Sector Reports

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Sugar SectorGood in parts

INDIADecember 2008

Tushar Manudhane

([email protected])

+91-22-6632 2238


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2

Contents

(Prices as on December 24, 2008)

_______________________________________________________________________________

_______________________________________________________________________________

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Page No.Industry

Sugar cycle turning positive 4

Supply-demand mismatch to improve margins 5

Alternate crops to sugarcane are more profitable 7

Minimal impact on domestic sugar prices 8Domestic Scenario for Ethanol 10

SAP to impact margins of UP-based mill owners 11

Upturn and Forward integration to enhance margins of mill owners 12

Companies

Shree Renuka Sugars 14

Bajaj Hindustan 17

Balrampur Chini 20

Comparison on main parameters 22

Annexure

Manufacturing Process 24

Value Flow Chart 25


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3

Industry


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Sugar cycle turning positive

2-3years

2-3years

As of now, we are in this stage of the cycle

Factors impacting this cycle

Domestic factors

Reduction in cultivation area for sugarcane by17% in FY09 and further reduction of 6-8%expected in FY10 / diversion of cultivation areafor alternate crops.

This would result in reduction inincremental supply by 4.2 MT, whereincremental demand is expected to rise by0.9 MT on an average over the next coupleof years.

Natural factors like delay in monsoon and flood inwestern UP during this season would impact yieldof sugar from sugarcane.

International factors

EU, who was one of the major exporters, is

expected to become net importer by 2010.Fall in price of crude oil to about US$40-45 perbarrel reduces incentive to produce moreethanol which further impacts supply demand ofsugar at global scale.


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Supply-demand mismatch to improve margins

Demand Drivers

30% of total consumption is used directly by household, while 70% is used indirectly.

Sugar consumption is expected to grow at the rate of 4-4.5 % because of

steady growth of population by 1.3-1.4% per annum


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6

Contd...

Supply Constraints

Excess production of sugar in the last couple ofyears resulted in no significant increase in theminimum support price of sugarcane for farmers,as compared to minimum support price foralternate crops like wheat paddy, etc.

This excess supply of sugar resulted in a reductionin the margins of mill owners which led to a delayin payment by mill owners to farmers, furtherreducing their incentive to plant sugarcane crop.

Reduction in cultivation area by about

17% during SS 2008-09, would resultin reduction in production of

sugarcane to approx 280.5 MT.

Reduction in production of sugarcane may result in reduction of closing stock over next two years

Source: Crisil, PL Research, Year ending - September


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7

Alternate crops to sugarcane are more profitable

Maharashtra (this state contributes 32% of total domestic sugar production):Either of these four combinations could be used by the

farmer

Crop Wheat Jowar Sweetcorn Bajra Moong 1 Jowar+1Wheat

1 Jowar+1Sweetcorn

1 Moong+1Sweetcorn

+1 Bajra

Sugarcane

Yield (Qtl / Acre) 15 15 20 12 3 30 35 35 330

SP (Rs / Qtl) 1,000 700 800 800 1,700 1,700 1,500 3,300 140Total Earnings 15,000 10,500 16,000 9,600 5,100 25,500 26,500 30,700 46,200

Cultivation Cost (Rs / Acre) 7,029 5,000 5,000 4,500 1,500 12,029 10,000 11,000 17,215

Net Earnings 7,971 5,500 11,000 5,100 3,600 13,471 16,500 19,700 28,985

Earnings (As % of cost) 113.4 110.0 220.0 113.3 240.0 112.0 165.0 179.1 168.4

Source: PL Research Jowar: Jun-Jul, Wheat: Nov-Apr, Sweetcorn: Nov-Jan, Bajra: Apr-May, Sugarcane: Oct-Jan (Next year)

Uttar Pradesh (this state contributes 30% of total domestic sugar production):

Source: PL Research Wheat : Nov - Apr, Paddy: July - Sep

Crop Wheat Paddy 1 Wheat + 1 Paddy Sugarcane

Yield (Qtl / Acre) 15 20 35 240

SP (Rs / Qtl) 1,000 800 1,800 140

Total Earnings 15,000 16,000 31,000 33,600

Cultivation Cost (Rs / Acre) 7,029 8,500 15,529 17,215

Net Earnings 7,971 7,500 15,471 16,385

Earnings (As % of Cost) 113.4 88.2 99.6 95.2


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8

Minimal impact on domestic sugar prices

The world sugar trade accounts for 35-40% ofglobal sugar production of approx. 161m tonnes.

