Sugar Sector Report - 7 Apr 2011

INDIA
7
th
April 2011
India Sugar India Sugar

INITIATION
Long term sweetness eclipses near term bitterness Spotting a diamond among crystals
Analyst: Jehan Bhadha Analyst: jehan-bhadha@darashaw.com +91-22-43022256 Bhadha Jehan jehan-bhadha@darashaw.com
1001-Regent Chambers, Nariman Point, Mumbai
CONTENTS
Executive Summary Domestic Analysis Consumption to grow at 4-5% SY11 Production to exceed consensus - Acreage - Yield - Drawal Rate - Recovery Rate Production Derivation Up-cycle may start post SY12E Domestic Cycle ~ turning Shorter & Viscous Global Analysis Production Composition Brazil ~ Structurally suited for increasing production Projecting Global Production Consumption Composition Projecting Global Consumption Long Term Outlook - BULLISH Short to Medium Term Outlook NEUTRAL to BEARISH Recent Happenings that prevented the usual cyclical downturn Current Rally not a mere devaluation of the dollar Domestic Price Projection Deregulation Concerns Valuations Business Model Comparison Companies Shree Renuka Sugars - Shree Renuka Sugars long term appreciation potential Bajaj Hindusthan Balrampur Chini
3 4 4 5 6 7 8 10 11 12 13 14 14 15 17 18 19 20 21 22 23 24 25 26 27 29 30 30 43 47 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 2030 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 Brazils estimate provides for 19% growth. Thus we forecast prices to range between 2030 cents/lb and observe a declining trend as we progress into H2 2011E and expect it to average at 23 cents/lb for 2011E. Indias 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 Indias 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 Companies SHRS BJH BRCM CMP 76 82 75 Fair Value 86 73 65 Returns 13% -11% -13% EV/EBITDA SY11E 4.3 11.9 6.8 SY12E 5.0 16.3 10.2 P/BV SY11E 1.5 0.7 1.6 SY12E 1.2 0.7 1.6 ROE SY11E 29% -6% 12% SY12E 17% -12% 4% Rating BUY* HOLD HOLD Source: Darashaw
* We expect returns of 4x in 4 years for SHRS

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.
35 30 25 20 15 10 5 SY95 SY97
Sugar Consumption & Production (mn ton)
C onsumption Production
SY99
SY01
SY03
SY05
SY07
SY09
SY11E
SY13E
Indias 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.
25 20 Kg / Year
Per Capita Consumption - Sugar v/s Gur & Khandsari

Brazil Russia
15 10 5 0 196061 197071 198081 199091 200001 200708 Sugar Gur & Khandsari
EU USA India C hina 0 10 20 30 40 50 60 70
Source: Cooperative Sugar Vol 40 (9)
SY15E
Source: Crisil, Darashaw
Per Capita Consumption (kg)
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 12%
Change in SY10
Change in SY11E
Acreage (mn ha)
4.4
0.5
-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
29%
29%
33%
Source: Crisil, Darashaw 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
30 26 Mn Ton 22 18 14 10 Drawal Drawal SY09 SY10 Acreage Recovery Acreage Recovery SY11E Yield Yield
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--vis substitute crops. Thus, depending on the ROI, a farmers 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
125% 100% 75% 50% 25% SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11 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.
6.0 5.5 Acreage (mn ha) 5.0 4.5 4.0 3.5 3.0 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11E SY12E
Source: Crisil, Darashaw Minimum Support Prices Cane SY05 SY06 SY07 SY08 SY09 SY10 SY11 107 115 118 110 155 230 205 Growth 13% 7% 3% -7% 41% 48% -11% Wheat 640 700 850 1000 1080 1100 1120 Growth 2% 9% 21% 18% 8% 5% 2% Rice 575 585 635 760 865 1065 1010 Growth 2% 2% 9% 20% 14% 23% -5% Cotton 1960 1980 1990 2030 3000 3000 Growth 2% 1% 1% 2% 48% 0% Jowar 505 515 525 548 610 850 Growth 3% 2% 2% 4% 11% 39%
5% 890 3000 0% 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.
Yield (Ton/hectare) 72 68 64 60 56 SY02 SY03 SY04 SY05 SY06 SY07 SY08
YoY C hange 40% 30% 20% 10% 0% -10% -20% -30% -40% SY09 SY10 SY11E SY12E SY13E
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.
Rainfall (% of Normal) 110% 105% 100% Rainfall 95% 90% 85% 80% 75% SY95 SY96 SY97 SY98 SY99 SY00 SY01 SY02 SY03 SY04 SY05 SY06
Yields 72 70 68 Yields 66 64 62 60 58 SY07 SY08 SY09 SY10
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 isnt 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.
400 350 300 mn tons 250 200 150 100 50 0 SY01 SY02 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11E SY12E SY13E
C ane used for Gur, Khandsari, Seed C ane Production
Source: Crisil, Darashaw 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 140 Cane used for Gur & Khandsari (mn ton) 120 100 80 60 40 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11E 40 35 30 25 20 15 10 Sugar Price (INR/kg) C ane used for Gur & Khandsari
Sugar Price (INR/kg)
Source: NCDEX, Crisil, Darashaw
Dynamics of Drawal Rate Cane Production Scenario Sugar Price Trend Sugar Pricing Resultant Gur Demand Gur Pricing Profitability for Gur manufacturer Ability to pay instant cash to Farmers Farmers prefer selling to Gur manufacturers Drawal Rate towards Sugar Mills High Declining As cheap as Gur Low Low Low No No High Low Increasing Costlier than Gur High High High Yes Yes Low Source: Industry, Darashaw Alternate sweetener markets 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 markets 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) Cane Production Used for Sugar Drawal Rate - % of Total Cane Used for Gur, Khandsari, Seed % of Total Cane Sugar Price / kg
SY04 233 132 57% 101 43% 16
SY05 236 124 53% 112 47% 18
SY06 281 189 67% 92 33% 19
SY07 345 277 80% 68 20% 16
SY08 340 265 78% 75 22% 16
SY09 280 163 58% 118 42% 29
SY10 300 206 69% 94 31% 33
SY11E 346 274 79% 72 21%
SY12E 380 309 81% 72 19%
SY13E 361 286 79% 75 21%
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%.
C ane Production 400 350 300
Drawal Rates 90% 80% 70% 60%
250 200 SY01 SY02 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11E SY12E SY13E
50% 40%

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 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% SY01 SY02 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11E SY12E SY13E
10
Production Derivation
SY02 Cane Price Paid (INR/Qtl) Growth Acreage (mn ha) Growth Yield (ton/ha) Growth Cane Production (mn ton) Growth Drawal (%) Cane Crushed Growth Recovery Sugar Production Growth 95 6% 4.41 2% 67 -2% 297 0% 61% 180 2% 10.3% 18.5 0%
SY03 95 0% 4.52 2% 64 -6% 287 -3% 68% 194 8% 10.4% 20.1 9%
SY04 95 0% 3.93 -13% 59 -7% 233 -19% 57% 132 -32% 10.2% 13.5 -33%
SY05 107 13% 3.66 -7% 65 9% 236 1% 53% 124 -6% 10.1% 12.6 -7%
SY06 115 7% 4.20 15% 67 4% 281 19% 67% 189 52% 10.3% 19.5 55%
SY07 118 3% 4.86 16% 71 6% 345 23% 80% 277 47% 10.2% 28.3 45%
SY08 110 -7% 5.04 4% 68 -5% 340 -2% 78% 265 -4% 10.0% 26.5 -6%
SY09 150 36% 4.38 -13% 64 -5% 280 -18% 58% 163 -39% 9.1% 14.7 -45%
SY10 230 53% 4.23 -3% 71 11% 300 7% 69% 206 27% 9.2% 19.0
SY11E 205 -11% 5.08 20% 68 -4% 346 15% 79% 274 33% 9.2% 25.2
SY12E 215 5% 5.58 10% 68 0% 380 10% 81% 309 13% 9.2% 28.4
SY13E 225 5% 5.30 -5% 68 0% 361 -5% 79% 286 -7% 9.2% 26.3
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 Ministrys 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 30 1st Estimate 3% 25 mn tons 31% 20 30% 15 14% 39% Actual
10 SY06 SY07 SY08 SY09 SY10
Source: Kingsman, Darashaw

