Shree Renuka Sugar Turn around story

Sugarbull · November 17, 2015, 9:37am

Shree Renuka Sugars (CMP 16 Rs.) is one of the largest sugar producers in the world, the leading manufacturer of sugar in India, and one of the largest sugar refiners in the world
Sugar:
The Company operates eleven mills globally with a total crushing capacity of 20.7 million tonnes per annum (MTPA) or 94,520 tonnes crushed per day (TCD). The Company operates seven sugar mills in India with a total crushing capacity of 7.1 MTPA or 35,000 TCD and two port based sugar refineries with capacity of 1.7 MTPA. The Company also has significant presence in South Brazil, through acquisitions of Renuka Vale do Ivai and Renuka do Brasil. Renuka Vale do Ivai was acquired on 19th March 2010 and is 100% owned by the Company. The Company currently holds 59.4% equity stake in Renuka do Brasil which was acquired on 7th July 2010. The combined crushing capacity of the Brazilian subsidiary companies is 13.6 MTPA. The Company is the only sugar producer globally with year round crushing due to complementary seasons in India and Brazil.

Ethanol:
The Company manufactures fuel grade ethanol that can be blended with petrol. Global distillery capacity is 6,240 KL per day (KLPD) with Indian distillery capacity at 930 KLPD (630 KLPD from molasses to ethanol and 300 KLPD from rectified spirit to ethanol) and Brazil distillery capacity at 5,310 KLPD.

KBK Chem-Engineering (100% subsidiary) facilitates turnkey distillery, ethanol and bio-fuel plant solutions.

Power:
The Company produces power from bagasse (a sugar cane by product) for captive consumption and sale to the state grid in India and Brazil. Total Cogeneration capacity increased to 555MW with exportable surplus of 356 MW. Indian operations produce 242 MW with exportable surplus of 135 MW and Brazilian operations produce 313 MW with exportable surplus of 221 MW.

The Company’s presence in the largest sugar producing country, Brazil and the largest sugar consuming country, India provides access to information on movements in market price and the know-how of the global supply-demand situation. The Company’s operations in Brazil are favoured by low operating cost, high scalability and highly conducive climatic conditions. The Company’s Indian operations are present in sugar rich belt of South and West India, ensuring high sugarcane yields and sugar recovery from cane. The strategically located port-based refineries in Gujarat and West Bengal states of India cover India, South Asia and Middle-East markets competitively.

Promoter:
Narendra Murukumbi’s rags to riches story is inspiring. He is only 46 years old and an IIM graduate. Approx. 10,000 famers became shareholder in company’s IPO which changed the relationship between the farmers and the sugar mill from supplier to that of a shareholder.

                       Annual results in brief

(Rs crore)
Mar ’ 15 Mar ’ 14 Mar ’ 13 Mar ’ 12 Dec ’ 11

Sales 5,744.20 6,522.40 6,395.40 6,362.10 5,381.80
Operating profit 176.30 140.00 594.80 738.80 542.40
Interest 336.20 318.20 367.10 369.90 272.70
Gross profit -156.00 -123.50 242.70 370.00 270.70
EPS (Rs) -3.18 -6.95 0.77 1.25 1.17

Shree Renuka is an innovative company and there are many things I like about the company:

Leader in India’s fuel ethanol business with nearly 21% market share. New ethanol tenders are expected to price at Rs. 26
Largest raw sugar refining capacity in India. Sugar refining capacity helps enhance the company’s asset utilization by processing raw sugar during off-season.
The company is the second largest exporter of sugar from india with a presence in the Middle East, South East Asia and East Africa. It exports almost 20% of India’s international sugar trade
The company directly markets sugar to institutional buyers instead of selling to wholesale agents and dealers. The company is a sugar ‘supplier of choice’ amongst companies that produce carbonated soft drinks, fruit juices, choclates, baby foods and dairy products. Its clients include Coca Cola, Pepsi, ITC, Britannia, Nestle and Cadbury, among others. The company sells premium refined sugar.
Company enjoys certain advantages on account of its West and South Indian location. It has plants in Maharashtra and Karnataka. It enjoys a longer crushing season (over 200 days, starting from October to May), higher recovery (10-20% higher than other regions), proximity to port and lower sugarcane prices due to much lesser state interference in setting sugarcane prices.
In order to diversify it’s revenue base, the company has acuired a 80% stake in KBK Chem-Engineering Pvt. Ltd. engaged in providing turnkey solutions (EPC contracts) in the field of distilleries, ethanol plants and biofuels.