While Brazils influence in global trade isexpected to increase, EU is expected to become amarginal player by 2010.

This scenario is expected to improve the prices ofsugar at global level.

Another factor that would drive sugar prices atglobal level is alternate use of cane for ethanolproduction. Fuel ethanol substitutes gasoline andhence substitutes crude oil.

This linkage is primarily driven by Brazils policyof dynamic management of its share of ethanoland sugar production.

Major exporters

Source: Company Data, PL Research

34%

21%

7%

2%

3%

2%

2%

2%

27%Brazil

EU

Australia

India

Thailand

Guatemela

Columbia

S. Africa

Others

Going ahead - weak relation between global and domestic

sugar prices

Source: Bloomberg

100

150

200

250

300350

400

450

500

Oct-03

Mar-04

Aug-04

Jan-05

Jun-05

Nov-05

Apr-06

Sep-06

Feb-07

Jul-07

Dec-07

M

ay-08

Oct-08

($/tonne

)

1,000

1,200

1,400

1,600

1,800

2,000

2,200

(Rs/Quint

al)

White Sugar Domestic price (RHS)


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9

Contd...

Brazil

MY2004-05 MY2005-06 MY2006-07 MY2007-08

Sugarcane Production (m tonne) 386 387 428 491

Supply of sucrose (m tonne) 55 55 62 71

Sucrose for Ethanol production (m tonne) 28 28 32 38

Sugarcane converted to alcohol (%) 49.9 51.5 50.5 54.5

Source: Brazil Biofuels Ethanol Annual Report 2008, MY- Marketing Year- May-April

Proportion of sugarcane for Ethanol in Brazil has been increasing YoY and is expected to increase to 58% in MY2008-09, as ethanol blending is a cost effective process as compared to supplying non-blended petrol for transportation.

Global factors affects India in a small way because

very high import duty on sugar (about 60%).

exports are regulated by government by controlling export subsidy on sugar.


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10

Domestic Scenario for Ethanol

Blended

Petrol

Demand (m

tonnes)

Blended

petrol

Demand in

(m litres)

Demand for Ethanol (m litres) Alcohol

demand

(Other than

Ethanol)

5% Blending 10% Blending

2007-08 10 14,322 716 1,432 1,835

2008-09E 11 15,734 787 1,573 1,917

2009-10E 12 17,288 864 1,729 1,998

Probable alcohol demand over the next couple of years

Source: Crisil

Probable alcohol production over the next couple of years

Source: Crisil

Total alcohol demand Potential

Alcohol

production

Deficit

5% blending 10% Blending 5% Blending 10% Blending

2007-08 2,551 3,267 2,765 214 (502)

2008-09E 2,704 3,490 2,084 (620) (1,406)

2009-10E 2,862 3,727 1,995 (867) (1,732)

Demand more than supply,indicating firming-up prices ofEthanol in the future to meetdemand for blending program.


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11

SAP to impact margins of UP-based mill owners

In UP, where yield of sugar from sugarcane is about 9.5-10%

Source: PL Research

Cost of sugarcane (Rs / Kg of sugar) 11.0 12.5 13.5 14.5 15.0 15.5 16.0

Total cost of producing sugar to mill owners ( Rs / Kg of

sugar)

15.65 17.15 18.15 19.15 19.65 20.15 20.65

In Karnataka, where yield of sugar from sugarcane is about 11 -11.5%

Source: PL Research

Cost of sugarcane (Rs / Kg of sugar) 11.0 12.5 13.5 14.5 15.0 15.5 16.0

Total cost of producing sugar to mill owners ( Rs / Kg ofsugar)

14.61 15.96 16.86 17.76 18.21 18.66 19.11

We expect the cost of producing sugar in UP to be more than its selling price, thus contributing negatively for thebusiness.