11
Up-cycle to start beyond SY12E Domestic Sugar Balance S.Y.s 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11E 2011-12E 2012-13E Op. Inventory 11.2 12.7 8.5 4.8 5.0 10.6 9.4 5.7 6.3 5.8 7.1 Production 20.1 13.5 12.7 19.3 28.3 26.3 14.6 19.0 25.2 28.4 26.3 Imports 0 0.0 2.1 0.5 0 0 4.2 4.6 0 0 0 Exports 1.5 0.0 0.0 1.1 1.7 5.0 0 0 1.7 2.0 0 Consumption 17.1 17.7 18.5 18.5 21.0 22.5 22.5 23.0 24.0 25.1 26.2 Inventory 12.7 8.5 4.8 5.0 10.6 9.4 5.7 6.3 5.8 7.1 7.2 Inventory/ Ratio 74% 48% 26% 27% 50% 42% 25% 27% 24% 28% Inventory (Months) 8.6 5.5 3.1 2.9 5.7 5.0 3.0 3.1 2.8 3.2
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.
12
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--vis steadily rising prices for other crops. Cycles turning shorter
Sugar Price 35 30 Sugar Price 25 20 15 10 5 SY96 SY97 SY98 SY99 SY00 SY01 SY02 SY03 SY04
Inventory (in months) 10 9 8 7 6 5 4 3 2 1 0 SY05 SY06 SY07 SY08 SY09 SY10 SY11E SY12E SY13E
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
50
Sugar Price
40
30
20
10 Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Source: CMIE
Inventory (Months)
13
GLOBAL SCENARIO Production Composition

Global Production Pie - 152 mn ton (2008-09)
10%
31% 17%
India EU China Brazil Thailand Australia Pakistan Others
3% 3% 5% 21%
10%
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 30 25 20 Mn Ton 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 Australia Pakistan Thailand India EU USA Mexico China
15 2003 2004 2005 2006 2007 2008 2009 30 Mn Ton 35 Production on the Upswing
25
Brazil
20
Source: International Sugar Organization Brazil Driving half of Global Production Growth
Source: International Sugar Organization
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) Brazil Others Global 19 116 150 2008 (mn ton) 30 121 169 CAGR Weight in Global Production (SY03-08) X X 15% 85% = = Contribution to Global Growth 1.3% 1.0% 2.3% Source: International Sugar Organization, Darashaw
9.2% 1.2% 2.3%
14
Brazil ~ worlds 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. Brazils sugar production has grown at a CAGR of 9% since 1993 as against a mere 1% growth for global production (ex-Brazil).
25 20 15 mn ton 10 5 0 -5 2003 2004
Country-wise Net Exports
Brazil Sugar Production 40 35

Brazil India Thailand Mexico Australia
30 mn ton 25 20 15 10 5 0
2005
2006
2007
2008
2009
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Source: International Sugar Organization, Darashaw
Source: UNICA
Sugarcane Producing regions in Brazil
Brazil Growth Rates
Production 14% 12% 10% 8% 6% 4%

Center-South region accounts for 85% of cane production
C onsumption
Exports
2% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: UNICA
Source: UNICA
15
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.
30 25 20 15 10 5 0 Brazil
Sugar - Cost of Production
2007 2008 2009 2010 2011
Thailand
Australia
India
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.
3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 1960 1970
Shift towards Flex Fuel Vehicles
Gasoline
Ethanol
FlexFuel
1980
1990
2000
2001
2002
2003
2004
2005
2006
2007
Source: UNICA
2008
16
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.
50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 16 19 23 27 30 26 31 28 Brazil - Sugar Production Forecast 38 40 42 44
34
36
25
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 & Indias production has already been discussed in this report. We have assumed the rest of the worlds production to continue to increase at a CAGR of 1.4% which has been the case historically.
Brazil SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11E SY12E SY13E SY14E SY15E SY16E 23 25 27 26 30 31 28 34 36 38 40 42 44
India 14 13 20 28 27 15 19 25 28 26 21 25 26
Rest of the World 106 103 104 112 112 107 110 114 116 118 119 121 123
Global 142 141 150 166 169 152 157 173 180 182 180 188 193
Source: UNICA, ISMA, Darashaw
17
Consumption Composition
Global Consumption Pie - 164 mn ton (2008-09) 14% India EU 14% 45% C hina Brazil 9% US Russia 8% Others
4%
6%
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.
24 21 mn tons
Growimng Sugar Consumption
Stagnating Sugar Consumption 30 25 mn tons

India Brazil
18 15 12 9 2003 2004 2005 2006 2007 2008 2009
20 15 10 5 2003 2004 2005 2006 2007 2008 2009
EU USA
C hina
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) NA & EU Developing Countries Global 45 96 141
2009 (mn ton) 42 122 164
CAGR
Weight in Global Production (2003-09) X X 30% 70% = =
Contribution to Global Growth -0.3% 2.8% 2.5%
-1.0% 4.0% 2.5%
18
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 SY04 SY05 SY06 SY07 SY08 SY09 CAGR
45 44 47 46 45 44 42 -1.0%
96 101 100 106 112 119 122 4.0%
141 145 147 153 157 163 164 2.5%
SY10E SY11E SY12E SY13E SY14E SY15E SY16E
42 41 41 40 40 40 39
127 132 137 143 148 154 160
168 173 178 183 188 194 200
19
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.
Consumption
Inventory
Production & Consumption (Mn Ton)
190 180 170 160 150 140 130 2001 2002
Production
C onsumption
190 170 150 Mn Ton 130 110 90 70 50 2001 2002 2003 2004 2005 2006 2007 2008 2009
2003
2004
2005
2006
2007
2008
2009
Source: International Sugar Organisation, Darashaw
2010
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 43% 28% Price (Raw) (cents/lb) 10 23
2001 2010 CAGR 2011E 2016E CAGR
133 157 1.9% 173 193 2.2%
135 169 2.5% 173 200 2.9%
58 47 -2.2% 47 28
27% 14%
23 30+

Production 200 C onsumption Inventory Ratio 50%
Raw Sugar Price cents/lb) 40 35 Inventory Ratio 30 25 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 10% 20% 30% 40% Raw Sugar Price Inventory Ratio 50%
mn tons
30% 160 20% 140 10%
120 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E
0%

Inventory Ratio
180
40%
Source: Bloomberg, International Sugar Organization, Darashaw
20
2010
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 Brazils estimate provides for 19% growth.
Production (Mn Ton) India 2008 2009 2010 2011E 2012E 27 15 19 25 28 Var -6% -45% 29% 33% Brazil 30 31 28 34 Var 15% 4% -8% 19% Others 112 107 110 114 Var 0% -5% 3% 4% Global 169 152 157 174 Var 2% -10% 3% 11%
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 2030 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 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E Production 133 138 150 142 141 150 166 169 152 157 173 180 Consumption 135 138 141 145 147 153 157 162 164 168 173 178 Surplus/Deficit -2 0 9 -2 -6 -2 9 6 -12 -11 0.2 Inventory 57 57 66 64 58 55 64 71 58 47 47 Inventory Ratio 42% 41% 47% 44% 39% 36% 41% 44% 36% 28% 27% Raw Price 9 8 7 9 12 16 12 14 20 23 23
2.1 49 28% 20 Source: International Sugar Organization, Bloomberg, Darashaw
Raw Sugar Price 25 20 cents/lb 15
Inventory Ratio 50% 45% 40% 35%
Forward Contracts - Raw Sugar (Backwardation) 28 27 Cents / lb 26 25 24 23 22 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12
10 5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E
30% 25%
Source: Bloomberg, Internationa Sugar Organization, Darashaw

Source: Sugaronline.com
21
Recent Happenings that prevented the usual cyclical downturn
Raw Sugar (cents/lb) 35 30 25 20 15 10 5 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 Brazils 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
22
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 Raw Sugar 30 cents / pound 25 20 15 10 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
1.8
32% 34%
Raw Sugar (at C onstant C urrency)