Conclusion:

With the collapse of global sugar prices, financial performance started deteriorating and put the company to near bankrupt position.

But now it has started turning the corner in line with global prices and many Sops in the offing by Present government including Ethanol blending, export incentives and others.

The Company has witnessed a strong Revenue CAGR of 55% and EBITDA CAGR of 58% from FY2006 to FY2012. The strong financial performance has ensured consistent returns for shareholders with an average Return on Equity of approx. 20% from FY 2006 to FY 2012. The Company’s strong Management team has delivered consistently to ensure growth through successful completion of strategic acquisitions.
In addition to compnay’s efficient management, underlying reason for such a strong performce is sugar prices at global level almost tripled during this period from 11 c/lb to 35 c/lb. Considering cycle of 3-5 years in sugar sector prices have now bottomed out at 11 c/lb and again started rising above 15 c/lb. Up surge in sugar prices after consecutive surplus year after year has forced in efficient players out of market. And those who have survived will derive benefit in coming time with prices likely to touch upper end of cycle and may surpass 35c/lb in two to three years.

Shree renuka with improved efficiency and synergy is likely to repeat strong CAGR of 55% again for coming 3-to 5 years. Stock prices are likely to increase 8 to 10 times from present level of 16 Rs.

Supporting Hypothesis to conclusion:

Warren Buffet is against cyclical stock for simple reason that average cash flow over a period of time is not so fantastic because of negative return during down turn of cycle. At the same time many renowned players have advocated for cyclical sector because they offer us safe entry during down turn.

I invite all estimated valuePicker colleagues to join me and embark on this wonderful journey of big bull run in Shree Renuka which has just commenced.

Shree Renuka is right now resting on three strong pillars which form strong foundation which creats case for superior returns in medium to long term as under:

(1). Cyclicals: Timing is everything in cyclical sector. If we pick the stock at down turn of cycle and exit at up turn, it offers multi fold returns.

(2). Turn around: When company is turning the corner, it is available at throw away price due to debt laden position of company. History is full of such companies which passes through rough whether and come out with flying colours. With kind of dynamism Mr. Murukumbi has shown in establishing Shree Renuka, it is ripe for big turn around at this stage.

(3). Asset plays: Because of huge assets owned by company stock available at discounted price is as good as by asset at discounted rates when sector is in recession. Sugar sector is offering best opportunity because of consecutive 5 years of surplus in international sugar market.

Above three are criteria out of six categories identified by non other than Peter Lynch. The veteran who has coined the term Multi bagger.

Technical terms Sugar cycle has taken U turn at international level and new new bull run has started with bottom in place. Shree Renuka is only international sugar company from India who has managed to escape controls of states and Indian government to some extent. With rich experience of Wilmar group in trading of agro items lot of synergy has come in to existence.

While management is writing turn around story of Shree renuka, I am pleased to invite you all to share your valuable experience.

Disclosure: I am holding substantial quantity bought between 7.50 Rs. to 31 Rs.

Sugarbull.

Sugarbull · November 17, 2015, 11:58am

Manishji:
Risk involved in Shree Renuka is poor results which is because of recession in international market. Also leveraged buying of operations at Brazil could not reward the company because of adverse scenerio in Brazil as well as international sugar market. ICE Future which is bench mark of global sugar market was at peak of 31 C/lb when Shree Renuka bought two mills in Brazil. But poor market and continued surplus in sugar sector for consecutive 5 years put Shree renuka to near bankrupt situation. Debt was restructured by sale of equity to Singapore based Wilmar International. But this was inadequate and its capital started eroding.

Only silver line here is because of all these adverse scenario, Shree Renuka’s price hit the bottom and now with ICE future again on rising trend, bright future is ahead. With huge operational leverage Shree Renuka is likely to generate enough cash flow to turn around.

In coming time we might see Shree Renuka touching new highs.