In Karnataka, due to higher yield, we expect cost of producing sugar to be less than its selling price, thuscontributing positively for the business.

Situation expected in 2008-09 and 2009-10

Sensitivity of SAP on total cost of producing sugar

Situation expected in 2008-09 and 2009-10


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12

Upturn and Forward integration to enhance

margins of mill ownersMill owners would be benefited in terms of improvementin margins due to:

Lower sugar production which would continue for1-2 years, thus firming the prices of sugar. Weexpect average sugar price at Rs1900 per quintalin 2009 and Rs2000 per quintal in 2010.

Forward integration across the value chain wouldfurther enhance the profitability of mill owners, as

we also expect ethanol price to firm-up.However, higher cane price would reduce margins tosome extent.

Due to low yield of sugar in UP as against higher yield inKarnataka, we expect mills based in Karnataka to bebenefited more than those in UP.

BUY Shree Renuka Sugars, REDUCE Bajaj Hindustan and

Balrampur Chini.

Domestic Sugar prices

Source: Bloomberg, PL research

Key Financials

Source: PL Research Year ending - September

Y/e Sept\ SRSL BJH BCL

FY08 FY09E FY10E FY08E FY09E FY10E FY08 FY09E FY10E

Sales (Rs m) 21,143 23,661 34,764 21,117 25,540 28,913 14,909 15,389 18,316

EBIDTA Margin (%) 11.9 18.9 17.6 15.9 20.0 21.6 21.1 17.6 18.3

FDEPS (Rs.) 5.0 8.5 12.4 -3.2 3.1 12.9 3.2 2.0 3.9PE (x) 12.5 7.4 5.0 - 20.8 4.9 14.8 22.9 11.8

Debit / Equity (x) 1.2 0.6 0.4 2.7 2.4 1.7 1.5 1.4 1.2

RoE (%) 9.3 22.6 24.4 -3.2 3.2 12.4 8.6 5.4 9.8

RoCE (%) 10.8 14.9 17.7 1.3 5.5 8.4 6.5 5.2 7.0

P/BV (x) 2.2 1.4 1.1 0.7 0.7 0.5 1.3 1.3 1.2

Mkt Cap/ Sales (x) 0.8 0.8 0.5 0.4 0.4 0.3 0.8 0.8 0.6

M/Cap (Rs m) 19,216 19,216 19,216 9,036 9,036 9,036 11,628 11,628 11,628

1,000

1,200

1,400

1,600

1,800

2,000

2,200

Oct-99

Apr-00

Oct-00

Apr-01

Oct-01

Apr-02

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

(Rs

/quintal)


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13

Companies


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14

Shree Renuka Sugars BUYCMP: Rs65

Target Price: Rs89Shares O/s.: 297m

Consistent Performance: Shree Renuka Sugars (SRSL)has shown CAGR of 50% in revenues and 125% in netprofit over 2001-2007. It has been comparatively morebeneficial as compared to its peers due to higherrecovery of sugar and ability to export.

JV with HPCL for Ethanol: As first of its kind of

collaboration, SRSL has joined hands with HindustanPetroleum Corp (HPCL) to set up an ethanol plant inMaharashtra. Under the terms of agreement, HPCL wouldbuy all the Ethanol from the JV company.

Increasing diversification: SRSL has been trying todiversify its business to reduce the impact of cyclicality

of sugar by increasing business of distillery and power.Contribution of distillery and power are expected toincrease from 7.3% and 5.1% in FY08 to 17.4% and 6.6%,respectively by FY10.

RoE likely to remain stable: RoCE is expected toimprove from 12.2% in FY08 to 17.7% in FY10 due to

improvement in EBIT margin as well as asset turnover. SoRoE is also likely to improve to 24.4% in FY10, but wouldbe affected due to lower leverage impact.

Valuation: We expect 11.9% growth in topline in FY2008-09 and 46.9% in FY2009-10. We also expect bottom-lineto grow by 86.9% and 47.4% in FY2008-09 and FY2009-10,

respectively, giving an EPS of Rs8.5 and Rs12.4 inFY2008-09 and FY2009-10, respectively.

