Sector Update

July 9, 2013 Sector View

Negative

Sugar
Sweetness fading.
CMP 41.0 39.0 17.0 New TP 46.0 45.0 17.0 Old TP 64.0 54.0 20.0

Target Price
Company Balrampur Chini Dhampur Sugar Shree Renuka Sugar

Price Performance (%)

Return % Shree Renuka Sugars Balrampur Chini Dhampur Sugar Bajaj Hindusthan 1M (19.5) (16.7) (18.1) (6.4) 3M (31.1) (27.7) (20.4) (24.0) 6M (49.6) (39.4) (22.9) (29.2) 12M (50.9) (54.5) (31.1) (36.9)

Balrampur Chini
FY12 P/E (x) Target P/BV(x) EV/EBITDA (x) RoNW(%) RoCE(%) NA 0.9 7.4 NA 3.6 FY13E 6.2 0.8 3.7 12.8 8.7 FY14E 6.3 0.8 3.2 11.3 8.4 FY15E 10.9 0.7 4.4 6.0 5.1

The sugar sector has remained stressed over the past year mainly on the back of higher cost production compared to the lower increase in prices. Though partial decontrol handed a breather to sugar companies by relieving them of ~| 3000 crore levy sales burden, lower sugar prices and higher cane cost have played a spoilsport. Further, with production in the country remaining healthy at 25.2 million tonnes (MT) in FY13 and expected to decline only marginally to 23.7 MT in FY14, we do not expect a significant run up in prices during the year. With prices not slated to witness a significant run up but sugarcane prices (state advised price and fair & remunerative price) to see another round of increase, we expect the profitability of companies to remain under pressure in FY14E. Hence, with the sectors outlook remaining grim, we revise downwards the target prices of the companies under our coverage universe. Healthy production to arrest significant increase in sugar realisation Indias sugar production is expected to decline marginally to ~25 MT in SY12-13 versus a healthy production of 26.3 MT in SY11-12 (source: ISMA). We believe higher production for two consecutive years, with consumption remaining at ~23 MT and higher global production restricting export attractiveness, has provided for a higher closing stock in the country (~6 MT in FY13) thereby restricting our expectation of a significant price increase in FY14E. Further, with the price increases last year (FY13) being significant (~15%) we do not expect prices to rally much this year, keeping the earnings growth for sugar companies restricted. However, good support to realisation for sugar companies would come from higher levy sugar realisation at ~| 32/kg (gain of ~| 13/kg if sold at | 32/kg against loss of ~| 13/kg as the levy sales price stood at | 19/kg until FY13). By-product sales to support earnings With the implementation of mandatory 5% blending of ethanol with petrol by June 30, 2013 for oil marketing companies, the increase in demand for ethanol (~1 billion litres) pulled up prices to ~| 34/litre against | 27/litre. With higher cane crushing, the higher availability of molasses would, hence, boost distillery segment revenues both by volume and prices. Moreover, the higher availability of bagasse would aid the earnings from the co-generation segment and also make them sturdy. Avoid high debt companies With sugar realisation not expected to witness significant upsides in FY14E but the spectre of further increase in sugarcane prices continuing to loom over profitability, we remain cautious on the outlook for the sector. We recommend that investors avoid companies that have higher exposure to debt as higher interest cost payment could drain the profitability. We are also revising our target prices downwards on the back of near term sector concerns, glut in global sugar production, expected increase in domestic sugarcane prices and lower export prices (raw sugar at 16.5 cents/lb, white sugar at $495/tonne). We maintain BUY on Balrampur Chini and Dhampur Sugar with a target prices of | 43 and | 46, respectively, and HOLD on Renuka Sugar with a target price of | 17.

Dhampur Sugar
P/E (x) Target P/BV (x) EV / EBITDA (x) RoNW(%) RoCE (%) FY12 8.3 0.6 5.5 5.9 7.0 FY13E 6.2 0.5 6.2 7.8 7.0 FY14E NA 0.6 6.2 0.0 4.9 FY15E NA 0.6 7.2 0.3 3.6

Shree Renuka Sugars

P/BV (x) EV/EBITDA Target EV/EBITDA RoNW(%) RoCE(%) Debt / EBITDA FY12 0.5 6.1 6.0 (1.4) 6.7 5.5 FY13 0.8 4.9 4.9 (25.6) 7.7 4.3 FY14E 0.9 4.6 4.6 0.7 10.1 4.0 FY15E 0.9 4.9 4.9 5.3 9.4 3.9

