BoFA-ML cuts Shree Renuka's price target

MUMBAI: Bank of America Merrill Lynch expects Shree Renuka Sugars to ‘underperform’ and reduced its price target to Rs 31 from Rs 38 per share as it expects weaker global sugar prices, due to excess supply, to negate the benefit of an increase in capacity utilization and restrain a recovery in earnings.

“Renuka’s Brazil mills will be adversely impacted by (1) an over 20 percent decline in global sugar price to around US$0. 20/lb, and (2) a sluggish ramp-up in harvesting owing to excess rain. The above two factors should restrain the benefit of a 14 percent increase in production driven by an increase in plantation area and an 18 percent depreciation in the Brazil Real,” the report said.

The Indian units are likely to report better profits on account of sugar exports but the profit margins will be limited.

“Profit of the India unit is likely to improve from Rs 24.5 crore in the April 2011-March 2012 period to Rs 98 crore in FY13e and to Rs 103 crore in FY14e, driven by higher sugar exports. However, the profit margin on exports from the refinery is likely to be capped at around Rs2/kg, owing to the higher cost of raw sugar procured within India,” the report noted.

The brokerage cut the company’s EPS estimates by 25 percent for FY13e and 55 percent for FY14e.

“Consequently, we lower our price objective to Rs 31 from Rs 38. Our price objective is now based on a P/B of 0.9x FY13e as we expect the stock to derate owing to a decline in ROE to 8 percent in FY13e and 10 percent in FY14e and the lack of visibility about a cyclical upturn in sugar prices,” the report added.

At 02:15 p.m., the stock was at Rs 28.75, up 0.52 percent, on the BSE. It has touched a high of Rs 28.90 and a low of Rs 28.20 today.