Key Financials (Rs m)Y/e September FY07 FY08 FY09E FY10E

Revenue (Rs m) 9,506 21,143 23,661 34,764

Growth (%) - 122.4 11.9 46.9

EBIDTA (Rs m) 1,320 2,526 4,479 6,121

PAT (Rs m) 830 1,332 2,489 3,668

EPS (Rs) 26.7 4.6 8.5 12.4

Growth (%) - (82.9) 85.3 46.9

Net DPS (Rs) - 0.2 0.4 0.6


Profitability & Valuation

Y/e September FY07 FY08 FY09E FY10E

EBIDTA Margin (%) 13.9 11.9 18.9 17.6

RoE (%) 22.3 20.4 22.6 24.4

RoCE(%) 10.3 12.2 14.9 17.7

EV/ Sales (x) 0.8 1.3 1.1 0.7

EV / EBIDTA (x) 6.1 11.0 6.0 4.1

PER (x) 1.9 14.2 7.6 5.2

P / BV (x) 0.4 2.2 1.4 1.1

Net Dividend yield (%) - 0.2 0.3 0.5



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15

SRSLs growth plan

Capex Plan till FY10 Funds raised for capex

Ethanolo Expansion - 450 KLPD Rs1500m

o Secondary Distillery Rs150m

KBK Chem Rs400m

Cogen Havalgah Rs900m

Athani refinery Rs350m

Overseas Invest. 1500m

Brownfield expansion Rs1500mo Athani (2000TCD)

o Havalga (4000TCD)

15MW power plant

o Havalga Rs600m

2000 TPD refinery

o Mundra - Rs3500m

TOTAL Rs5600m

Debt (ECB)- Rs2400mEquity - Rs1640m

SDF Loan - Rs135m

Preferential issue Rs625m

20.04 Mn warrants to the promoter @ Rs 114.36 / warrant Rs2291m

Internal accruals and Borrowing Rs3309m

TOTAL Rs5600m

Source: PL Research Year ending - September

Particulars FY2008 FY2009P FY2010P

Crushing Capacity (TCD) 27,750 35,000 35,000

Refining Capacity (TPD) 2000- Haldia,

2000-Plants

2000- Haldia,

2000-Plants

2000- Haldia,2000-Plants,2000 Mundra

Sugar production capacity (m tonnes) 1.4 1.6 2.3

Ethanol production KLPD 450-Integrated,100 Secondary 900-Integrated,300-Secondary 900-Integrated,300-Secondary

Ethanol production capacity (m litres) 140 330 330

Power Capacity 103.5 MW, 55 MW Surplus 129 MW, 70 MW Surplus 164 MW , 90 MW Surplus


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16

Financials

Income Statement (Rs m)


Net Revenues 9,506 21,143 23,661 34,764

Expenditure

Raw Materials 6,749 15,767 15,987 24,487

% of Net Revenues 71.0 74.6 67.6 70.4

Personnel 239 419 592 973

% of Net Revenues 2.5 2.0 2.5 2.8

Mfg. & Other Expenses 1,067 2,431 2,604 3,183

% of Net Revenues 11.2 11.5 11.0 9.2

EBIDTA 1,320 2,526 4,479 6,121

Net Interest 134 701 600 480

Dep & Amortization 249 193 603 810

EBIT 1,070 2,333 3,876 5,311

EBIT margin (%) 13.9 11.9 18.9 17.6

PBT 1,066 1,784 3,326 4,881

Total Tax 236 427 812 1,188

Effective Tax rate (%) 14.0 23.9 24.4 24.3

PAT 830 1,332 2,489 3,668


Balance Sheet (Rs m)


