The latest deal of Shree Renuka Sugars Ltd, (SRSL) the acquisition of Brazil’s Grupo Equipav’s sugar business, is a game changer in the making.
SRSL spent Rs1,500 crore in creating assets over five years till the fiscal ended 30 September 2009. Sugar firms count their year from October.
In November, it announced the acquisition of a Brazilian sugar company Vale Do Ivai (VDI). It is now acquiring a 51% stake in Grupo Equipav’s Brazilian sugar business for $329 million (Rs1,530 crore). The sugar business has debt of Rs3,821 crore, which will be partly repaid from SRSL’s equity infusion.
SRSL’s strategy of building stand alone sugar refining plants partially frees it from the ups and downs of sugar cane production crop cycle. This is in addition integrated sugar making capacity, where it also produces alcohol and ethanol and generates power from bagasse.
The benefits of its strategy were visible in fiscal 2009. SRSL produced about 1 million tonnes (mt) of sugar, up 72% over 2008, but the share of processed raw sugar went up from 11% to 62%. Its success has encouraged it to set up a new refining plant in Gujarat due to start in fiscal 2011, expanding capacity by 2.5 times.
Graphic: Yogesh Kumar/Mint
Its raw sugar requirement will increase substantially as a result, at about 1.7 mt per annum, and is a key consideration for its Brazilian acquisitions.
The VDI acquisition will meet about 20% of its requirement, based on current capacity. The Equipav acquisition gives it crushing capacity of about 12 mt (10.5 mt at present), meeting a larger portion of its raw sugar needs, with the quantum depending on the plant configuration.
SRSL is paying Rs2,600 crore for the two acquisitions, a large sum and just over 85% of its current balance sheet size.
SRSL’s ability to absorb these two acquisitions will be a key concern. With a net worth of Rs1,530 crore, as of September, SRSL’s debt to equity ratio was 0.9:1. Both acquisitions will add about Rs4,500 crore of debt on a consolidated basis (assuming full consolidation of Equipav, since the Brazilian promoter continues to own about 49%).
It will need to raise cash by issuing equity and that, along with improving internal accruals, to help keep its debt to equity ratio at more comfortable levels.
Since the acquired companies’ financials have not been disclosed, it is difficult to evaluate the impact on SRSL’s numbers. The debt overhang will be another key issue that is likely to make investors uncomfortable.
In an uptrend, the benefits may easily outweigh the negatives. The real test will come when the cycle turns down or when government policy changes affect operations.
What the deals do achieve is make SRSL a large global sugar player, which perhaps explains why its share price gained after the announcement, despite investor discomfort with large acquisitions. Another factor could be that its share price had fallen by nearly 20% in a month, and the acquisition providing some relief.
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