44642127 Sector Reports

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INDIADecember 2008

Sugar SectorGood in parts

Tushar Manudhane ([email protected]) +91-22-6632 2238


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Contents_______________________________________________________________________________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 8 Domestic Scenario for Ethanol 10 SAP to impact marginsof UP-based mill owners 11 Upturn and Forward integration to enhance margins of

mill owners 12 Companies Shree Renuka Sugars Bajaj Hindustan Balrampur Chini Comparison on main parameters

14 17 20 22

Annexure Manufacturing Process 24 Value Flow Chart 25 _______________________________________________________________________________(Prices as on December 24, 2008)

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Industry

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Sugar cycle turning positiveFactors impacting this cycleDomestic factors Reduction in cultivation area for sugarcane by 17% in FY09 andfurther reduction of 6-8% expected in FY10 / diversion of cultivation area for alternate crops. This would result in reduction in incremental supply by 4.2 MT,where incremental demand is expected to rise by 0.9 MT on an average over the next couple of years. Natural factors like delay in monsoon and flood in western U

P during this season would impact yield of 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 per barrel reduces incentive to produce more ethanol which further impacts supply demand of sugar at global scale. As of now, we are in this stage of the cycle

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Supply-demand mismatch to improve marginsDemand Drivers30% 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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Contd...Supply ConstraintsExcess production of sugar in the last couple of years resulted in no significant increase in the minimum support price of sugarcane for farmers, as compared tominimum support price for alternate crops like wheat paddy, etc. This excess supply of sugar resulted in a reduction in the margins of mill owners which led toa delay in payment by mill owners to farmers, further reducing their incentive

to plant sugarcane crop.

Reduction in cultivation area by about 17% during SS 2008-09, would result in 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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Alternate crops to sugarcane are more profitableMaharashtra (this state contributes 32% of total domestic sugar production):Either of these four combinations could be used by the farmer Crop Yield (Qtl /Acre) SP (Rs / Qtl) Total Earnings Cultivation Cost (Rs / Acre) Net Earnings Earnings (As % of cost) Wheat 15 1,000 15,000 7,029 7,971 113.4 Jowar 15 700 10,5005,000 5,500 110.0 Sweetcorn 20 800 16,000 5,000 11,000 220.0 Bajra 12 800 9,6004,500 5,100 113.3 Moong 3 1,700 5,100 1,500 3,600 240.0 1 Jowar+1 Wheat 30 1,70

0 25,500 12,029 13,471 112.0 1 Jowar+1 Sweetcorn 35 1,500 26,500 10,000 16,500 165.0 1 Moong+1 Sweetcorn +1 Bajra 35 3,300 30,700 11,000 19,700 179.1 Sugarcane330 140 46,200 17,215 28,985 168.4

Source: PL Research

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

Uttar PradeshCrop Yield (Qtl / Acre) SP (Rs / Qtl) Total Earnings

(this state contributes 30% of total domestic sugar production):Wheat 15 1,000 15,000 7,029 7,971 Paddy 20 800 16,000 8,500 7,500 1 Wheat + 1 Paddy 35 1,800 31,000 15,529 15,471 Sugarcane 240 140 33,600 17,215 16,385

Cultivation Cost (Rs / Acre) Net Earnings

Earnings (As % of Cost) Source: PL Research

113.4 Wheat : Nov - Apr, Paddy: July - Sep

88.2

99.6

95.2

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Minimal impact on domestic sugar pricesThe world sugar trade accounts for 35-40% of global sugar production of approx.161m tonnes. While Brazils influence in global trade is expected to increase, EUis expected to become a marginal player by 2010. This scenario is expected to improve the prices of sugar at global level. Another factor that would drive sugarprices at global level is alternate use of cane for ethanol production. Fuel ethanol substitutes gasoline and hence substitutes crude oil. This linkage is prim

arily driven by Brazils policy of dynamic management of its share of ethanol andsugar production. Major exporters27% 2% 2% 2% 3% 2% 7% 21% 34% Brazil EU Australia India Thailand Guatemela Columbia S. Africa Others

