The government’s decision to amend the fair and remunerative price (FRP) mechanism for sugar cane procurement means that state governments can now fix a higher price and not have to pay the difference between it and FRP to the farmers. In the current season, the issue is more political than driven by the market situation. Sugar cane is anyway being procured at around Rs200 a quintal, compared with FRP of Rs129, due to lower output and higher demand. Buyers are scrambling to buy cane, as sugar prices are ruling high, up by nearly 90% from a year ago.
It is in this backdrop that Shree Renuka Sugars Ltd announced its results for fiscal 2009 (year ended September). Its results reflect the combined effect of higher sugar production and higher realizations. The company’s strategy is unique, focusing on a higher share of refining capacity, compared with integrated sugar production. This reduces its investment, insulates it from seasonality as it can process raw sugar at any time, and reduces dependence on cane production.
In fiscal 2009, Shree Renuka’s sugar produced from cane declined by 28% to 377,750 tonnes but sugar processed from raw sugar jumped nine fold to 637,089 tonnes. Sugar output doubled as a result, and sugar sales rose by 50% during the year and by 48% during the September quarter. Realizations were higher by 66% and 84%, respectively.
Graphics: Yogesh Kumar / Mint
During fiscal 2009, sugar sales rose by 144% from the previous year to Rs1,861 crore. The company has a sugar inventory of 390,344 tonnes, including raw sugar. This inventory will get offloaded in the coming months. Higher revenue from by-products such as ethanol and from power generation were offset by a decline in trading income. Overall revenues thus rose by a relatively modest 27% to Rs2,499 crore. But its expenditure rose by only 17% and operating profit margins as a result improved over 4 percentage points to 16.3%.
Shree Renuka’s stand-alone net profit doubled to Rs143.5 crore and its consolidated net profit increased by 91% to Rs225 crore. At Rs230, its share is trading close to its 52-week high, due to the favourable operating environment and its recent acquisition of a Brazilian sugar producer. It trades at about 12 times its projected fiscal 2010 earnings, which is reasonable given the positive factors.
A rising debt burden is a concern, as it is expanding capacity, and the Brazilian acquisition itself may add to consolidated debt. Any uncertainty caused by policy changes and the sugar shortfall turning into a surplus will be the key triggers to watch out for.
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