% 14% 7% Inc/(Dec) in Non-op L&A 399 0 0 0


Important Disclosure

This material has been prepared by Darashaw & Co Pvt Ltd, Mumbai, India

(www.darashaw.com).

The views expressed herein correctly reflect our views. The company, its directors, and clients hold long

position in the stock of the company as on the date of the report.

The information contained herein is confidential and is intended solely for the addressee(s). Any unauthorized access,

use, reproduction, disclosure or dissemination is prohibited. This information does not constitute or form part of and

should not be construed as, any offer for sale or subscription of or any invitation to offer to buy or subscribe for any

securities. The information and opinions on which this communication is based have been complied or arrived at from

sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to

their accuracy, correctness and are subject to change without notice. © Darashaw & Co. Pvt. Ltd., 2006

Documents

Sugar Sector Report - 7 Apr 2011