Source: Company Data, PL Research

Going ahead - weak relation between global and domestic sugar prices500 450 400 ($/tonne) 350 300 250 200 150 100 Aug-04 Apr-06 Jun-05 Jan-05 Nov-05Mar-04 Feb-07 Sep-06 Jul-07 Dec-07 May-08 Oct-03 Oct-08White Sugar Domestic price (RHS)

2,200 2,000 (Rs/Quintal) 1,800 1,600 1,400 1,200 1,000

Source: Bloomberg

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Contd...BrazilMY2004-05 Sugarcane Production (m tonne) Supply of sucrose (m tonne) Sucrose forEthanol production (m tonne) Sugarcane converted to alcohol (%) 386 55 28 49.9MY2005-06 387 55 28 51.5 MY2006-07 428 62 32 50.5 MY2007-08 491 71 38 54.5

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

l

Proportion of sugarcane for Ethanol in Brazil has been increasing YoY and is expected to increase to 58% in MY200809, 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 (about60%). exports are regulated by government by controlling export subsidy on sugar.

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Domestic Scenario for EthanolProbable alcohol demand over the next couple of yearsBlended Petrol Demand (m tonnes) 2007-08 2008-09E 2009-10E Source: Crisil 10 1112 Blended petrol Demand in (m litres) 14,322 15,734 17,288 Demand for Ethanol (m litres) 5% Blending 10% Blending Alcohol demand (Other than Ethanol) 1,835 1,917 1,998

716 787 864

1,432 1,573 1,729

Demand more than supply, indicating firming-up prices of Ethanol in the future to meet demand for blending program. Probable alcohol production over the next couple of yearsTotal alcohol demand 5% blending 2007-08 2008-09E 2009-10E Source: Crisil 2,5512,704 2,862 10% Blending 3,267 3,490 3,727 Potential Alcohol production 2,765 2,084 1,995 Deficit 5% Blending 214 (620) (867) 10% Blending (502) (1,406) (1,732)

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SAP to impact margins of UP-based mill ownersSensitivity of SAP on total cost of producing sugarIn UP, where yield of sugar from sugarcane is about 9.5-10%Cost of sugarcane (Rs / Kg of sugar) Total cost of producing sugar to mill owners ( Rs / Kg of sugar) Source: PL Research 11.0 15.65 12.5 17.15 13.5 18.15 Situation expected in 2008-09 and 2009-10 14.5 19.15 15.0 19.65 15.5 20.15 16.0 20.65

In Karnataka, where yield of sugar from sugarcane is about 11 -11.5%Cost of sugarcane (Rs / Kg of sugar) Total cost of producing sugar to mill owners ( Rs / Kg of sugar) Source: PL Research 11.0 14.61 12.5 15.96 13.5 16.86

Situation expected in 2008-09 and 2009-10 14.5 17.76 15.0 18.21 15.5 18.66 16.019.11

We expect the cost of producing sugar in UP to be more than its selling price, thus contributing negatively for the business. In Karnataka, due to higher yield,we expect cost of producing sugar to be less than its selling price, thus contributing positively for the business.

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Upturn and Forward integration to enhance margins of mill ownersMill owners would be benefited in terms of improvement in margins due to: Lowersugar production which would continue for 1-2 years, thus firming the prices ofsugar. We expect average sugar price at Rs1900 per quintal in 2009 and Rs2000 per quintal in 2010. Forward integration across the value chain would further enhance the profitability of mill owners, as we also expect ethanol price to firm-up. However, higher cane price would reduce margins to some extent. Due to low yie

ld of sugar in UP as against higher yield in Karnataka, we expect mills based inKarnataka to be benefited more than those in UP. BUY Shree Renuka Sugars, REDUCE Bajaj Hindustan and Balrampur Chini.