Sugarbull

Mehnazfatima · November 17, 2015, 3:38pm

Mehnazfatima · November 17, 2015, 3:49pm

param77 · November 24, 2015, 11:30am

Renuka sugars was attractive in haydays now not a worth to enter into this sector although all sugar companies witnessing uptrend but Fundamentals of SRS not so promising as i learnt in one of the interviews of MD they are going to file Chapter 11 one of their subsidiary in Brazil… As a Value investor i wouldn’t buy stock at any levels as long as it improves it’s Balance sheet… may be out there people who wants extra bucks in short time might go well with TA(Technical Analysis) and capitalize on the uptrend… to me both FA(Fundamental analysis) and TA(Technicals) aren’t complementing so i keep away from this company. Companies which are battling with Debts are tough to tackle unless some companies like Wilmar(Commodity company) willing to acquire them…

Disclo : i don’t hold stock of Sree Renuka Sugars

Sugarbull · December 5, 2015, 11:14am

Dear Girishji: Thanks for posting your constructive view on Shree Renuka. I am posting my reply with some clarifications on Shree Renuka covering apprehensions raised by you.

Partnership with Wilmar:

Shree Renuka, is now equally owned by its initial promoters Murkumbi family and Wilmar International(WIL) of Singapore after a deal in
February 2014, Both Wilmar and Murkumbi family hold 27.72% each in
SRSL. Stake was sold to Wilmar in Rs. 517 Crores.
Jean-Luc Bohbot and AtuI Chaturvedi are Nominee Directors of Wilmar Sugar Holdings, w.e.f. 24 June 2015

Chapter 11 law :

In an exclusive interview to CNBC-TV18, Narendra Murkumbi, VC & MD, Shree Renuka , says that:

The plan to file for protection was a well-thought out one to restructure the company’s debts.
We acquired this company in 2010 and we have had a series of bad events especially very bad weather and now for the last two years very low prices. We are seeking court protection to come out with the comprehensive restructuring plan for debt. Brazil has a Chapter 11 law, which means that the company is protected while it does this.
Shree Renuka Sugars believes that re-organisation under judicial recovery is the best way to re- organise, protect our Brazilian subsidiaries and provide a path to our eventual turnaround in Brazil. Underlying operating business has been quite steady this year in these companies with combined cane crushing of 5.7 million tonnes till 27 September 2015.
After the acceptance of bankruptcy request under the judicial recovery law, Renuka Brazil will be under the so-called judicial protection for a period of 180 days during which it has to present a plan to the court for approval with the creditors including banks.
I want to emphasise here that there is no cash impact of this filing because we have not been investing further or supporting additionally the Brazilin subsidiaries since the last couple of years.

Points supporting My view:

The capital value of the assets in Brazil is about USD 1 billion. The debt is about USD 650 million. Thus Brazil subsidiary can be isolated at any point of time.
Prices in Indian market have increased by 20 to 25 % . International sugar prices have improved by 45 % from bottom of 10.67 C/lb to 15.48 C/lb
Thus sugar cycle has bottomed out and fundamentals of sugar business are improving and.
After consecutive surplus for 5 years a big jump in prices can not be ruled out. Expecting even moderate increase will bring substantial revenue for company to wipe off the existing debt and post good results.

Stocks are attractive in heydays but at the same time it attracts many investors and market price is always high in most case stock is overvalued. We get such good stocks at discounted price or undervalue only during days of poor fundamentals or bottom of cylce. We can get good return provided we grab them at low price, if we are confident of improvement in fundamentals and successful turn around by management. I am sure at the peak of sugar cycle Shree renuka will enjoy heydays and will be darling of not only investors but traders as well as it was in past.

Sugarbull · January 2, 2016, 8:50am

Dear Girishji: I also agree with your point that Fundamentals and Technicals should complement each other. In reality Technicals precedes fundamentals by period of around 2 to 4 quarters. This is more true in case of companies which are turning around. Since promoters or policy makers involved are in possession of advance information and events which are affecting the turn around, they start creating positions before occurrence of actual events.

That is what Technical Analysis is all about. From price actions we try to make out what is happening inside the stock. Chart reveals and unfolds what is going on in stock below the surface.

If you see the sequence of events and co-relate with the price, you understand everything.

