Shree Renuka Sugars is a fully integrated sugar company which focuses on manufacturing, marketing and trading of sugar. It is also engaged in power generation and ethanol production. The company was incorporated in 1995 and in 1998 it acquired a sick mill with the capacity of 1250 TCD (tons crushed per day) of Nizam Sugar Limited a Government of Andhra Pradesh undertaking, situated at Hindupur in Andhra Pradesh. After that a VRS was launched and all plant and machinery with remaining employees were transferred to Munoli in Belgaum in 1999 and the capacity was enhanced to 2500 TCD and a co generation plant of 11.2 MW was set up. Commercial production of sugar commenced in 1999, generation of power in 2000 and manufacture of ethanol in 2002. Shree Renuka produces three products from sugarcane which are sugar, ethanol and power. The manufacturing process is such that sugar is produced both from sugarcane as well as raw sugar. As a result the sugarcane mill operated for 208 days in 2004 and the refinery was operated for 200 days. The industry average was 140 and 99 days respectively. Shree Renuka Sugars has the largest sugar refinery in the country with a capacity of 1000 TPD. The company focuses towards corporate sales and they constitute 68.35% of sales in FY 2004. For the period 2001-2005 Shree Renuka exported 8.32% of total Indian sugar.
Financials
The turnover of the company has consistently grown from Rs. 285.83 mn in 2000 to Rs. 35913.53 (for six months ended in 2005). The profit after tax has also grown from a negative of 26.97 mn in 2000 to 196.66 mn in the six months ended 2005. The company has a total debt of Rs.1480 mn and the share capital and reserves only stand at Rs. 464 mn, this is quite high and it shows in the Interest cost which at 69.93 mn is more than a third of the total income after tax. The EPS for fiscal 2004 is 4.99 whereas for the preceding years it was 2.15 and 1.99.
Objects of the Issue
The primary objects of issue are increasing the cane crushing capacity, increasing the distillery capacity, setting up a cogeneration power plant and repayment of loans.
The expansion of cane crushing facility would take up most of the money at 635 million and debt will be repaid to the extent of 98.6 million. The company intends to finance 1000 million out of the planned expenditure of 1383.6 million from the fresh issue and finance the remaining through internal accruals.
Key Risks
Sugar is a highly government regulated industry and it doesn’t bode well for sugar mills as they are forced to buy sugar at a certain price and are forced to buy sugar from farmers within a distance of 15 miles from their mills. In times of shortage such as now this does not have any negative impact but at times when the global sugar production is high and its cheaper to import than to procure locally the competitive edge of Indian producers will lessen in comparison to their global peers.
There is a criminal proceeding pending against some directors and legal and regulatory proceedings have also been initiated against the company.
Sugar industry is cyclical in nature and is now currently in a boom so any shares acquired for the longer term would be at a higher end of the spectrum.
There is intense competition from the players in UP as the UP government has constituted a policy by which transport subsidies and other financial and non-financial incentives will be awarded to those companies which make a minimum of Rs. 3,500 million investment in their existing sugar mills in Uttar Pradesh or setting up new mills in Uttar Pradesh. Such incentives and subsidies may allow Uttar Pradesh sugar mills to supply sugar at lower prices.
Conclusion
The shares are being issued at a price of Rs.250 – Rs.300 and the issue is open from 7th October to 14th October. At an EPS of Rs.4.99 the P/E multiple works out to be between 50 and 60 which is very high for a company in an commodity industry regulated by the government and investors are well advised to stay away from the issue.
Shree Renuka Sugars is entering the capital market with the public issue of equity shares of face value of Rs 10 each for cash at a premium aggregating Rs 100 crore (Rs 1 billion). The issue opens on October 7, 2005 and closes on October 14.
There will also be a green shoe option aggregating Rs 10 crore (Rs 100 million). The issue is being made through a 100% book building process and the price band is Rs 250 to Rs 300 per equity share.
The equity shares are proposed to be listed on the BSE and NSE. JM Morgan Stanley is the book running lead manager and Edelweiss Capital is co-book running lead manager for the IPO.
The Company
The company is a fully integrated player and processes sugarcane into three co-products viz. sugar, ethanol and power. It owns and operates a 2500 TCD sugar mill in Munoli at Belgaum in Karnataka with a 20.5 MW co-generation plant, a 60 KL ethanol distillery and a 1000 TPD raw sugar processing refinery, the largest refinery in India.
In 2004, the company entered into a two-year lease agreement with the 2500 TCD Ajara Cooperative Sugar Factory, in Maharashtra. In July 2005, the company entered into a six-year agreement with Mohanrao Shinde Cooperative Sugar Factory (Unit III) to operate the sugar mill and co-generation power plant, also in Maharashtra.
The company has a wholly owned subsidiary Renuka Commodities DMCC, incorporated in the free trade zone in Dubai, for third country trade of sugar.
The company exported 2,40,919 tonnes of sugar in the last five years and ranked second in Indian sugar exports. The company had imported about three lakh tonnes of raw sugar last year.
The core promoters of the company are Vidya Murkumbi (Executive Chairperson); Narendra Murkumbi (Managing Director) and Murkumbi Industries Private Limited, and Murkumbi Bioagro Private Limited.
Shree Renuka Sugars has nearly 9000 farmers as its shareholders
Financials
For the nine-month period ended June 30, the company's sales grew by 144.94 per cent to Rs 518.43 crore (Rs 211.65 crore) and profit after tax grew by 224.31 per cent to Rs 32.05 crore (Rs 9.88 crore).
Forthcoming Projects
The company has embarked on expansion projects at an outlay of Rs 128.50 crore to be funded by the IPO proceeds and internal accruals.
At the Belgaum plant, cane crushing capacity will be expanded from 2,500 tonnes a day to 7,500 tonnes a day at a cost of Rs 63.50 crore and the doubling of distillery capacity to 120 kilo litres a day at an investment of Rs 15 crore.
The company is also setting up a 15-MW co-generation power plant at a cost of Rs 20 crore and a 120 kilo litre a day distillery in Maharashtra at a cost of Rs 30 crore. Also, the company would repay its existing debt of Rs 9.86 crore.
All these projects are slated to commence commercial production between October 2006 and December 2006.
Conclusion
Issue price band of Rs. 250-300 implies a PE of about 32.18 to 38.61 times FY04 earnings. In this financial year(nine month results) the company posted a remarkable growth in term of profit and sales. After the completion of the above projects the company will post a good results in the future also. If one consider the future earnings and growing opportunity of sugar industry one could subscribe Shree Renuka Sugar for long term.