Analysts name
Sanjay Manyal sanjay.manyal@icicisecurities.com Parineeta Poddar parineeta.poddar@icicisecurities.com

ICICI Securities Ltd | Retail Equity Research

Exhibit 1: Sugar production consumption in country over the years (in MT)
30.00
Indias production in the last three years (SY11, SY12 and SY13E) has continued to remain healthy with consumption remaining at similar levels. Higher production in comparison to consumption has led to ample amount of inventory build up, keeping prices lower

28.5 19.3 19.0

26.3 22.0 22.5 14.7 23.0 19.5

25.00 20.00 15.00 10.00 5.00 0.00 SY05 18.5 12.7

24.2 23.0

26.0 22.5

25.0 22.5

23.7 23.0

21.0

SY06

SY07

SY08

SY09

SY10E

SY11

SY12

SY13E

SY14E

Production

Consumption

Source: Company, ICICIdirect.com Research

Maharashtra, the countrys largest producing state, witnessed lower production in SY13E on the back of drought conditions in the state impacting the recovery rate. Uttar Pradesh has been witnessing higher sugar production on the back of increased cane acreage area

Exhibit 2: Key sugar producing states expected output (in MT)

States SY12 Maharashtra Uttar Pradesh Karnataka 9.0 7.0 3.8 Production (in mkg) SY13E* 7.9 7.7 3.1 SY14E* 5.9 8.4 2.7

Source: Company, ICICIdirect.com Research SY13E are preliminary output nos. from sources, SY14E nos. are USDA expectations

Exhibit 3: Central government (FRP), state government advised sugarcane prices (in |/quintal)
320
We believe the significant upward revision in sugarcane prices (in the last three years) both by the central government and the state Government has lured farmers to increase the cane acreage area. This, in turn, has led to higher sugar production in the country and significant increase in the cost of production for millers

280.0 240.0 210.0 140.0 165.0 160.0 180.0 210.0

270 220 170 120 70 20 95.0 107.0 115.0 125.0

80.3 SY05

81.2 SY06

81.2 SY07

107.8

125.0

139.0

SY08

SY09 FRP

SY10 SAP

SY11

SY12

SY13

Source: Company, ICICIdirect.com Research

Falling sugar prices to impact profitability With sugar prices remaining lower on a YoY basis but cost of production increasing (higher cane cost YoY) for millers, margins from the segment are expected to get drained further. Also, with higher interest cost due to higher requirement of working capital and prevailing higher interest rates, earnings growth seems unlikely in FY14E and FY15E. With international prices also remaining lower, export attractiveness to boost earnings was mitigated. At current sugar and sugarcane prices, millers in Uttar Pradesh would be making losses. However, Maharashtra-based mills would be making

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marginal profits. Any further decline in prices or increase in cane cost and conversion cost could impact the profitability adversely.
Exhibit 4: Effective profitability for manufacturers at current sugar and cane prices
UP based millers Sugar Prices (|/kg) Sugarcane Prices (Rs per quintal)* Sugarcane Cost Conversion cost Cost of Production Margins 33 280.0 31.1 3.5 34.6 -1.6 Maharashtra based millers 32.5 300.0 27.3 3.5 30.8 1.7

Source: Company, ICICIdirect.com Research

Exhibit 5: Domestic prices in Mumbai (|/quintal)

3800 3600 3400 3200 3000 Nov-12 Jul-12 Aug-12 Jul-13 Oct-12 Jan-13 Sep-12 Dec-12 Feb-13 Mar-13 Apr-13 May-13 Jun-13

Exhibit 6: Domestic prices in Delhi (|/quintal)

4100 3900 3700 3500 3300 3100 2900 Aug-12 Nov-12 Jul-12 Oct-12 Sep-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Exhibit 7: Raw sugar prices (US cents/pound)

25 23 21 19 17 15 13 Nov-12 Oct-12 Jan-13 Jul-13 Aug-12 Sep-12 Dec-12 Feb-13 Mar-13 Apr-13 Jul-12 May-13 Jun-13

Exhibit 8: White sugar prices (US dollar/tonne)

650 600 550 500 450 400 Nov-12 Oct-12 Jan-13 Aug-12 Sep-12 Dec-12 Feb-13 Mar-13 Apr-13 Jul-12 May-13 Jun-13 Jul-13

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Increase in import duty to 15% could help sustain domestic prices At the current import duty of 10% and raw sugar prices of 16.5 cents/pound, selling imported sugar in the domestic market would yield a gain of | 3/kg to traders (manufacturing cost at | 60/US$ is ~| 28/kg). This arbitrage opportunity could lead to higher imports into the country further pressurising the already hammered sugar prices. However, with import duty increased to 15% this margin could slim down by | 1/kg. Therefore, discouraging imports and restricting the availability in the country would prevent sugar prices from falling further. Hence, it is a positive move for millers except Renuka Sugar, which refines large quantities from its Kandla and Haldia port.

