Shree Renuka Sugars (BSE:SRS), is India's largest sugar refiner and ethanol producer with refining capacity of 4000 tonnes/day and distillery capacity of 600 Kilo liter/day. It has 21% market share in India's fuel ethanol market and has an aggressive growth plan of increasing its ethanol production capacity to 900 Kilo liter/day by Dec 2009. It also accounts for 20% of India's international sugar trade.
On the basis of distillery to sugar capacity and power generation to sugar capacity, SRS is India's most integrated sugar producer with double the asset utilization rate of that of its industry peers. It has expanded in fuel ethanol and power production using its by-products, molasses and bagasse. In FY2008 non sugar products accounted for 77% of the net profits.
After its IPO in October 2005, the company has expanded from 500 tonnes crushed/day to 37,500 tonnes crushed/day through inorganic and organic growth modes. On 1st August 2008,it announced plans to develop a SEZ in Gujarat. The production in the SEZ is free from the domestic sugar release mechanism and local taxes. It also announced plans to jointly develop integrated sugar and ethanol plant with Hindustan Petroleum on 11th September 2008 .
The sugar industry is a capital intensive industry requiring substantial investment of time and resources in setting up the sugar mills. SRS uses a combination of owned and leased mills for its capacity expansion. Out of its 10 mills, 5 are leased. Leased mills enable quicker time-to-market and higher profitability as the variable cost are directly under the control of the management. SRS has developed an expertise in buying or leasing sick mills and then converting them in to profitable units.In India, the sugar season lasts for 150 days. In order to extend this sugar season, SRS invested in multi-feed sugar refineries. During the season it uses sugarcane juice to produce sugar and during off season it uses raw sugar. This has enabled SRS to have double the asset utilization rate as that of the industry peers. The company has a locational advantage as all its units are located in Maharashtra and Karnataka where the crushing season lasts longer and where the sugar yield from the sugarcane is also 10-12% higher than in other parts of India. In these regions, the sugarcane price is correlated with the sugar price and is protected from sugar spot price variations. In other sugar producing states the state dictated minimum procurement price makes the sugar cane prices much more inflexible.
From FY04-05 to FY 07-08, sales revenues have grown from Rs 798 crore to Rs 2,129 crore, at average annual rate of over 55%. In the same period, profit after tax grew by a 46% average annual growth rate. In FY06-07, revenue and profit after tax fell by 12.86% and 31%, respectively, due to a fall in sugar prices by over 35%. With sugar prices recovering, revenues grew 120% in FY07-08 with profit after tax (PAT) increasing by 61%.
The company has a high secured debt to equity ratio. In FY2005, when the company had it IPO the ratio was reduced from a high of 2.5 to 1.3.In 2007, the ratio increased to 1.84 after SRS assumed more debt for the acquisition of KBK Chem-Engineering Pvt Ltd and Sarita Sugars.
Share holding pattern: The promoters, namely the Murkumbi family, holds a majority of SRS shares with 40.53% ownership; foreign institutional investors (FII) and other institutional investors own 34.55% of the company. In order to better align the interests of the cane suppliers and SRS, the company sold its shares to its sugarcane farmers and helped build a cooperative relationship with them. The farmers own 9% of SRS's equity. This model is unique to this industry and it ensures timely and coordinated supply of sugarcane. In order to fund the next phase of growth, the company sold 6 million shares to the promoters on September 11 2008. The final inprinciple listing is awaited from BSE and NSE.
|Shree Renuka Sugars share holding pattern |
|Promoters (Murkumbi Family)||40.53%|
|Private Corporate Bodies||3.67%|
|Banks Fin. Inst. and Insurance||1.71%|
SRS operates in four segments, all of which are closely related to the sugar industry. This horizontal integration of the business enables effective utilization of byproducts and higher profit margins. For every kilogram of sugar sold, the company generates an additional Rs. 6 thanks to horizontal integration.
Sugar Manufacturing (36.16% of the revenues and 38.58% of operating income): It also has India's largest raw sugar refining capacity of 4,000 tonnes/day. All 10 sugar manufacturing units are located within 150Km of the nearest port, enhancing the flexibility to address domestic and export markets. In FY2008, their manufacturing units had a near 100% capacity utilization and the company averaged over 20 tons of sugar production per tonnes crushes/day of crushing capacity. This is twice the industry average.This segment contributed 36.16% of total revenues revenues and 38.58% of SRS' operating income during FY2008.On August 27,2008 SRS issued 18,000,000 warrants for further capacity expansion.
Trading (49.91% of the revenues and 45.93% of operating income): In October 2004 SRS setup a wholly owned subsidiary, Renuka Commodities DMCC for catering to the Global market. It was incorporated and registered as a company in Dubai Metal Commodities Center for free trade zone in Dubai, UAE. It manages the trading segment of SRS. It focuses on marketing the products to institutional buyers. Approx 25% of the sugar produced by SRS is sold through this route. This segment accounted for 49.91% of the revenues and 45.93% of the operating income in FY2008. SRS hedges its sugar price risk and actively participates in the futures trading through the trading segment.Apart from sugar it also trades in other agro commodities like coffee, tea, rice, pulses etc.
