SHREE RENUKA SUGARS: Bad Weather, Weak Re Add to Woes of Company

Shree Renuka Sugars has fallen to one-third of its value from a year ago after its dismal September 2011 quarter results.
The company appears to battling bad weather, adverse government decisions, a weakening rupee, faltering economic growth and an over leveraged balance sheet. While sorting out these issues will take time, the company is now taking steps to reduce its debt pile. But it will take a while before the stock can regain lost ground.
The September 2011 quarter saw the company post its first-ever loss since its listing. The loss, at . 615.9 crore at the consolidated level, equalled profits for nearly six preceding quarters, leading to the company losing almost 40% of its market capitalisation in a few days.
The main blow came from the appreciation of US dollar leading to a forex loss of . 570 crore. This was mainly in its Brazilian subsidiaries, which have a debt of $485 million, apart from trade advances of $117 million.
Even excluding these forex losses, the company had a consolidated loss of . 46.1 crore, mainly due to operational problems. Its subsidiary in Brazil, Renuka Do Brasil, were hit because of exceptionally dry weather and two instances of frost in the state of Sao Paulo which resulted in a heavy drop in sugarcane yields. Lower production of sugarcane raised the cost of raw materials and also led to under-utilisation of plant.
After its two acquisitions in Brazil last year, the company’s balance sheet health has deteriorated. Its debt-to-equity ratio rose from 2.8 last September to 4.1 at the end of September 2011. Interest cost, too, jumped nearly three-fold in the last 12 months adding to investor concerns.
In the near term, there may not be a major improvement. In India, higher sugarcane prices are going to add to costs. The government’s decision to allow one million tonne of exports boosted local sugar prices. However, that will be shortlived considering that this move weakened global prices. Similarly, domestic crushing will soon start in full swing which will increase supply.
Brazil too will take two seasons to reach full utilisation levels. It is, however, taking steps to sell a part of its co-generation assets in Brazil to prune its debt. While it attempts to further clean up its books, the company will have to wait for overall market conditions to improve.