Sources of Fund

Share Capital 311 297 297 297

Resrves and Surplus 4,128 8,039 12,523 16,147

Total Shareholder's fund 4,439 8,867 13,351 16,975

Total Loan Fund 6,470 8,595 7,500 6,000

Total 11,111 17,929 21,531 23,954

Application of Fund

Assets

Gross Block 6,314 8,401 12,051 15,651

Less: Dep & Amortization 691 884 1,486 2,296

Net Block 5,623 7,517 10,565 13,355

CWIP 2,087 5,212 2,500 400

Total Current Assets 4,436 7,663 9,957 13,089

Total Current Liab. & Prov 1,218 2,789 1,800 3,200

Net Current Assets 3,218 4,874 8,157 9,889

Total 11,111 17,929 21,531 23,954


Major Shareholders

Promoters 40.5%

Foreign 24.0%

Domestic Inst. 10.50%

Public & Others 24.9%


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R

Expansion


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18

PB/MDF Another growth driver for BHL

The principal usage of MDF/particle board is in the construction of cupboards, shutters and wardrobes, shel].68w[(oaxd51nl


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19

Financials

Income StatementY/e September FY07 FY08 FY09E FY10E

Net Revenues 17,805 21,117 25,540 28,913

Expenditure

Raw Materials 13,441 13,693 14,855 16,518

% of Net Revenues 75.5 64.8 58.2 57.1

Personnel 1,423 1,483 2,056 2,281

% of Net Revenues 8.0 7.0 8.1 7.9


% of Net Revenues 13.6 12.2 13.8 13.4

EBIDTA

Net Interest 915 2,071 2,250 1,793

Dep & Amortization 1,619 2,799 2,526 2,561

EBIT 612 644 2,734 3,826

EBIT margin (%) 3.4 3.0 10.7 13.2

PBT (303) (1,427) 484 2,033

Total Tax (160) (980) 48 203

Effective Tax rate (%) 52.9 68.7 10.0 10.0

PAT (103) (447) 435 1,830


Balance Sheet (Rs m)Y/e September FY07 FY08 FY09E FY10E

Sources of Fund




Total Loan Fund 35,934 35,934 33,288 26,400Total 51,266 50,474 47,964 42,605

Application of Fund

Assets

Gross Block 29,218 45,000 45,500 46,000

Less: Dep & Amortization 4,671 7,470 9,995 12,556

Net Block 24,547 37,530 35,505 33,444CWIP 16,299 900 500 200


Total Current Liab. & Prov 7,143 2,855 2,752 2,010


Total 51,266 50,474 47,964 42,605


Major Shareholders

Promoters 45.7%

Foreign 13.9%



CMP R 47


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20

Balrampur Chini ReduceCMP: Rs47

Target Price: Rs28Shares O/s.: 248m

Expansion in place to take advantage of upturn:Balrampur Chini Limited (BCL) has nine mills spreadacross eastern and central Uttar pradesh with anaggregate sugarcane crushing capacity of 73000 TCD andaddition of 3000 TCD through Indo Gulf Industries (thecompany has acquired majority stake in this company)Ithas also de-risked its business through diversification

into distillery (320 KLPD), power co-generation (181 MW,Saleable 126 MW) and bio-compost manufacture.

No Further Capex in immediate future: No furthercapex is expected in immediate future with respect tominimizing effect of cyclicality on business.

Higher Cane price and flood to impact profitability: Weexpect BCL to maintain the RoCE as well as RoE over theperiod from FY2007-08 to 2009-10. RoCE as well as RoEmay get lower in the year 2008-09 mainly due to highercane price of Rs 140 per quintal and reduction insugarcane crushing due to flood in western UP. RoCE andRoE are expected to improve in FY2009-10 mainly due to

higher sugar price, higher ethanol price.

Valuation: We expect 3.2% growth in topline in FY2008-09 and 17.9% in FY2009-10. We expect bottomline to de-grow by 35.6% in FY2008-09 and grow by 93.7% inFY2008-09 and FY2009-10 resp. giving an EPS of Rs 2.0and Rs 3.9 in FY2008-09 and FY2009-10 respectively.

