Sugar Sector Review - Buy Renuka Sugars

Shree Renuka Sugars (SRSL) was up five per cent on Friday on significant spurt in trading volume in both cash and derivatives segment. SRSL having business model of sugar mills in Brazil and refining in India appreciated 18 per cent in six trading sessions on short covering of 6.30 million shares in its December futures.

The market picture chart (MKTP) sourced from Bloomberg is hinting at fresh volume based upside target of around Rs 95 with price opportunity support expected to come around Rs 82. The stock earlier had reacted from its high of Rs 106.90 to Rs 76.55 during recent bloodbath in the mid-cap stocks. The data points suggest that SRSL can easily move up above Rs 100 going ahead.

Likely Triggers: The buzz was on account of review of sugar export policy in January and government's approval of shipments of 500,000 metric tons for the sugar year ending September 2011. Farm Minister Sharad Pawar hinted at completion of procedures for sugar sales outside the country in 10 days and a review of export plans at the end of next month.

Sugar analysts, domestic as well as foreign broking houses have given buy-side call for SRSL with price target of Rs 110-120. Analysts expect a decent 20 per cent growth in revenue and operating margins of around 18-20 per cent in the next two financial years. The earnings per share is expected to be above Rs 10 in each year.

Key drivers for the positive outlook - global raw sugar prices sustaining at over US cent 25/lb and management expectation of a 31 per cent rise in EPS if current sugar price sustain. Sugar prices reached the highest level in almost 30 years last month in New York on concern that shipments from Brazil, the biggest producer, and India, may be too low to meet demand.

Click here to read SECTOR ANALYSIS: Sugar

Bank of America Merrill Lynch analyst expects Brazil mills to have $114 million pre-tax profit in FY11E. If international raw sugar price of US cent 22/lb assumed for FY11E rises to current sugar price of US cent 28/lb then Brazil mills would help improve consolidated FY11E EPS by 31 per cent to Rs 13.4.

Analyst at Motilal Oswal Research expect Renuka do Brazil (formerly Equipav) to earn net profit of Rs 673 crore and Vale Do Ivai SA Acucar E Alcool (VDI) to add another Rs 630 crore in four years between SY10 and SY14. Renuka had invested Rs 1,150 crore to buy Equipav and Rs 409 crore for VDI. Which means, if everything goes well, pay-back will happen by SY2014.

Chart Check: Renuka Sugars after a steep 28 per cent correction post Diwali, has witnessed an extremely volatile movement over the next four weeks. Last week, the stock had apprecaited by 9 per cent to Rs 90. The stock has been taking support around its short-term (20-weeks) moving average for the last four weeks.

The momentum oscillators on the daily charts are in favour of an upmove, however, given the high volatility over the last four weeks, once can expect the volatility to subdise, and the stock behaving in a more subtle manner.

The stock is likely to get considerable support around Rs 86, below which it may test Rs 83. On the up side, the stock is likely to test Rs 94, above which the stock may flare up to Rs 100.

Source : Smartinvestor

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