30% 25%
USD/BRL
2.5
2.3
2.0
1.5 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
35 cents / pound 30 25 20 15 10 Dec-10 Jan-11 Sep-10 Aug-10 Nov-10 Mar-11 Feb-11 Oct-10 Jul-10 Raw Sugar Raw Sugar (at C onstant C urrency)
2.0 1.9 1.8 1.7 1.6 1.5 1.4 May-10
USD/BRL
Source: Bloomberg
Source:Bloomberg
Dec-10
Mar-10
Apr-10
Sep-10
Aug-10
Nov-10
Oct-10
Jun-10
Jul-10
23
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 White Sugar - USD USD / INR Landed Price at Port Transport Cost Export Realization Domestic Prices Benefit if Exported 600 45 27000 2000 25000 29000 (4000) 700 45 31500 2000 29500 29000 500 800 45 36000 2000 34000 29000 5000
Glo ba & Do m e stic Pric e s D om estic Price Domestic Price (INR / kg) 45 40 35 20.0 30 25 Jan-10 Jul-10 May-10 Mar-10 Jan-11 Dec-10 Sep-10 Aug-10 Nov-10 Mar-11 Apr-10 Feb-10 Feb-11 Jun-10 Oct-10 15.0 10.0 G lobal Price (R aw) 35.0 30.0 25.0 International Price (cents/lb)
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 2008 2009 2010 2011E 2012E Production 169 152 157 173 180 Consumption 162 164 168 173 178 Surplus/Deficit 6 -12 -11 0 Inventory 71 58 47 47 Inventory Ratio 44% 36% 28% 27% Raw Price (cents/lb) 14 20 23 23
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 2006-07 2007-08 2008-09 2009-10 2010-11E 2011-12E Opening Inventory 5.0 10.6 9.4 5.7 6.3 5.8 Production 28.3 26.3 14.6 19.0 25.0 28.4 Imports 0.0 0.0 4.2 4.6 0.0 0.0 Exports 1.7 5.0 0.0 0 1.7 2.0 Consumption 21.0 22.5 22.5 23.0 24.0 25.1 Inventory 10.6 9.4 5.7 6.3 5.8 7.1 Inventory/ Ratio (%) 50% 42% 25% 27% 24% Cl. Stk. (Months) 5.7 5.0 3.0 3.1 2.8 Price INR/kg 16 16 24 33 29
28% 3.2 27 Source: Crisil, Darashaw
24
Deregulation Indias 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 governments 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 Command Area Cane Pricing Price intervention International Trade
Australia
Brazil
China
Thailand
India
Source: KPMG De-regulation is possible on the following counts
Command Area Command Area Reservation: Cane Pricing
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. Trade Policy Levy Quota DEREGULATION
Release Mechanism
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).
25
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 SY07 SY08 SY09 SY10 SY11 118 110 155 230 205 Growth 3% -7% 41% 48% -11% Wheat 850 1000 1080 1100 1120 Growth 21% 18% 8% 5% 2% Rice 635 760 865 1065 1015 Growth 9% 20% 14% 23% -5% Cotton 1990 2030 3000 3000 3000 Growth 1% 2% 48% 0% 0% Jowar 548 610 850 850 890 Growth 4% 11% 39% 0% 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 Brazils growth rate could result in a global surplus. However, we believe that our estimate of Brazils production growth trajectory (44 mn ton in 2016) is ahead of estimates of UNICA (41 mn ton) and thus we do not foresee Brazils 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 50% 45% 40% 35% 30% 25% 20% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
26
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 worlds largest sugar producer Brazil and the worlds 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 SY12E Book Value Target P/BV (x) Implied Book Value No of Shares Value / Share CMP Returns 26,305 0.5 14,249 228 73* 82 -11%
BRCM 12,389 1.4 16,807 257 65 75 -13%
SHRS 39,016 1.5 57,369 670 86 76 13%
Valuations are based on Quality of Earnings (SY11 Figs.) PAT Margin Asset Turnover Equity Multiplier (Assets/Equity) DuPont ROE Net Debt / Equity Target P/BV (x) -5% 0.4 3.2 -6% 2.1 x 0.5 7% 1.1 1.7 12% 0.6 x 1.4 9% 1.1 2.7 29% 1.6 x 1.5 Source: Darashaw
* Indicates INR 10/share included from power foray of BJH
27
Valuation Bands
SHRS
EV/EBITDA 12 10 8
2.0
Mean
4.0
P/BV
Mean
3.0
6 4 2 Dec-06
1.0
Dec-07
Dec-08
Dec-09
Dec-10
0.0 Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Source: Darashaw
Source: Darashaw
BRCM
EV/EBITDA 16 14 12 10 8 6 4 Dec-06 1.0 3.0 Mean 4.0 P/BV Mean
2.0
Dec-07
Dec-08
Dec-09
Dec-10
0.0 Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Source: Darashaw
Source: Darashaw
BJH
EV/EBITDA 28 24 20
1.5
Mean
2.5
P/BV
Mean
2.0
16 12 8 4 Dec-06
1.0
0.5
Dec-07
Dec-08
Dec-09
Dec-10
0.0 Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Source: Darashaw
Source: Darashaw
28
Business Model Comparison

(All figures are taken for SY11E) Sugar Brazilian Operations Revenue Share SHRS Dynamics India (from Cane) 16% 25%
Import raws, refine & re-export to Asian countries and capture arbitrage profits of USD 30/ton
Refining
Trading
Market Intelligence Degree of Superior; Excellent global and domestic exposure Comments Integration
Distillery Integration (Ltrs/TCD) 27
Cogeneration Integration (Units/TCD) 35,791
36%
15%
Indulging in opportunistic trading across geographies and within India
2/3rd of cane is from owned farms whereby cane costs are fixed
Lower exposure lowers risks as losses are incurred during down-cycles
Higher integration leads to better performance during down-cycles as raw materials are available in abundant supply at lower costs
Revenue Share
0%
73%
High exposure
10%
0% Average;
Degree of Integration
28,341
BJH Dynamics
leads to losses during downcycles, besides BJHs cost of production is the highest Not a core activity for the company. A one off event.
Domestic focus Comments

BJH has not expanded its non-sugar businesses enough to keep the company in black during a downturn
Revenue Share BRCM
0%
70%
9%
0% Average; Domestic focus
Degree of Integration
20,863
High exposure
Not a core activity for the company. A one off event.
Dynamics
leads to losses during downcycles.
BRCM too has not expanded its non-
Comments
sugar businesses enough to keep the company in black during a downturn
29
Shree Renuka Sugars Ltd
INVESTMENT RATIONALE Rating Date CMP Price Target Upside BUY 7 APR10 INR 76 INR 86 +13% 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 upcycle, we foresee an annual EBITDA of USD 800 mn for the consolidated company COMPANY DATA Industry Equity (INR mn) Face Value KEY MARKET DATA BSE Code BSE Group NSE Code Bloomberg Code Mkt Cap. 52 Week high/low Daily Turnover 532670 A RENUKA SHRS IN 52 bn 108 / 52 74.8 mn 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 companys profitability is significantly higher production in SY12E in Brazil and India which could propel a significant decline in sugar prices. Sugar 670 1 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. 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.
SHARE HOLDING PATTERN (Dec10)
Promoters MFs, FIs, Banks FIIs Others
38% 11% 22% 29%
PRICE PERFORMANCE Returns (%) 3 Month 6 Month 12 Month * Benchmark Abs (20) (12) 8 Rel.* (17) (7) (1) Sensex
Analyst Contact No
Jehan Bhadha +91-22-43022256
Email ID jehan-bhadha@darashaw.com
Summary Financials INR Mn. SY09 SY10 SY11E SY12E Sales 28224 78516 101388 103194 YoY 33% 178% 29% 2% EBIDTA 4,720 13,575 22,582 19,905 Margin 17% 17% 22% 19% PAT 2235 7034 7329 5806 Margin 8% 9% 7% 6% EPS 3.3 10.5 10.9 8.7 YoY 93% 215% 4% RoE 15% 30% 29% P/E 10.8 7.2 7.0 P/BV 1.6 2.2 1.6
-21% 19% 8.8 1.3 Source: Darashaw Estimates
30
COMPANY BACKGROUND SHRS History 1998 2000-02 2004 2005-06 2007 2008 2009-10 2011 Acquisition of assets of Nizam Sugars Ltd and transfer to Munoli Commencement of 11.2 MW co-generation plant, 60 KLPD distillery & 250 TPD refinery IPO Acquisition of two mills in Karnataka Acquisition of KBK Chemical Engineering Commissioning of 2,000 TPD port based refinery at Haldia Acquisition of two sugar mills in Brazil having combined crushing capacity of 60,400 TCD 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
Sugar Crushing 60,000 TCD
Renuka Commodities DMCC Trading
Distillery 1230 KLPD
Distillery 5310 KLPD
CoGen 173 MW
CoGen 203 MW
Sugar Trading
KBK Chemical Engineering
31
INVESTMENT RATIONALE Largest & the fastest growing sugar company backed by superior promoter cum management SHRS is Indias 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 3.5 3.0 2.5 mn tons 2.0 1.5 1.0 0.5 0.0 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 Indias 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.
BRC M BJH SHRS
32
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.
Domestic Capacity Details

Unit Sugarcane (TCD) Co-gen (MW) Distillery (KLPD) Refinery (TPD)
Owned Munoli (Kar) Athani (Kar) Havalgah (Kar) Pathri (Mah) Gokak (Mah) Dhanuka (Mah) Leased Aland(Mah) Arag (Mah) Raibag (Kar) Refineries Haldia (WB) Mundra (Guj) Total 35,000 15 15 173 930 2,000 3,000 9,000 1,250 4,000 2,500 15 7,500 8,000 8,000 1,250 2,500 14 300 35.5 38 40.5 150 300 150 30 1,000 2,000 1,000
Source: Company
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