Domestic Sugar prices2,200 2,000 1,800 (Rs / quintal) 1,600 1,400 1,200 1,000 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Apr-03 Oct-03 Apr-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-99 Oct-02 Oct-04 Oct-07 Oct-10

Source: Bloomberg, PL research

Key Financials

Y/e Sept\ FY08 Sales (Rs m) EBIDTA Margin (%) FDEPS (Rs.) PE (x) Debit / Equity(x) RoE (%) RoCE (%) P/BV (x) Mkt Cap/ Sales (x) M/Cap (Rs m) 21,143 11.9 5.0 12.5 1.2 9.3 10.8 2.2 0.8 19,216 SRSL FY09E 23,661 18.9 8.5 7.4 0.6 22.6 14.9 1.40.8 19,216 FY10E 34,764 17.6 12.4 5.0 0.4 24.4 17.7 1.1 0.5 19,216 FY08E 21,11715.9 -3.2 2.7 -3.2 1.3 0.7 0.4 9,036 BJH FY09E 25,540 20.0 3.1 20.8 2.4 3.2 5.50.7 0.4 9,036 FY10E 28,913 21.6 12.9 4.9 1.7 12.4 8.4 0.5 0.3 9,036 FY08 14,90921.1 3.2 14.8 1.5 8.6 6.5 1.3 0.8 11,628 BCL FY09E 15,389 17.6 2.0 22.9 1.4 5.45.2 1.3 0.8 11,628 FY10E 18,316 18.3 3.9 11.8 1.2 9.8 7.0 1.2 0.6 11,628

Source: PL Research

Year ending - September

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Companies

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Shree Renuka SugarsConsistent Performance: Shree Renuka Sugars (SRSL) has shown CAGR of 50% in revenues and 125% in net profit over 2001-2007. It has been comparatively more beneficial as compared to its peers due to higher recovery of sugar and ability to export. JV with HPCL for Ethanol: As first of its kind of collaboration, SRSL hasjoined hands with Hindustan Petroleum Corp (HPCL) to set up an ethanol plant inMaharashtra. Under the terms of agreement, HPCL would buy all the Ethanol from t

he JV company. Increasing diversification: SRSL has been trying to diversify itsbusiness to reduce the impact of cyclicality of sugar by increasing business ofdistillery and power. Contribution of distillery and power are expected to increase 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 to improve from 12.2% in FY08 to 17.7% inFY10 due to improvement in EBIT margin as well as asset turnover. So RoE is also likely to improve to 24.4% in FY10, but would be affected due to lower leverage impact. Valuation: We expect 11.9% growth in topline in FY200809 and 46.9% inFY2009-10. We also expect bottom-line to grow by 86.9% and 47.4% in FY2008-09 and FY2009-10, respectively, giving an EPS of Rs8.5 and Rs12.4 in FY2008-09 and FY2009-10, respectively.14

BUYKey Financials (Rs m)Y/e September Revenue (Rs m) Growth (%) EBIDTA (Rs m) PAT (Rs m) EPS (Rs) Growth(%) Net DPS (Rs) FY07 9,506 1,320 830 26.7 FY08 21,143 122.4 2,526 1,332 4.6 (82.9) 0.2

CMP: Rs65 Target Price: Rs89 Shares O/s.: 297m

FY09E 23,661 11.9 4,479 2,489 8.5 85.3 0.4

FY10E 34,764 46.9 6,121 3,668 12.4 46.9 0.6


Profitability & ValuationY/e September EBIDTA Margin (%) RoE (%) RoCE(%) EV/ Sales (x) EV / EBIDTA (x) PER (x) P / BV (x) Net Dividend yield (%) FY07 13.9 22.3 10.3 0.8 6.1 1.9 0.4 FY0811.9 20.4 12.2 1.3 11.0 14.2 2.2 0.2 FY09E 18.9 22.6 14.9 1.1 6.0 7.6 1.4 0.3 FY10E 17.6 24.4 17.7 0.7 4.1 5.2 1.1 0.5



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FinancialsIncome Statement (Rs m)Y/e September Net Revenues Expenditure Raw Materials % of Net Revenues Personnel% of Net Revenues Mfg. & Other Expenses % of Net Revenues EBIDTA Net Interest Dep & Amortization EBIT EBIT margin (%) PBT Total Tax Effective Tax rate (%) PAT6,749 71.0 239 2.5 1,067 11.2 1,320 134 249 1,070 13.9 1,066 236 14.0 830 15,76774.6 419 2.0 2,431 11.5 2,526 701 193 2,333 11.9 1,784 427 23.9 1,332 15,987 67