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Revising estimates With the outlook for the sector remaining grim for FY14E and sugar prices not expected to rally as much as last year, we are revising our estimates across companies. We are reducing the sugar realisation for FY14E and FY15E and increasing the realisation from distillery (higher prices offered by OMCs in FY14E). Though revenue growth revision is marginal as the lower sugar realisation would be compensated by higher by-products realisation, margins would slide significantly. The hit on margins would be on account of lower realisation as well as further revision in cane prices in FY14E and FY15E.
Exhibit 9: Balrampur Chini
Particulars Old Revenue
Higher realisation from by-products would keep revenues at current levels. However, higher cane cost for UP mills, Balrampur Chini and Dhampur Sugar, would impact margins significantly. Lower margins would thereby impact the earnings. However, with interest cost for both companies being manageable, the drain on margins is a bigger concern

FY14E New 3136.3 452.0 14.4 158.8 6.5 % Change (2.9) 5.8 119 bps (12.2) (12.2) Old 3227.7 368.5 11.4 150.9 6.2 3,231.0 427.2 13.2 181.0 7.4

FY15E New 3244.9 310.3 9.6 92.0 3.8 % Change 0.5 (15.8) -185 bps (39.1) (39.1)

EBITDA EBITDA Margin % PAT EPS

Source: Company, ICICIdirect.com Research

Exhibit 10: Dhampur Sugar Mills

Particulars Old Revenue EBITDA EBITDA Margin % PAT EPS 1,515.2 207.2 13.7 41.3 6.7 FY14E New 1499.7 184.0 12.3 -0.2 0.0 % Change (1.0) (11.2) -141 bps NA NA Old 1,536.0 179.3 11.7 33.7 5.4 FY15E New 1519.0 147.9 9.7 1.3 0.2 % Change (1.1) (17.5) -193 bps (96.1) (96.1)

Source: Company, ICICIdirect.com Research

Exhibit 11: Shree Renuka Sugar

Though we do not expect a significant impact in the margins of Renuka Sugar, it is the interest cost on the high debt in the books that is a bigger concern. Hence, until the company lightens its balance sheet, improving operational efficiency alone would be of little help

Particulars Revenue EBITDA EBITDA Margin % PAT EPS Old 11,918.8 1,586.0 13.3 153.5 2.3

FY14E New 11357.4 1552.7 13.7 8.1 0.1

% Change (4.7) (2.1) 36 bps (94.7) (94.7)

FY15E Old 11,460.0 1,479.3 12.9 184.7 2.8

New 11318.9 1354.1 12.0 65.3 1.0

% Change (1.2) (8.5) -95 bps (64.6) (64.6)

Source: Company, ICICIdirect.com Research

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ICICIdirect.com Universe (Sugar)

Sector / Company Balrampur Chini (BALCHI) Dhampur Sugar (DHASUG) Renuka sugar (RENSUG) CMP (|) 41 39 17 TP(|) Rating 46 45 17 Buy Buy Hold M Cap (| Cr) 1,002 242 1,188 EPS (|) FY13 FY14E FY15E 6.6 6.2 -5.6 6.5 0.0 0.1 3.8 0.2 1.0 P/E (x) EV/EBITDA (x) FY13 FY14E FY15E FY13 FY14E FY15E 6.2 6.2 NA 6.3 NA NA 10.9 NA 17.5 3.7 6.2 4.9 3.2 6.2 4.7 4.4 7.2 4.9 RoCE (%) FY13 FY14E FY15E 8.7 7.0 7.7 8.4 4.9 10.1 5.1 3.6 9.4 RoE (%) FY13 FY14E FY15E 12.8 7.8 NA 11.3 NA NA 6.0 0.3 5.3

Source: Company, ICICIdirect.com Research

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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We /I, Sanjay Manyal, MBA and Parineeta Poddar MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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