SHRS
Power (units) / TCD
Refining as % of Crushed Capacity
SHRS
SHRS
BJH
BJH
BJH
BRCM
BRC M
BRC M
10
20
30
10000
20000
30000
40000
0%
5%
10%
15%
20%
Source: Companies
Source: Companies
Source: Companies
33
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 900 800 USD / Ton USD/Ton 700 600 500 400 300 Sep-09 60 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 May-11 White Raw 100 120
Forward Contracts - White Premium
80
Aug-11
Nov-11
Feb-12
Source: Bloomberg
Source: Bloomberg
34
Sugar Model
SY09
SY10
SY11E
SY12E
Cane - Sugar Cane Crushed (mn ton) Recovery Rate Sugar Production (mn ton) Sales Volume (mn ton) Sugar Realizations (INR/kg) Blended Realizations (INR/kg) Revenue (INR bn) 3.5 10.7% 0.38 0.42 19.3 20.9 9511 4.0 11.2% 0.45 0.32 28.0 31.5 10931 5.0 11.2% 0.56 0.56 25.2 27.0 15251 5.6 11.2% 0.63 0.63 23.4 25.0 15791
Cane Cost (INR/ton) Transport Cost (INR/ton) Conversion Cost (INR/ton) Total Cost (INR bn) PBIT (INR bn) PBIT Margin
1750 200 445 22321 975 10%
2800 200 350 30045 1828 17%
2400 200 350 26457 -291 -2%
2400 200 350 26457 -853 -5%
Imported Raw - Sugar Sales Volume (mn ton) Realization (INR/ton) Revenue (INR mn) PBIT (USD/ton) PBIT (INR mn) 0.38 22.9 8702 44 760 0.8 31.5 25200 60 1.0 27 27000 30 1.2 23 27600 30
2160 1350 1620 Source: Company, Darashaw
35
Ethanol and Power segments to provide cushion during downturn Distillery segments 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 Cane Crushed (mn tons) Molasses Recovery (%) Internal Molasses Obtained (mn tons) % of alcohol realized Internal Alcohol Produced (mn ltrs) External Molasses Bought (mn tons) External Alcohol Produced (mn ltrs) Total Alcohol Produced (mn ltrs) Alcohol Sold (mn ltrs) Realization (INR/ltr) Revenue (INR mn) Molasses cost (INR/ton) Molasses Cost (INR mn) Conversion Cost (INR/ltr) Conversion Cost (INR mn) Operating Cost (INR mn) PBIT Margins
SY09 3.5 4.5% 0.16 22% 35 0.22 48 83 65 25.8 1676 2250 845 6.0 209 1054 622 37%
SY10 4.0 4.5% 0.18 22% 40 0.17 36 76 51 27.7 1418 2800 970 5.5 219 1189 229 16%
SY11E 5.0 4.5% 0.23 22% 50 0.25 55 105 135 26.8 3621 2520 1201 5.0 249 1451 2171 60%
SY12E 5.6 4.5% 0.25 22% 56 0.30 66 122 122 25.5 3104 2268 1256 5.0 279 1536 1569 51%
Source: Company, Darashaw
Cogen profitability to improve SHRSs 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.
36
Cogeneration Model Cane Crushed (mn tons) Bagasse Recovery (%) Bagasse Obtained Power generated Realization (INR/unit) Revenue (INR mn) Bagasse cost (INR/ton) Bagasse Cost (INR mn) Conversion Cost (INR/unit) Conversion Cost (INR mn) Operating Cost (INR mn) PBIT Margins
SY09 3.5 29% 1.0 378 7.8 2946 1030 1051 2.2 831 1882 1064 36%
SY10 4.0 35% 1.4 825 4.8 3944 1150 1622 2.2 1815 3437 507 13%
SY11E 5.0 33% 1.7 615 4.5 2768 300 499 1.7 1046 1544 1224 44%
SY12E 5.6 33% 1.9 689 4.5 3100 250 465 1.5 1033 1499 1601 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 Revenue Growth PBIT Margins
SY09 2426 62% 100 4%
SY10 2224 -8% 87 4%
SY11E 2446 10% 96 4%
SY12E 2569 5% 100 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 Revenue Growth PBIT Margins
SY09 5090 -52% 1087 21%
SY10 16643 227% 1550 9%
SY11E 10969 -34% 1022 9%
SY12E 10278 -6% 957 9%