.6 592 2.5 2,604 11.0 4,479 600 603 3,876 18.9 3,326 812 24.4 2,489 24,487 70.4973 2.8 3,183 9.2 6,121 480 810 5,311 17.6 4,881 1,188 24.3 3,668 FY07 9,506 FY08 21,143 FY09E 23,661 FY10E 34,764

Balance Sheet (Rs m)Y/e September Sources of Fund Share Capital Resrves and Surplus Total Shareholder

s fund Total Loan Fund Total Application of Fund Assets Gross Block Less: Dep& Amortization Net Block CWIP Total Current Assets Total Current Liab. & Prov Net Current Assets Total 6,314 691 5,623 2,087 4,436 1,218 3,218 11,111 8,401 8847,517 5,212 7,663 2,789 4,874 17,929 12,051 1,486 10,565 2,500 9,957 1,800 8,15721,531 15,651 2,296 13,355 400 13,089 3,200 9,889 23,954 311 4,128 4,439 6,47011,111 297 8,039 8,867 8,595 17,929 297 12,523 13,351 7,500 21,531 297 16,147 16

,975 6,000 23,954 FY07 FY08 FY09E FY10E


Major ShareholdersPromoters Foreign Domestic Inst. Public & Others 40.5% 24.0% 10.50% 24.9%


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Expansion

R

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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(oaxd51nl5 ] [

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FinancialsIncome StatementY/e September Net Revenues Expenditure Raw Materials % of Net Revenues Personnel% of Net Revenues Mfg. & Other Expenses % of Net Revenues EBIDTA Net Interest Dep & Amortization EBIT EBIT margin (%) PBT Total Tax Effective Tax rate (%) PAT915 1,619 612 3.4 (303) (160) 52.9 (103) 2,071 2,799 644 3.0 (1,427) (980) 68.7(447) 2,250 2,526 2,734 10.7 484 48 10.0 435 1,793 2,561 3,826 13.2 2,033 203 10

.0 1,830 13,441 75.5 1,423 8.0 2,425 13.6 13,693 64.8 1,483 7.0 2,584 12.2 14,855 58.2 2,056 8.1 3,519 13.8 16,518 57.1 2,281 7.9 3,877 13.4 FY07 17,805 FY08 21,117 FY09E 25,540 FY10E 28,913

Balance Sheet (Rs m)Y/e September Sources of Fund Share Capital Resrves and Surplus Total Shareholder

s fund Total Loan Fund Total Application of Fund Assets Gross Block Less: Dep& Amortization Net Block CWIP Total Current Assets Total Current Liab. & Prov Net Current Assets Total 29,218 4,671 24,547 16,299 20,549 7,143 10,420 51,266 45,000 7,470 37,530 900 15,678 2,855 11,044 50,474 45,500 9,995 35,505 500 15,490 2,752 10,959 47,964 46,000 12,556 33,444 200 11,751 2,010 7,961 42,605 141 13,69614,060 35,934 51,266 141 13,149 13,514 35,934 50,474 141 13,485 13,849 33,288 4

7,964 141 15,215 15,579 26,400 42,605 FY07 FY08 FY09E FY10E


Major ShareholdersPromoters Foreign Domestic Inst. Public & Others 45.7% 13.9% 13.1% 27.3%