Distillery (5.6% of the revenues and 6.07% of operating income): SRS is the largest producer of ethanol in India with a market share of 21%. In FY2008, it had ethanol production capacity of 600 Kilo Liter/day. By Dec 2009, the company plans to expand it to 900 Kilo Litre/day with flexibility to use molasses and sugarcane juice. Both the inorganic and organic growth routes are used for meeting the target. On July 23, 2008 it acquired Godavari Biofuels Pvt. Ltd. for Rs. 18 million. In order to better manage the ethanol manufacturing business, SRS announced the creation of a wholly owned Subsidiary SRSL Ethanol Ltd on Dec 24, 2008.In FY2008, this segment contributed to 5.6% of the total SRS revenues and 6.07% of total operating income. In Dec 2008, company had a three year ethanol book order of 217 million liters from oil marketing companies. The aggressive expansion of SRS in this segment is due to the implementation of ethanol blending programs world wide as shown in the table.
|Ethanol blending programs in different countries (mixed with gasoline) |
|Up to 5%||5 -10%||10 -20%||20 -100%|
Co-generation (8.7% of the revenues and 9.28% of operating income): In an electricity intensive sugar industry, co-generation of electricity using the sugar by-product bagasse is an effective horizontal integration initiative. The co-generation units also qualify as clean development mechanism products and earn tradable carbon credits.By Dec 2008, SRS had 129 MW of co-generation capacity. Of this, it sold 70MW to the power grid. In FY2008, the co-generation units saved Rs. 229 million for SRS in terms of electricity bills. It also helped generate 8.7% of the annual revenues and contributed to 9.28% of the total operating Income. In October 2008, through the acquisition of Gokak Sugars Ltd, SRS added 14 MW of additional co-generation capacity. In order to better manage the co-generation business, SRS announced the creation of a wholly owned Subsidiary SRSL Ethanol Ltd on March 1, 2008.
In Maharashtra and Karnataka where SRS is located, low rainfall was recorded in the monsoon of 2008. Since sugarcane is a water intensive crop, farmers have shifted to other crops. The acreage under sugarcane crop has shown a decline of 17% in the season of 2008. SRS is entirely dependent on its suppliers for raw material availability. However it has taken steps to reduce the risk of shortage of raw material by trying to align the goals of the suppliers to that of the company by making them shareholders.
Shree Renuka sugars is not a vertically integrated player in the sugar industry since it has no captive sugarcane farms. Any shortage of raw material would lead to underutilized capacity and thus reduction in the net profit. The sugarcane availability in India follows a cyclical pattern as explained in the adjoining figure. The sugarcane produced depends on the overall market dynamics in the industry. The sugarcane crop is also highly dependent on the prevalent weather conditions.
Raw material prices are controlled by the state's minimum price level and sugar prices are controlled by monthly release quotas and levy sugar quota of 10% of produce. In addition, SRS is not allowed to set up a mill within a 15 Km radius of an existing mill. Conversely, a mill cannot refuse to crush any cane that comes from within its command area (15Km radius). This has resulted in a fragmented industry. On 18th April 2007, Government of India set up an expert panel to decontrol the sugar industry.The panel recommended complete decontrol, but the government has not taken any action yet. Complete deregulation would result in setting up of bigger sugar mills and more mobility in the supply of sugarcane and lower cost of operations.
Sugar is a highly regulated industry all over the world. The international price for this commodity is distorted by trade barriers including production quotas, guaranteed prices and import tariffs. Even at the national level there are regulations governing the procurement, raw material prices and sugar prices.
On 27th October 2004, the government of India mandated 5% ethanol blending in gasoline. Due to a shortage of fuel grade ethanol, the decision took time to be implemented. During this time, SRS has rapidly expanding its distillery division to supply ethanol to oil companies. It has captured 21% market share of the ethanol market in the country. Its capacity expansion plans are keeping in view the mandatory 10% ethanol blending due by Oct 2008. However, since the government has not released the notification for the above mandate, the decision has not yet been implemented by the oil companies. Any delays in implementing the 10% ethanol blending deadline would result in loss of the potential earnings from the distillery division.
Due to stiff regulations in sugarcane procurement, the sugar industry is highly fragmented. Even the leading players do not control more than 4 percent production of sugar in the country. Small mills make up bulk of the production of sugar.Some of the important competitors are mentioned below.
Financial Comparison of the competitors:
|Financial metrics FY2008|
|Name||Market Capitalization in Rs Cr||Sales Turnover in Rs Cr||Operating Margin||Net Profit in Rs Cr|
|Shree Renuka Sugars||1,930.24||1,824.20||12.87%||92.70|
Market share: The market share of sugar players in India based on market capitalization.