37
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 companys 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 Brasils 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
38
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 SHRSs 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 Sugar Realizations Cane from Own Land Outsourced Cane Cane Cost Other Costs (INR/Kg) (INR/Kg) (INR/Kg) 27 0% 100% 21.5 3.1
VDI 27 85% 15% 8.2 7.7
RDB 27 67% 33% 9.5 8.3
PBIT PBIT Margins
(INR/Kg)
2.4 9%
11.1 41%
9.2 34% Source: Company, Darashaw
SHRS is now the 7th largest sugar company in Brazil.
70 60 50 40 30 20 10 0
60
Capacity (mn ton)
37
36 21
17
16
14
13
13
13
Guarani
Louis Dreyfus
Usaacusar
Lincoln Junqueira
Sao Martinho
ETH Brenco
Bunge
Cosan
SHRS
Source: Company
Coruripe
39
Sugar Model Total cane crushed (Mn Ton) Cane utilised for sugar Cane utilised for ethanol Captive Cane % Own cane (Mn Ton) Bought out (Mn Ton) Own cane cost (BRL / Ton) Bought out cane cost (BRL / Ton) Blended cane cost (BRL / Ton) Revenue Recovery(%) Sugar Production(Mn tonnes) Sugar Realisations (Cents/Pound) INR / USD Sugar Realisations (INR/Ton) Sugar Revenues (INR Mn) Cost Cane Cost (BRL/Ton of Sugar) Processing Cost (BRL/Ton) Other Cost BRL/Ton Total Cost BRL/Ton Total Cost INR/Ton Total Cost INR Mn PBIT (INR Mn) PBIT Margin
Renuka Do Brasil SY11E 9.3 55% 45% 67% 6.2 3.1 37 74 49 SY12E 9.7 55% 45% 67% 6.5 3.2 37 65 46
Vale Do Ivai SY11E 2.7 70% 30% 85% 2.3 0.4 37 74 43 SY12E 3.0 70% 30% 85% 2.5 0.4 37 65 41
14% 72% 23 45 22813 16337
14% 75% 20 45 19838 14817
14% 0.26 23 45 22813 6036
14% 0.29 20 45 19838 5774
352 110 120 582 14662 10470 5866 36%
329 110 120 559 14085 10543 4274 29%
304 110 120 534 13445 3563 2474
294 110 120 524 13183 3842 1932
41% 33% Source: Company, Darashaw
40
Ethanol Model Revenue Recovery Rate (Ltrs / Ton of Cane) Production Volume ('000L) - Direct Route Production Volume ('000L) - from Sugar Div Total Production ('000L) Share of Hydrous Ethanol Share of Anhydrous Ethanol Hydrous Production ('000L) Hydrous Realisation Net (BRL/Ton) Hydrous Realisation (INR/Ton) Hydrous Revenue (INR Mn) Anhydrous Production ('000L) Anhydrous Realisation (BRL/Ton) Anhydrous Realisation (INR/Ton) Anhydrous Revenue Revenue Rs Mn Direct Ethanol Cost Cane Cost to Ethanol (BRL / '000 Ltrs) Process Cost (BRL / '000 Ltrs) (150-130) Other Cost (BRL / '000 Ltrs) (45-30) Total Cost (BRL/'000 Ltr) Total Cost (Rs/ Ltr) Total Cost Rs Mn Indirect (Sugar Div) Ethanol - Cost Conversion Cost (INR/Ltr) Conversion Cost EBITDA (INR Mn) EBITDA Margin
Renuka Do Brasil SY11E SY12E
Vale Do Ivai SY11E SY12E
80 334800 102300 437100 33% 67% 144243 541 13623 1965 292857 1165 29330 8589 10555
80 349200 106700 455900 33% 67% 150447 514 12942 1947 305453 1107 27863 8511 10458
80 64800 29700 94500 60% 40% 56700 541 13623 772 37800 1165 29330 1109 1881
80 71280 32670 103950 60% 40% 62370 514 12942 807 41580 1107 27863 1159 1966
616 150 45 811 20 6841
576 150 45 771 19 6783
532 150 45 727 18.3 1186
514 150 45 709 17.8 1272
6 614 3100 29%
6 640 3035 29%
6 178 517
6 196 498
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
2000
120 110 100 90 80 70 60 50 40 Mar-09 Dec-09 Mar-10 Dec-10 Sep-09 Sep-10 Mar-11 Jun-09 Jun-10
Ethanol (BRL/ton)
1800 1600 1400 1200 1000 800 600 400 200
Crude Oil (USD)
Anhydrous Ethanol Hydrous Ethanol C rude (Brent)
Source: Bloomberg
41
Cogeneration Model Revenue Total Capacity MW Bagasse Recovery from cane Bagasse Obtained (Mn Ton) Percent of Units realised from Bagasse Total Power generated (Mn Units) Captive Consumption (Mn Units) (@40%) Surplus (Mn Units) Realisation BRL/MWhour Realisation INR/Unit Total Revenue INR Mn Cost Conversion Cost (INR / Unit) Conversion Cost (INR Mn) EBITDA (INR Mn) EBITDA Margin
Renuka Do Brasil SY11E SY12E
Vale Do Ivai SY11E SY12E
203 30% 2.8 36% 1004 402 603 100 4.8 2887
203 30% 2.9 36% 1048 419 629 100 4.8 3011
1.9 1896 979 34%
1.9 1908 1021 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.
42
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 Cane - Sugar Cane Crushed (Mn tons) Sugar Realization (INR/kg) Cane Price (INR/Quintal) Cane-Sugar sold (mn tons) EBITDA Ethanol / Alcohol Alcohol Sold (Mn ltrs) Alcohol Realization (INR/unit) Cost (INR/ltr) EBITDA Cogeneration Surplus Power (Mn units) Cogen Realization (INR/unit) Cost (INR/unit) EBITDA Refined Sugar Refining Volumes (Mn tons) Refining Margin (USD/ton) EBITDA Trading Trading Volumes (Mn tons) Trading EBITDA Margins EBITDA KBK Chemical EBITDA Less: Unallocable Expenditure India - EBITDA India 4.36 BULL CASE - Assumptions Cane - Sugar Cane Crushed (Mn tons) Sugar Realization (cents/lb) Sugar sold (mn tons) Cane Cost (BRL/ton) EBITDA Ethanol Hydrous Sold (Mn Ltrs) Hydrous Realization (BRL/ton) Anhydrous Sold (Mn Ltrs) Anhydrous Realization (BRL/ton) Blended Realization (BRL/ton) Cost (BRL/ton) EBITDA Cogeneration Surplus Power (Mn units) Cogen Realization (BRL/unit) Cost (INR/unit) EBITDA Yeast, Molasses & Others EBITDA Brazil 14.9 26 1.38 53 15149 221 753 346 1414 1156 828 5725
32
290 0.49 2307 109 28 20 1332
323 4.0 3.5 316
1.4 30 3702
732 100 66 1189
5214
5.4 9% 1611 196 791 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) SY14E EBITDA EV Net Debt Implied EV No of Shares Fair Value CMP Returns 6.0 35,951 215,707 (15,964) 199,742 670 298 76 4x Source: Darashaw
43
VALUATION We value SHRS using P/BV multiple-based methodology owing to the ongoing sugar down-cycle. Peer Comparison Price (BRL) Brazilian Companies Cosan Ltd Cosan SA Sao Martinho Average Price (INR) Indian Companies SHRS BRCM BJH Average 70 69 72 7.0 12.7 NA 8.8 37.6 NA 1.6 1.6 0.7 1.3 1.3 1.6 0.7 1.2 Sep Sep Sep Sep 21.4 26.2 24.0 10.0 15.5 22.3 15.9 13.7 15.4 17.6 15.6 6.2 7.1 6.0 6.4 8.1 7.7 6.0 7.3 Mar Mar Mar Mar PE (x) SY11E SY12E EV/EBITDA (x) SY11E SY12E Year End
PE (x) SY11E SY12E
P/BV (x) SY11E SY12E
Year End
Source: Darashaw
Valuations are based on Quality of Earnings (SY11E Figs.) BJH PAT Margin Asset Turnover Equity Multiplier (Assets/Equity) DuPont ROE Net Debt / Equity Target P/BV (x) -5% 0.4 3.2 -6% 2.1 x 0.5 BRCM 7% 1.1 1.7 12% 0.6 x 1.4 SHRS 9% 1.1 2.7 29% 1.6 x 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) SY12E Book Value Implied Book Value No of Shares Fair Value CMP Returns 1.5 39,016 57,369 670 86 76 13% Source: Darashaw
44
EV/EBITDA 12 10 8
Mean
P/BV 4.0
Mean
3.0
2.0
6 4 2 Dec-06
1.0
Dec-07
Dec-08
Dec-09
Dec-10
0.0 Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Source: Darashaw
Source: Darashaw
Darashaw vs Consensus Estimtes
(INR Bn) Consensus Darashaw Vs Consensus
Revenue SY11E SY12E EBITDA SY11E SY12E PAT SY11E SY12E Price Target Total Consensus Calls : 20 6.4 6.8 102 BUY: 15 7.3 5.8 86 HOLD: 4 16% -15% -16% SELL: 1 Source : Bloomberg, Darashaw 17.7 19.9 22.6 19.9 28% 0% 88.5 97.6 101.2 102.9 14% 5%
45
Profit & Loss Net Sales Change in stock VoP Other operating inc Income
SY09 28,160 0 28160 64 28224
SY10 76,694 0 76694 1822 78516
SY11E 101,156 0 101156 231 101388
SY12E 102,939 0 102939 254 103194
Balance Sheet Equity Reserves & Surplus Networth
SY09 317 14779 15302
SY10 670 22808 23479
SY11E 670 31674 32344
SY12E 670 38464 39134
Debt
13427
65080
56221
49748
Expenditure Raw Materials Employee SG&A
23,504 16,276 571 2,729
64,941 37,283 1,067 5,267
78,805 42,326 1,407 6,947
83,289 46,167 1,432 7,070
Sources of Funds
28877
88710
88722
89043
Application of Funds
28877
88710
88722
89043
Gross Fixed Assets EBIDTA 4,720 13,575 22,582 19,905 Less Acc. Depreciation Net Fixed Assets Depreciation 675 2,457 6,106 6,575 Capital WIP EBIT 4045 11118 16476 13330 Investments Interest Non-Operating income Extra-ordinary income Extra-ordinary exp 1,077 0 0 0 2,377 0 0 0 3,673 0 0 0 3,477 0 0 0 Other Current Assets Inventories Debtors Cash PBT 2,968 8,741 12,803 9,853 Loans & Advances Current Assets Tax 728 1,703 3,329 2,562 Current Liabilities PAT Minority Interest PAT after Min Int Dil EPS 2240 5 2235 3.3 7038 4 7034 10.5 9474 2146 7329 10.9 7291 1486 5806 8.7 Non-Current Liabilities Provisions Current Liabilities & Prov
15704 1555 14149
82466 17629 64837
105283 23735 81548
113358 30310 83048
2585
7027
477
1189
1189
1189
718 10721 1762 4912 4518 22631
881 17711 5226 6019 17342 47179
881 19949 6893 4318 20662 52702
881 20288 7014 3423 20904 52510
9157 1014 10172
34954 3278 38232
41481 4018 45500
43536 3094 46630
826
1391
1335
1191
Misc. Expenditure
28
117
117
117

46
Ratios SalesGrowth IncomeGrowth EBIDTAGrowth Adj.PATGrowth EPSGrowth RawMaterials Employee SG&A EBIDTAmargin Depreciationrate EBITmargin OtherincometoPBT TaxRate Adj.PatMargin PAT/Sales Sales/Assets Assets/Equity DupontRoE RoE RoCE
SY09
SY10
SY11E
SY12E
FCFF
SY09
SY10
SY11E
SY12E
33% 33% 77% 93% 93% 172% 178% 188% 215% 215%
32% 29% 66% 4% 4%
2% 2% -12% -21% -21% EBIT Less Adj. Taxes NOPLAT Inc / (Dec) in WC Operating Cash Flow 4,045 992 3,053 4,618 (1,566) 11,118 2,166 8,953 (6,422) 15,374 16,476 4,284 12,192 (2,111) 14,303 13,330 3,466 9,864 (1,473) 11,338
58% 2% 10% 17% 4% 14%
47% 1% 7% 17% 3% 14%
42% 1% 7% 22% 6% 16%
45% 1% 7% 19% 6% 13%
Inc / Dec in other op assets Net Capex Net Investment
(186) 3,820 8,438
237 63,350 56,928
56 1,756 -355
144 1,644 171
Free Cash Flow to Firm
(5,385)
(47,976)
12,547
9,693
Non-Operating cash flow 0% 25% 8% 0% 19% 9% 0% 26% 9% 0% 26% 7% Finaning Cash Flow 8% 1.0 1.9 15% 9% 0.9 3.8 30% 9% 1.1 2.7 29% 7% 1.2 2.3 19% Dividend (adj for inc/dec in prov) Equity buyback/(issue) After-tax Interest Debt Repayment/(issue) Inc/(Dec) in Non-op Investments 15% 14% 30% 17% 29% 15% 19% 12% Inc/(Dec) in Excess Cash Inc/(Dec) in Non-op L&A Cash flow to investors
(5,385)
(47,976)
12,547
9,693
(5,385) 65 (5,178) 813 (4,636) 0 1,973 1192
(47,976) 371 (1,882) 1914 (52,657) 0 (1,017) 5300
12,547 782 0 2718 10,098 0 (1,046) 0
9,693 652 0 2573 6,474 0 0 0
47
Bajaj Hindusthan
INVESTMENT RATIONALE 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. Sugar 221 1 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. 500032 B BAJAJHIND BJH IN 18.9 bn 144 / 66 23.8 mn 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--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.
Rating Date CMP Price Target Upside
HOLD
7 APR11 INR 82 INR 73 -11%
COMPANY DATA Industry Equity (INR mn) Face Value KEY MARKET DATA BSE Code BSE Group NSE Code Bloomberg Code Mkt Cap. 52 Week high/low Daily Turnover
SHARE HOLDING PATTERN (Dec11)
Promoters MFs, FIs, Ins FIIs Others
35% 7% 14% 44% 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 BJHs 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-toequity ratio of 2.2x as on SY10. We expect it to rise to 2.8x by SY12E. CONCERNS
PRICE PERFORMANCE Returns (%) 3 Month 6 Month 12 Month * Benchmark Abs (31) (40) (40) Rel.* (28) (35) (49) Sensex
Analyst Contact No Email ID
Jehan Bhadha +91-22-43022256

