Shree Renuka Sugar

The domestic sugar cycle is set to enter a favourable phase for producers, with output expected to decline sharply over the next two years, lending support to sugar prices.

Investors looking to capitalise on this trend can consider buying the stock of Shree Renuka Sugars, a South-based integrated sugar producer.

With sizeable capacities coming on-stream this year, Shree Renuka appears well-placed, among large listed players, to capitalise on a scenario of firming sugar prices amidst dwindling cane supplies.

At the current market price of Rs 113, the stock trades at about 11 times its estimated earnings for 2008-09 (year ending September).

Shree Renuka has used proceeds of earlier equity offers to fund an ambitious expansion in sugar (now at 25,250 tcd), distillery (450 klpd) and power cogeneration (103.5 MW) capacities.

It augments owned capacity with facilities leased from cooperative sugar mills; making for a less capital intensive model.

With the commissioning of a Haldia-based refinery in June, the company also has sugar refining capacities of 4000 tpd under its belt. Units located in Karnataka and Maharashtra allow the company to source cane at competitive prices, unlike Uttar Pradesh-based mills which have to shell out higher state-fixed prices.

After a two-year slump, domestic sugar prices are set to firm up over the next year, on the back of a 20 per cent drop in sugar output in the crushing season commencing October 1 and lower inventories.

Recent policy changes which allow sugar mills to process cane directly into ethanol also allow producers to switch between the two products, based on demand and relative realisations.

Going forward, while rising domestic prices would improve the profit margin on the company's core sugar business, favourable policies on ethanol (for which the company is the leading supplier) and revenues from power, will also bring in sizeable revenues.

Both ethanol and power capacities will be substantially scaled up this year.

Port-based refining facilities, backed by a recent sourcing arrangement with a Brazilian sugar producer, may help the company tap export opportunities in neighbouring Asian and West Asian markets, amidst rising global sugar prices.

Looking ahead, any policy changes to decontrol sugar will be a positive trigger to the stock price.

The key risks to the earnings outlook may arise from any upward revision in output estimates and any policy moves that seek to restrict sugar exports, to quell prices.