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Balrampur ChiniExpansion in place to take advantage of upturn: Balrampur Chini Limited (BCL) has nine mills spread across eastern and central Uttar pradesh with an aggregate sugarcane crushing capacity of 73000 TCD and addition of 3000 TCD through Indo Gulf Industries (the company has acquired majority stake in this company)It has also de-risked its business through diversification into distillery (320 KLPD), power co-generation (181 MW, Saleable 126 MW) and bio-compost manufacture. No Furt

her Capex in immediate future: No further capex is expected in immediate futurewith respect to minimizing effect of cyclicality on business. Higher Cane priceand flood to impact profitability: We expect BCL to maintain the RoCE as well asRoE over the period from FY2007-08 to 2009-10. RoCE as well as RoE may get lower in the year 2008-09 mainly due to higher cane price of Rs 140 per quintal andreduction in sugarcane crushing due to flood in western UP. RoCE and RoE 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 FY200809 and 17.9% in FY2009-10. We expect bottomline to degrow by 35.6% in FY2008-09 and grow by 93.7% inFY2008-09 and FY2009-10 resp. giving an EPS of Rs 2.0 and Rs 3.9 in FY2008-09 and FY2009-10 respectively.

ReduceKey Financials (Rs m)Y/e September Revenue (Rs m) Growth (%) EBIDTA (Rs m) PAT (Rs m) EPS (Rs) Growth(%) Net DPS (Rs) FY07 13,948 765 (470) (2.5) FY08 14,909

CMP: Rs47 Target Price: Rs28 Shares O/s.: 248m

FY09E 15,389 3.2 2,714 504 2.0 (35.6) 1.0

FY10E 18,136 17.9 3,315 977 3.9 93.7 1.0

6.9 3,141 783 3.2 (223.7) 1.0


Profitability & ValuationY/e September EBIDTA Margin (%) RoE (%) RoCE(%) EV/ Sales (x) EV / EBIDTA (x) PER (x) P / BV (x) Net Dividend yield (%) FY07 5.5 (7.4) 0.2 1.8 32.1 (18.4) 1.3 FY08 21.1 8.6 6.5 1.7 8.2 14.9 1.3 2.1 FY09E 17.6 5.4 5.2 1.6 8.9 23.1 1.3 2.1 FY10E 18.3 9.8 7.0 1.3 7.0 11.9 1.2 2.1


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Comparison on main parametersSRSLIntegration & Diversification Earnings Growth & Margins Leverage LocationCrushing Capacity (TCD) Refining Capacity (TPD) Ethanol production (KLPD) PowerCapacity (MW Saleable) Particle Board MDF 37500 2000- Haldia, 2000-Plants 900-Integrated, 300-Secondary 70 136000 800 90 50000 m3 pa 160000 m3 pa 76000 320 126-

BHL

BCL

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Annexure

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Manufacturing ProcessWeighing and Preparing Cane Cane Milling / Crushing Juice Defecation & clarification Juice Evaporation Syrup Boiling Centrifuging Factory Raw Sugar24

To Grid Boilers Turbines Press mud Power To factory

Bio-composting

Fermentation

AlcoholMain Process Supplementary Process24


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Value Flow Chart

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

1 Tonne of Molasses gives approx. 220-250L of Alcohol 1 Quintal of Bagasse can generate approx. 35 units of power

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Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli,Mumbai 400 018, India. Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage45% 40% % of Total Coverage 35% 30% 25% 20% 15% 10% 5% 0% Buy Accumulate ReduceSell 3.1% 18.8% 42.2% 35.9%

PLs Recommendation Nomenclature BUY Reduce Trading Buy : Over 15% Outperformance

to Sensex over 12-months Accumulate : Underperformance to Sensex over 12-months: Over 10% absolute upside in 1-month Sell Trading Sell Under Review (UR) : : :: Outperformance to Sensex over 12-months Over 15% underperformance to Sensex over 12-months Over 10% absolute decline in 1-month Rating likely to change shortly

Not Rated (NR) : No specific call on the stock

This document has been prepared by the Research Division of Prabhudas LilladherPvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copiedor made available to others without prior permission of PL. It should not be co

nsidered or taken as an offer to sell or a solicitation 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 theaccuracy or completeness of the same. Neither PL nor any of its affiliates, itsdirectors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed hereinor for any omission therein. Recipients of this report should be aware that pastperformance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments willdepend upon the recipient

s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients ortheir relatives may have position(s), make market, act as principal or engage in

transactions of securities of companies referred to in this report and they mayhave used the research material prior to publication. We may from time to timesolicit or perform investment banking or other services for any company mentioned in this document.


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