There is long straight line at 7 to 7.5. Means company circle or informed sources are lending support or buying.
Than News of chapter 11 in Brazil breaks out. Immediately from next day price started shooting up with heavy volumes.
Than poor results were declared and price started shooting up again with volumes about 15 to 20 times.
After initial flag pattern, prices have already started rising pattern now with two parallel lines slanting upward and higher top higher bottom formation is visible.

So with every bad news someone is jacking up price. I am not telling all these, but chart is telling us. We need to read what chart is telling. In fact good TA should reveal ( If not predict) the changing fundamentals. Management is likely to benefit immensely from international sugar prices which has just reversed the trend.

Sugarbull · January 2, 2016, 11:25am

Dear Mehnazfatimaji,

You have nicely explained Aggressive entry in Bollinger Band at 7.50. This has proved as formation of solid bottom. At the same time squeeze in Bollinger Band observed at that time followed by immediate break out seems to have appeared again. Likely hood of repetition of similar break out has emerged again from Bollinger band squeeze on First trading day of year 2016 by closing above 13.50.

Bollinger is indication that bulls and bears are equally strong (deviation from mean is zero). So when price breaks on upside it indicates that bulls have dominated bears. Bears become more weak and stocks shoots on upside

Needless to mention stock is witnessing fundamental turn around after 5 years long bear market. As also explained nicely on monthly chart by you giving us aspiration to cross 19.60. Than we might see flight is attaining higher altitudes successively.

param77 · January 3, 2016, 8:28am

@ Sugarbull,

i completely agree with your views on Technicals, the point if you observe whole of commodity
market is under pressure and downtrend seen in crude or sugar or Palm in global market.Sudden
spike in sugar sector isn’t surprising, i also saw same spike in WILMAR stock which was shortlived
Investors booked profit in Wilmar and exit. I closely watch Wilmar for 2 reason 1) Wilmar is major stake holder in SRS and 2) i have vested interest in Wilmar.

to clear cloud 2015 Wilmar was buying their stocks in aggressively in their home listed bourse, may be
that could be triggering factor on our markets that i don’t know…for which i cannot corroborate… one of the
reason i wouldn’t enter commodity sector due to downtrend so be patient and observe carefully.

BALASAHEB · January 3, 2016, 11:10am

i dont understand fundamental as well as technical.
but…
1.this year excess sugar stocks are waiting for there export with govt initiative .
2.will skip exports …but due to low water reserves this year sugar sector will see pries rise next year .
3. i am saying next year …but now sugar prises are at 30-31 rs will it sustain ???

dis holding balrampure chini and dalmiya sugers
and …only 4 stocks of shree renuka @ price of 84

Mehnazfatima · January 6, 2016, 9:14am

Mehnazfatima · February 17, 2016, 3:52pm

Sugarbull · February 19, 2016, 9:00am

Dear SQ: I like your logic of two resistance line. It means we are having double check, which gives more factor of safety to investor. It requires build up of upward momentum after successfully arresting the force which was dragging the stock in downward direction .

True reversal should generate enough momentum in 180 degree opposite direction to such an extent that after countering head winds, balance forces are capable of taking stock above second resistance line which qualifies the stock as BUY.

Good point. I will try to check your theory with other stock where successful reversal has taken place.

Wish you best of luck for success of methodology devised by you based on your knowledge and experience. I will name it as SQ software:).

Mehnazfatima · February 28, 2016, 8:04pm

manish962 · March 1, 2016, 6:04am

Looks too much importance given to the technicals. Hope you put your technicals with some fundamental backing.

Mehnazfatima · March 2, 2016, 1:32am

As Peter Lynch says, in cyclical investing, timing is the most important issue.

Still insofar as the fundamentals are concerned, the sugar sector is seeing a turn around.