Key Financials (Rs m)Y/e September FY07 FY08 FY09E FY10E

Revenue (Rs m) 13,948 14,909 15,389 18,136

Growth (%) - 6.9 3.2 17.9

EBIDTA (Rs m) 765 3,141 2,714 3,315

PAT (Rs m) (470) 783 504 977

EPS (Rs) (2.5) 3.2 2.0 3.9

Growth (%) - (223.7) (35.6) 93.7

Net DPS (Rs) - 1.0 1.0 1.0


Profitability & Valuation


EBIDTA Margin (%) 5.5 21.1 17.6 18.3

RoE (%) (7.4) 8.6 5.4 9.8

RoCE(%) 0.2 6.5 5.2 7.0

EV/ Sales (x) 1.8 1.7 1.6 1.3

EV / EBIDTA (x) 32.1 8.2 8.9 7.0

PER (x) (18.4) 14.9 23.1 11.9

P / BV (x) 1.3 1.3 1.3 1.2

Net Dividend yield (%) - 2.1 2.1 2.1



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21

Financials

Income StatementY/e September FY07 FY08 FY09E FY10E

Net Revenues 13,948 14,909 15,389 18,136

Expenditure

Raw Materials 10,705 9,062 10,198 11,829

% of Net Revenues 76.7 60.8 66.3 65.2

Personnel 772 864 877 997

% of Net Revenues 5.5 5.8 5.7 5.5


% of Net Revenues 11.6 12.4 10.4 11.0

EBIDTA 765 3,141 2,714 3,315

Net Interest 600 1,000 863 816

Dep & Amortization 838 1,253 1,285 1,300

EBIT 33 2,039 1,457 2,043

EBIT margin (%) 0.2 13.7 9.5 11.3

PBT (568) 1,039 594 1,227

Total Tax 65 256 90 250

Effective Tax rate (%) (11.4) 24.6 15.1 20.4

PAT (470) 783 504 977


Balance Sheet (Rs m)Y/e September FY07 FY08 FY09E FY10E

Sources of Fund




Total Loan Fund 12,896 14,040 12,500 11,500

Total 22,719 24,555 23,277 23,063

Application of Fund

Assets

Gross Block 20,820 23,580 24,300 24,500

Less: Dep & Amortization 4,279 5,532 6,817 8,117

Net Block 16,542 18,048 17,483 16,383

CWIP 3,337 1,000 300 200


Total Current Liab. & Prov. 4,001 3,000 3,550 3,050


Total 22,719 24,555 23,278 23,063


Major Shareholders

Promoters 35.7%

Foreign 20.6%




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22

Comparison on main parameters

SRSL BHL BCL

Integration & Diversification

Earnings Growth & Margins

Leverage

Location

Crushing Capacity (TCD) 37500 136000 76000

Refining Capacity (TPD) 2000- Haldia, 2000-Plants - -

Ethanol production (KLPD) 900-Integrated, 300-Secondary 800 320

Power Capacity (MW Saleable) 70 90 126

Particle Board - 50000 m3 pa -

MDF - 160000 m3 pa -


23/26

23

Annexure


24/26

24

Manufacturing Process

Weighing and Preparing Cane

Cane Milling / Crushing

Juice Defecation & clarification

Boilers Turbines Power

To Grid

To factory

Juice Evaporation

Syrup Boiling

Centrifuging

Factory Raw Sugar

Fermentation Alcohol

Bio-composting

Press mud

Main Process

Supplementary Process24


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25

Value Flow Chart

100 Kgs of Sugarcane gives approx. (9-11) Kgs ofSugar, (5-6) Kgs of Molasses, 33 Kgs of Bagasse

1 Tonne of Molasses gives approx. 220-250L ofAlcohol

1 Quintal of Bagasse can generate approx. 35 units

of power


26/26

BUY : Over 15% Outp erforma nce to Sensex over 12-mo nths Accumulate : Outpe rforma nce to Sensex over 12-months

Reduce : Underpe rformanc e to Sensex ove r 12-months Sell : Over 15% underpe rforma nc e to Sensex ove r 12-months

Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute d ec line in 1-month

Not Rated (NR) : No spe c ific c all on the stoc k Under Review (UR) : Rating likely to c hange shortly

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not forcirculation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or asolicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness ofthe same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, madeavailable or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability orotherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.

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We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

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