Mumbai: India’s biggest refiner, Shree Renuka Sugars Ltd’s $329 million (about Rs1,520 crore) bid for a 51% stake in Equipav SA Acucar e Alcool got a thumbs up from the equity markets on Monday even as analysts cautioned that the increase in debt and a possible correction in sugar prices could hurt the Indian firm in the long term.
The company’s stock rose 3.70% to end at Rs186.55 per share on Monday, beating the benchmark 30-share Sensex’s 0.28% gain because the Brazilian sugar and alcohol company looks a great strategic fit at a time when sugar prices at a peak.
Harsh Gupta, research analyst, institutional clients, at local brokerage SMC Group, said the shortage of sugar globally makes the deal an attractive proposition right now. “There is an 8-9 million tonne shortage of sugar globally and domestic sugar realizations have risen to Rs38,000 per tonne from Rs19,000 per tonne, which make this deal positive. However, the increase in debt because of this acquisition could pose problems,” Gupta said.
Shree Renuka will initially spend Rs671 crore after raising Rs185 crore from sale of promoters’ shares through a preferential offer. Another $105 million will be raised through a qualified institutional placement.
The Brazilian firm had a net debt of $822 million as of 31 December and though Renuka said the deal is “subject to approval of an acceptable debt restructuring package by the lenders”, analysts say a fair valuation is difficult currently when sugar prices are at the peak.
“Brazil is the cheapest producer of sugar and India is the largest consumer of the commodity, so this deal makes long-term strategic sense,” said Sageraj Bariya, research analyst with Angel Broking Ltd. “However, whether it is a good valuation, is a difficult call to take. Raw material is key in the sugar business and this deal gives Renuka the option to crush sugar cane in Brazil and import white sugar into India.”
Analysts said that though it looks a win-win deal currently, future prospects depend on the way sugar prices move. “The government does not charge any import duty on sugar because of the high prices currently, but if prices fall and the government resumes duties then it could hurt the company,” Bariya said.
In November, Sree Renuka had paid $82 million to acquire another Brazilian sugar firm Vale Do Ivai SA.