jehan-bhadha@darashaw.com
Summary Financials INR Mn. SY09 SY10 SY11E SY12E

Sales 22,993 34,441 30,301 29,476
YoY 58% 103% 39% 31%
EBIDTA 6948 6526 5881 5241
Margin 30% 19% 19% 18%
PAT 629 433 -2144 -3197
Margin 3% 1% -7% -11%
EPS 2.7 1.9 -9.4 -14.0
YoY 48% 200% 23% 40%
RoE 3% 1% -8%
P/E -
P/BV 0.5 0.7
-12% 0.7 Source: Darashaw Estimates
48
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 2004 2005-08 2008 2010-12 Set up 400 TCD crushing unit Addition of 7,000 TCD taking total capacity to 24,000 TCD Aggressive capacity expansion by 4x to 136,000 TCD. Expansion of Distillery to 800 KLPD & Cogeneration to 428 MW. Established Bajaj Ecotec Poducts, to manufacture Boards out of Bagasse. Expanding into Thermal power generation of 450 MW
BHL
Standalone
BHSIL
Consolidated
Sugar Crushing (TCD) Distillery (KLPD) Cogeneration (MW) Boards (m cube)
96,000 640 340 130,000*
40,000 160 88 80,000*
136,000 800 428 210,000* Source: Company, Darashaw
* indicates inclusion in the subsidiary Bajaj Ecotec Products
Plants Standalone Golagokarannath Kinauni Palia Kalan Khambarkhera Bilai Thanabhavan Budhana Gangnauli Barkhera Maqsoodapur Total in Standalone
Sugar - TCD
Distillery KLPD
Cogen - MW
13,000 12,000 11,000 10,000 9,000 9,000 9,000 9,000 7,000 7,000 96,000
100 160 60 160 160 640
30 35 40 35 35 35 40 25 35 30 340
BHSIL Kunderki Utraula Rudauli Pratappur Total in BHSIL 15,000 12,000 7,000 6,000 40,000 160 160 43 21 16 8 88
Total
136,000
800
428 Source: Company
49
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.
35 30
Operating Cost / kg
BJHs Operating Cost / kg has been

25 20 15 10 SY08 SY09 SY10 BJH BRC M SHRS
the highest among the top tier sugar companies thereby making it an inefficient player among its peers.
Source: Darashaw
Sugar Model
SY09
SY10
SY11E
SY12E
Cane - Sugar Cane Crushed (mn ton) Recovery Rate Sugar Production (mn ton) Sales Volume (mn ton) Sugar Realizations (INR/kg) Blended Realizations (INR/kg) Revenue (INR bn) 6.73 9.0% 0.61 0.82 24 22 17640 8.75 9.2% 0.81 0.81 33 29 23535 10.50 9.2% 0.97 0.88 29 27 23689 11.76 9.2% 1.08 1.10 27 25 27743
1451 152 715 2318 1347 7%
2266 152 465 2883 1292 5%
2016 152 350 2518 1019 4%
2116 152 350 2618 -911 -3%
Imported Raw - Sugar Sugar Produced (mn ton) Sales Volume (mn ton) Realization (INR/ton) Revenue (INR mn) PBIT (INR/ton) PBIT (INR mn) 137000 33 4521 5000 685 140000 29 4060 1000 210 -
50
Cogen profitability to improve; however revenue to be subdued compared to peers BJHs 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 Total Capacity (MW) Surplus Capacity (MW) Surplus as % of Total 428 105 25%
BRCM 180 126 70%
SHRS 164 90 55%
Source: Companies, Darashaw
Cogeneration Model Cane Crushed Bagasse Recovery (%) Bagasse Obtained Bagasse transferred to BEP Bagasse used for co-generation Power generated
SY09 6.7 31% 2.1 1.2 0.9
SY10 8.8 31% 2.7 1.3 1.5
SY11E 11.8 31% 3.6 1.7 2.0
SY12E 9.8 31% 3.0 1.4 1.6
Realization (INR/unit) Revenue (INR mn)
3 788
4 1752
4.0 2402
5.0 2013
Bagasse cost (INR/ton) Bagasse Cost (INR mn) Conversion Cost (INR/unit) Conversion Cost (INR mn) Operating Cost (INR mn)
150 128 1.5 383 510
150 219 0.7 307 526
150 294 0.6 353 648
150 244 1.0 489 733
PBIT Margins
278 35%
1226 70%
1754 73%
1280 64%
51
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.
450 MW
405 MW Sale to UPPLC @ INR 4/unit
45 MW Sale in Open Access @ INR 5/unit
Power Economics FY13 Capacity (MW) Thermal Power Valuation Capacity (MW) Capex (INR mn) Equity (INR mn) BV Multiple BV of Plants (INR mn) BJHs stake BJHs BV of Plants (INR mn) BJH No of shares (mn) BV / Share (INR) 450 22500 6750 1.2 8100 26% 2106 215 10 PLF Generation (mn units) Blended Realization (INR) Revenue (INR mn) Coal required (mn ton) Landed Cost of Coal / ton (INR mn) Total Coal Cost Conversion Cost (@ INR 0.5/unit) Operating Cost (INR mn) 450 80% 2851 4.1 11690 1.46 5625 8197 1426 9623 INR mn PBIT Interest PBT Tax PAT PAT Share of BJH (26% stake) 2067 189 1878 639 1240 322
Source: Company, Darashaw & Co.
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.
52
Distillery segments contribution to improve 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.
Distillery Model Cane Crushed Molasses Recovery (%) Molasses Obtained (mn ton) % of alcohol realized Alcohol Produced (mn liters) Alcohol Sold (mn liters) Realization (INR/ltr) Revenue (INR mn) Molasses cost (INR/ton) Molasses Cost (INR mn) Conversion Cost (INR/ltr) Conversion Cost (INR mn) Operating Cost (INR mn) PBIT Margins
SY09 6.7 5.0% 0.3 18% 53 49 24 1190 3630 1059 3 148 1207 (17) (1%)
SY10 8.8 5.0% 0.4 20% 78 65 25 1657 3000 978 6 450 1428 230 14%
SY11E 11.8 5.0% 0.6 20% 104 104 27 2765 2750 1425 6 601 2026 740 27%
SY12E 9.8 5.0% 0.5 20% 84 84 27 2232 2750 1150 7 585 1735 496 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 Revenue Growth PBIT Margins
SY09 464
SY10 1546 233%
SY11E 2050 33% (120) -
SY12E 2554 25% 255 10%
(738) -
(330) -
53
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--vis its peers and historical trading ratios during past down-cycles. Fair Value - SY12E - P/BV Methodology SY12E Book Value P/BV Multiple (x) PAT Margin Asset Turnover Equity Multiplier (Assets/Equity) DuPont ROE Net Debt / Equity Target P/BV (x) -5% 0.4 3.2 -6% 2.1 x 0.5 7% 1.1 1.7 12% 0.6 x 1.4 8% 1.3 2.7 29% 1.6 x 1.5 Source: Darashaw Implied Book Value No of Shares Target Thermal Power BV/share SY12E Fair Value CMP Returns 26,305 0.54 14,249 228 62 11 73 82 -11% Source: Darashaw
Valuations are based on Quality of Earnings (SY11E Figs.) BJH BRCM SHRS
EV/EBITDA 28 24 20
Mean
2.5
P/BV
Mean
2.0
1.5
16 12 8 4 Dec-06
1.0
0.5
Dec-07
Dec-08
Dec-09
Dec-10
0.0 Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Source: Darashaw
Source: Darashaw
Revenue SY11E SY12E EBITDA SY11E SY12E PAT SY11E SY12E Price Target Total Consensus Calls : 9 (0.1) 0 77 BUY: 0 (1.6) (3.0) 73 HOLD: 2 -270% NA -5% SELL: 7 Source : Bloomberg, Darashaw 5.7 5.7 6.7 5.6 18% -2% 40.8 39.2 33.6 34.3 -18% -13%
54
SY09 20,259 0 20,259 2,734 22,993
SY10 33,048 0 33,048 1,393 34,441
SY11 E 33,587 0 33,587 1,415 35,002
SY12 E 34,262 0 34,262 1,444 35,705
SY09 177 20607 21135 651
SY10 191 28457 28838 2030 63498
SY11 E 228 28262 28491 2030 61218
SY12 E 228 26077 26305 2030 72671
Debt
40563
16046 12208 1653 2184
27915 22204 1839 3872
28348 22368 2045 3935
30152 23863 2275 4014
Sources of Funds
62348
94365
91738
101006
62348
94365
91738
101006
Gross Fixed Assets EBIDTA 6948 6526 6654 5554 Less Acc. Depreciation Net Fixed Assets Depreciation 3457 3440 4408 4909 Capital WIP EBIT 3833 2052 2247 645 Investments Interest Non-Operating income Extra-ordinary income Extra-ordinary exp 2781 342 0 0 3681 0 0 (1940) 4619 200 0 0 4959 200 0 0 Inventories Debtors Cash Loans & Advances PBT 1,393 311 -2,173 (4114) Current Assets
52951 10598 42353
68668 11098 57570
87974 15505 72469
97975 20414 77561
1548
9306
694
694
694
9564 499 1273 18594 29930
19674 1529 5258 14351 40812
19462 1554 777 12763 34555
21656 1585 826 14390 38457
Tax
787
(93)
-571
(1081)
Current Liabilities Provisions
9027 1951 10978
17492 1932 19423
20628 1330 21957
21833 932 22765
PAT
606
404
(1602)
(3033)
Current Liabilities & Prov
Adj. PAT Adj. EPS
629 2.7
433 2
(1602) (7)
(3033) (13)
Non-Current Liabilities
486
839
268
(814)
Misc. Expenditure