The domestic price of sugar which had fallen to below 24 rupees / kg has now risen to above 30 rupees / kg. Sugar companies had average sugar realization in Q3 @ 27 rupees /kg. Now it is almost a given that in Q4 the results will be better as the realization will now be in range of 29 -30 rupees /kg. Going forward, ISMA says that the sugar realization may be above 32 rupees / kg.
The Govt has fixed an ethanol procurement price of around 47 rupees per liter. This is irrespective of the fall in price of crude / petro prices. This translates to an average realization equivalent to 31 rupees / kg of sugar. The sugar mills have signed the ethanol supply contracts and are now set to fulfil the full blending quota.
The international sugar price is now above 14 cents / pound. At these prices the subsidized sugar exports become viable. Govt has mandated 3.2 million tons of exports out of which 1 million tons have aleady been executed. As the international sugar prices are in uptrend, export of remaining 2.2 million tons of subsidized sugar should not be an issue. This will further, support the domestic sugar prices.
There is already a shortage of sugarcane for crushing in Maharashtra and many Maharashtra mills have closed due to that. In march the mill closure in Maharashtra is about to accelerate. And due to two years of back to back drought, the sugarcane plantation in Maharashtra is reduced drastically in the continuing sowing season. Once the sugarcane plantation figures are released in April end, the extent of fall in sugarcane acerage will be known. But one thing appears to be anticipated by the market…next year sugar production is going to be lower than the present year…Therefore, in the next 12 months, domestic sugar prices will have an upward bias.

Now coming to the performance of sugar mills…as first pointed out by the father of Value investing Benjamin Graham (and explained in detail by Parag Parikh) that in a cyclical industry turnaround, it is the most efficient producers that rally first and the heavy debt laden inefficient producers that rally last BUT the returns from the inefficient producers are more in percentage terms.

And as explained above, the market leaders such as Balrampur, Dalmia sugar, Triveni Engineering, Dhampur sugar, Dwarkesh sugar have rallied quite a lost since Oct 2015.

But the biggest two sugar producers Bajaj Hindusthan and REnuka which have very high debt have not yet rallied. Those who missed the initial sugar rally in frontline sugar stocks, can still join the sugar rally as and when Bajaj and REnuka join the rally.

Hence, the need to closely monitor the price movement of these two stocks. If Renuka closes the week above 12.50, then the rally in REnuka too is deemed to have commenced.

Mehnazfatima · March 2, 2016, 1:53am

Pl refer to my post dated Sept 2015 on the discussion thread on sugar cycle. I have pointed a bottom formation and turnaround in sugar sector in Sept 2015 when all the sugar stocks were at their 52 week low.

At hat time nobody was willing to believe about the turnaround. At the bottom and also at the top of the cycle, fundamental analysis is not useful. In fact its quite misleading. At the bottom…in Sept 2015, those relying on fundamental analysis were very pessimistic.

And frankly speaking, sugar sector both domestic and international combined, has so many variables that no expert can be relied upon to give the correct prediction about the future. The reason that rallies in the sugar sector are so huge and so explosive is because they almost always catch the market offguard.

so I give quite lot of importance to technical analysis in sugar sector. Fundamental analysis should be used just to analyse specific sugar stocks. In that too, the choice in sugar sector is quite limited. .Its just Balrampur and Triveni which are big enough and have sufficient liquidity.

Mehnazfatima · March 2, 2016, 2:08am

No fundamental analysis is possible for Renuka. What is there to analyse in a company with a negative book value, a huge debt and which comes out each quarter with a loss running into hundreds of crores. Renuka and Bajaj Hindusthan are a fundamental analysts worst nightmare.

Reuka gets its raw sugar for refining purpose on a one year credit and sells it in international market after refining. When the sugar cycle is in uptrend, this enables renuka to make huge profits. Thus in an uptrend, Renuka acts like a stock with nitrox boosters. Its a pure momentum play. Let there be no doubt about it.

Disclosure: I have purchased Renuka sugar when it closed above the first resistance line. I may add more of the stock as and when it closes above 12.50…and I am invested in other sugar stocks too. In fact sugar stocks form quite a significant part of my portfolio.

Rits · March 9, 2016, 10:30am

Thanks for your posts giving details insight about sugar stocks. Do you think still there is a room for fresh entry in Renuka and Bajaj hindustan… Thanks again…

Mehnazfatima · March 9, 2016, 12:10pm

Yes…you can still invest in Renuka and Bajaj provided you maintain a strict closing stoploss of 13.20 in Renuka and 16.30 in Bajaj Hindustan. If and when the stock closes the day below these levels, you should exit the stock. REmember, its a closing stoploss…wait almost till the end of the day…till 3.25 pm…and then sell.