55
3% 3% 1% 4% -6% 3% -12% -3% 3% 0.37 2.9 3% 1% 0.36 3.3 1% -5% 0.38 3.2 -6% -8% 0.35 3.8 -12% 25% 57% 3% 0% (30%) 1% -9% 26% -5% -5% 26% -8% Finaning Cash Flow Dividend (adj for inc/dec in prov) Equity buyback/(issue) After-tax Interest Debt Repayment/(issue) Inc/(Dec) in Non-op Investments Inc/(Dec) in Excess Cash Inc/(Dec) in Non-op L&A (5315) 99 (7250) 1210 1574 0 (971) 0 (23820) (23) (8132) 4784 (22277) 0 3207 0 2675 156 (150) 4619 1624 0 (3574) 0 (11901) (448) (0) 0 (11453) 0 0 0 Cash flow to investors (5316) (23820) 2675 (11901) 53% 7% 10% 30% 7% 17% 64% 5% 11% 19% 5% 6% 64% 6% 11% 19% 5% 6% 67% 6% 11% 16% 5% 2% Non-Operating cash flow 149 1940 200 0 Free Cash Flow to Firm (5465) (25760) 2475 (11901) Inc / Dec in other op assets Net Capex Net Investment (446) 1606 7132 6586 29561 29009 571 6163 342 1081 6174 8868 SY09 SY10 SY11E SY12E FCFF SY09 SY10 SY11E SY12E
-9% 4% 223% (124%) (122%)
63% 14% -6% (31%) (33%)
2% 21% 2% -470% -496%
2% -7% -17% 89% 89% EBIT Less Adj. Taxes NOPLAT Inc / (Dec) in WC Operating Cash Flow 3833 2166 1667 (446) (3858) 2835 641 2,194 6586 3801 3155 713 2,441 571 8639 3918 886 3,032 1081 (5727)
56
Balrampur Chini Mills

INVESTMENT RATIONALE Rating Date CMP Price Target Upside HOLD 7 APR11 INR 75 INR 65 -13% 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. COMPANY DATA Industry Equity (INR mn) Face Value KEY MARKET DATA BSE Code BSE Group NSE Code Bloomberg Code Mkt Cap. (INR bn.) 52 Week high/low Daily Turnover 500038 B BALRAMCHIN BRCM IN 19.7 148 / 69 22.2 mn 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 governments 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 Analyst Contact No Email ID Jehan Bhadha 022 43022256
jehan-bhadha@darashaw.co
Sugar 257 1
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.
SHARE HOLDING PATTERN (Dec 10)
Promoters MFs, FIs, Ins FIIs Others
38% 16% 25% 21%
PRICE PERFORMANCE Returns (%) 3 Month 6 Month 12 Month * Benchmark Abs (15) (20) (17) Rel.* (12) (15) (26) Sensex
in case the global prices are below domestic prices, thereby keeping a lid on the domestic prices.
Summary Financials INR Mn. SY09 SY10 SY11E SY12E Sales 17,553 19,859 22,947 21,173 YoY 7% 13% 16% -8% EBIDTA 4556 2517 4004 2750 Margin 35% 52% 42% 34% PAT 2097 267 1520 513 Margin 12% 1% 7% 2% EPS 8.2 1.0 5.9 2.0 YoY 214% -87% 468% -66% RoE 19% 2% 13% P/E 72.1 12.7 P/BV 1.7 1.6
4% 37.6 1.6 Source: Darashaw
57
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 1979 1995 2003 2006-08 2010-11 Incorporated on taking over a sugar mill in Eastern UP IPO Diversified into distillery operations Further diversification into co-generation Expansion leading to almost doubling of capacities across all segments Coal based generation of power (40 MW)
BRCM
Sugar 76,000 TCD
Distillery 320 KLPD
Co-generation 181 MW
Plants Balrampur Babhnan Rauzagaon Gularia Mankapur Kumbhi Akbarpur Tulsipur Haidergarh Maizapur (Indogulf) Total
Sugar - TCD 12,000 10,000 8,000 8,000 8,000 8,000 7,500 7,000 5,000 3,000 76,500
Distillery KLPD 160 60 100 -
Cogen - MW 25 3 26 31 34 20 18 23
320
180 Source: Company
58
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. Sugar Model SY09 SY10 SY11E SY12E
Cane - Sugar Cane Crushed (mn ton) Recovery Rate Sugar Production (mn ton) Sales Volume (mn ton) Free Suga Realizations (INR/kg) Blended Realizations (INR/kg) Revenue (INR bn) 4.8 9.1% 0.4 0.7 23.7 21.8 15.2 5.4 9.2% 0.5 0.6 32.5 28.8 17.4 6.7 9.2% 0.6 0.6 29.0 27.0 16.9 7.5 9.2% 0.7 0.6 27.0 25.2 17.2
1379 150 355 12.0 3.1 21%
2386 150 355 16.8 0.5 3%
2016 150 350 16.1 0.8 5%
2116 150 350 18.2 -0.9 -6%
Imported Raw - Sugar Sales Volume (mn ton) Realization (INR/ton) Revenue (INR mn) PBIT (INR/ton) PBIT (INR mn) 0.02 32.5 650 1000 0.09 29.0 2610 1000 -
20 90 Source: Company, Darashaw
59
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 100% 80% 60% 40% 20% 0% SY06 SY09 SY10 SY11E SY12E
C ogen Distillery Sugar
Source: Company, Darashaw Cogeneration Model Cane Crushed Bagasse Recovery (%) Bagasse Obtained (mn ton) % Units realized from Bagasse Bagasse - Power (mn Units) Realization (INR/unit) Revenue Season (INR mn) Coal - Power (mn units) Realization (INR/unit) Revenue Off season (INR mn) Total Cogen Revenue SY09 4.8 35% 1.7 31% 514 3 1834 0.0 0 1834 SY10 5.4 35% 1.8 29% 518 4 2051 73 5.1 375 2426 SY11E 6.7 35% 2.3 29% 666 4.00 2664 130 5.0 642 3306 SY12E 7.5 35% 2.6 29% 746 4.04 3014 130 5.0 642 3655
Bagasse Cost / Ton Bagasse Cost (INR mn) Conversion Cost (INR/unit) Conversion Cost (INR mn) Coal Based Cost (INR/unit) Coal based Cost (INR mn) Operating Cost (INR mn)
160 267 1.5 770 0 0 1037
250 446 1.5 857 4.0 294 1598
225 517 1.4 1074 4 518 2109
200 514 1.3 1094 4 518 2127
PBIT Margins
796 43%
828 34%
1196 36%
1528 42%
60
Distillery segments contribution to improve 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.
Distillery Model Cane Crushed Molasses Recovery (%) Molasses Obtained (mn ton) % of alcohol realized Alcohol Sold (mn liters) Realization (INR/ltr) Revenue (INR mn) Molasses cost (INR/ton) Molasses Cost (INR mn) Conversion Cost (INR/ltr) Conversion Cost (INR mn) Operating Cost (INR mn) PBIT Margins
SY09 4.8 5% 0.24 21% 51 26 1308 1800 435 7.4 375 810 498 38%
SY10 5.4 5% 0.27 21% 38 25 940 2000 541 4.5 173 714 226 24%
SY11E 6.7 5% 0.33 21% 70 27 1852 1600 533 5.0 349 882 970 52%
SY12E 7.5 5% 0.37 21% 78 27 2075 1400 522 5.0 391 913 1161 56%
61
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 companys performance vis-vis its peers. Thus our fair value for BRCM is at INR 65.
Valuations are based on Quality of Earnings (SY11E Figs.) BJH PAT Margin Asset Turnover Equity Multiplier (Assets/Equity) DuPont ROE Net Debt / Equity Target P/BV (x) -5% 0.4 3.2 -6% 2.1 x 0.5 BRCM 7% 1.1 1.7 12% 0.6 x 1.4 SHRS 8% 1.3 2.7 29% 1.6 x 1.5
Fair Value - SY12E - P/BV Methodology SY12E Book Value P/BV Multiple (x) Implied Book Value No of Shares SY12E Fair Value CMP Returns 12,389 1.4 16,807 257 65 75 -13% Source: Darashaw
Source: Darashaw
EV/EBITDA 16 14 12 10 8 6 4 Dec-06
Mean 4.0
P/BV
Mean
3.0
2.0
1.0
Dec-07
Dec-08
Dec-09
Dec-10
0.0 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10
Source: Darashaw
Source: Darashaw
Revenue SY11E SY12E EBITDA SY11E SY12E PAT SY11E SY12E Price Target Total Consensus Calls : 16 0.7 2.2 90 BUY: 10 1.5 0.5 65 HOLD: 4 117% -77% -28% SELL: 2 Source : Bloomberg, Darashaw 3.5 4.7 4.0 2.8 14% -40% 27.4 25.1 22.9 21.1 -16% -16%
62
SY09 17,471 0 1447 82 17,553
SY10 19,814 0 2935 45 19,859
SY11 E 22,902 0 4280 45 22,947
SY12 E 21,128 0 5525 45 21,173
SY09 257 11081 11338
SY10 257 11126 11383
SY11 E 257 11882 12139
SY12 E 257 12137 12394
Debt
9906
9467
8543
9074
12997 10640 946 1411
17342 14879 991 1472
18943 16096 1145 1702
18423 15797 1056 1570
Sources of Funds
21244
20850
20681
21468
21244
20850
20681
21468
Gross Fixed Assets EBIDTA 4556 2517 4004 2750 Less Acc. Depreciation Net Fixed Assets Depreciation 1160 1136 1198 1263 Capital WIP EBIT 3396 1381 2806 1487 Investments Interest Non-Operating income Extra-ordinary income Extra-ordinary exp 1068 0 0 0 906 0 33 0 842 0 0 0 824 0 0 0 Inventories Debtors Cash Loans & Advances PBT 2,328 508 1,964 663 Current Assets
24889 6656 18233
26352 7792 18561
27801 8990 18811
29314 10253 19061
78
1222
1222
1222
1222
3511 171 342 2398 6422
3078 651 475 2062 6267
3335 816 519 2216 6886
3187 753 404 2128 6471
Tax
231
208
444
150
Current Liabilities Provisions
1622 1057 2679
2804 419 3222
3028 1296 4325
2958 489 3448
PAT
2097
300
1520
513
Current Liabilities & Prov
Adj. PAT Adj. EPS
2097 8.2
267 1.0
1520 5.9
513 2.0
Non-Current Liabilities
2039
1983
1918
1844
Misc. Expenditure

63
18% 16% 3% 7% 12% 14% 4% 7% 12% 0.8 1.9 18% 2% 1.0 1.8 3% 7% 1.1 1.7 12% 2% 1.0 1.7 4% 0% 10% 13% 7% 41% 19% 61% 5% 8% 26% 5% 19% 75% 5% 7% 13% 4% 7% 70% 5% 7% 17% 4% 12% #DIV/0! 0% 23% 16% 75% 5% 7% 13% 4% 7% #DIV/0! 0% 23% 16% Financing Cash Flow Dividend (adj for inc/dec in prov) Equity buyback/(issue) After-tax Interest Debt Repayment/(issue) Inc/(Dec) in Non-op Investments Inc/(Dec) in Excess Cash Inc/(Dec) in Non-op L&A 5,295 149 (107) 962 3,800 0 (0) 399 1,980 901 (2) 535 569 0 (23) 0 1,729 134 0 652 943 0 0 0 859 764 0 637 (542) 0 0 0 Cash flow to investors 5,295 1,980 1,729 859 Non-Operating cash flow 0 33 0 0 Free Cash Flow to Firm 5,295 1,947 1,729 859 Inc / Dec in other op assets Net Capex Net Investment 581 (555) (2,236) 56 306 (1,145) 65 315 442 74 324 291 SY09 SY10 SY11E SY12E FCFF SY09 SY10 SY11E SY12E
17% 7% 43% 214% 214%
13% 13% (45%) (87%) (87%)
16% 16% 59% 468% 468%
-8% -8% -31% -66% -66% EBIT Less Adj. Taxes NOPLAT Inc / (Dec) in WC Operating Cash Flow 3396 337 3,059 (1,681) 4,740 1381 578 802 (1,451) 2,253 2806 634 2,171 127 2,044 1487 336 1,151 (32) 1,183
64
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
65

Sugar Sector Report - 7 Apr 2011

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Sugar Sector Report - 7 Apr 2011

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INDIA

India Sugar India Sugar

Analyst: Jehan Bhadha Analyst: jehan-bhadha@darashaw.com +91-22-43022256 Bhadha Jehan jehan-bhadha@darashaw.com

1001-Regent Chambers, Nariman Point, Mumbai

1001-Regent Chambers, Nariman Point, Mumbai

* We expect returns of 4x in 4 years for SHRS

Sugar Consumption & Production (mn ton)

Per Capita Consumption - Sugar v/s Gur & Khandsari

EU USA India C hina 0 10 20 30 40 50 60 70

Source: Cooperative Sugar Vol 40 (9)

1001-Regent Chambers, Nariman Point, Mumbai

Coefficient of Variation 12%

Acreage (mn ha)

Production (mn ton)

Source: ISMA, Darashaw

5% 890 3000 0% Source: Ministry of Agriculture, Darashaw

1001-Regent Chambers, Nariman Point, Mumbai

Yield (Ton/hectare) 72 68 64 60 56 SY02 SY03 SY04 SY05 SY06 SY07 SY08

Yields 72 70 68 Yields 66 64 62 60 58 SY07 SY08 SY09 SY10

1001-Regent Chambers, Nariman Point, Mumbai

Sugar Price (INR/kg)

Source: NCDEX, Crisil, Darashaw

1001-Regent Chambers, Nariman Point, Mumbai

SY04 233 132 57% 101 43% 16

SY05 236 124 53% 112 47% 18

SY06 281 189 67% 92 33% 19

SY07 345 277 80% 68 20% 16

SY08 340 265 78% 75 22% 16

SY09 280 163 58% 118 42% 29

SY10 300 206 69% 94 31% 33

SY11E 346 274 79% 72 21%

SY12E 380 309 81% 72 19%

SY13E 361 286 79% 75 21%

29 27 Source: Crisil, Darashaw

C ane Production 400 350 300

Drawal Rates 90% 80% 70% 60%

Source: Crisil, Darashaw

Source: Crisil, Darashaw

1001-Regent Chambers, Nariman Point, Mumbai

SY03 95 0% 4.52 2% 64 -6% 287 -3% 68% 194 8% 10.4% 20.1 9%

29% 33% 13% -7% Source: Crisil, Darashaw

10 SY06 SY07 SY08 SY09 SY10

Source: Kingsman, Darashaw

28% 3.2 Source: Crisil, Darashaw

1001-Regent Chambers, Nariman Point, Mumbai

1001-Regent Chambers, Nariman Point, Mumbai

GLOBAL SCENARIO Production Composition

India EU China Brazil Thailand Australia Pakistan Others

Source: International Sugar Organization

9.2% 1.2% 2.3%

25 20 15 mn ton 10 5 0 -5 2003 2004

Country-wise Net Exports

Brazil Sugar Production 40 35

Source: International Sugar Organization, Darashaw

Sugarcane Producing regions in Brazil

Brazil Growth Rates

Production 14% 12% 10% 8% 6% 4%

1001-Regent Chambers, Nariman Point, Mumbai

Sugar - Cost of Production

2007 2008 2009 2010 2011

3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 1960 1970

Shift towards Flex Fuel Vehicles

1001-Regent Chambers, Nariman Point, Mumbai

Source: UNICA, Darashaw