%2F

INDIA/FOOD & BEVERAGE
Company BBG code Rating Share price (INR) 120.10 83.55 69.70 TP (INR) 95.00 100.00 75.00 Chg in TP (%) -20.8 Mkt cap
19 JULY 2010
P/E FY1 (USD m) 492 460 1,002 (x) (35.6) 18.7 7.7 FY2 (x) 47.0 9.8 10.6 Yld FY1 (%) 0.7 3.6 1.7
Bajaj Hindusthan Balrampur Chini Mills Shree Renuka Sugars
BJH IN BRCM IN SHRS IN
REDUCE BUY HOLD
Prices as at 16 July 2010; Source: Bloomberg, BNP Paribas estimates
INDUSTRY OUTLOOK
Increase in Brazil and Indian sugar production to weigh on sugar prices. Expect weak 2HF10; FY11 to be driven by higher volume and by products. Deregulation could be positive; BRCM well positioned to benefit. Initiate with BUY on BRCM; HOLD on SHRS; retain REDUCE on BJH.
Kunal Vora, CFA
+91 22 6628 2453 kunal.d.vora@asia.bnpparibas.com
A Bittersweet Symphony
Brazilian production and Indian monsoon are near-term drivers Brazilian sugar production is expected to increase by 5.5m tonnes due to dry weather during the crushing season and Bisada (previous years uncrushed) cane. The Indian Sugar Mills Association expects sugar production to increase by 6.5m tonnes, from 18.5m tonnes, to 25m tonnes. Due to strong production increase in the top two producers, global sugar supply is set to exceed demand after two deficit years. Our analysis of sugar futures indicates that though there is some tightness in the white-sugar market the same will get resolved by end of Brazilian crushing season. We maintain a negative view on global sugar prices. Weak 2HF10; FY11 to be driven by volume and by-products We expect sugar companies to breakeven or report losses in sugar segment due to high inventory value and low sugar prices. Companies had acquired sugar cane at high prices, as they were eyeing 28-year high sugar prices. Sugar prices have since declined sharply. In FY11 we expect 30% increase in India sugar production. We expect profitability to be driven by higher volume and sugar byproducts, such as power. Deregulation could be positive; BRCM preferred play The Indian sugar industry is highly regulated (Exhibit 15). In view of the high sugar cane production, the Indian government is considering deregulating the sugar sector. It may consider measures such as removing the levy quota, sugar release mechanism, bulk holding restriction, and reserve area as well as freeing up sugar cane pricing. We prefer BRCM as the play on deregulation as it tends to benefit from measures like removal of levy quota and change in sugar cane pricing mechanism. Prefer BRCM (BUY) over BJH (REDUCE) and SHRS (HOLD) We expect FY11 profits to be driven by higher volumes and by-products rather than sugar prices alone. In this scenario, we prefer BRCM, as the company has the least-leveraged balance sheet, no significant capex plan and the highest contribution from the power segment. We have a HOLD rating on SHRS as we like the domestic business but Brazilian acquisitions have leveraged the balance sheet. We retain REDUCE on BJH. Valuation Our analysis of the EV trend of sugar mills indicates that BJH and BRCM are trading near their bottom EV. We initiate on BRCM with a TP of INR100.00 (6.5x FY11 EV/EBITDA) and SHRS at INR75.00 (6.5x EV/EBITDA). We retain REDUCE on BJH and reduce TP to INR95.00 from INR120 (0.9x P/BV). Positive catalyst for the stocks could be from a negative production surprise from Brazil or India, deregulation of the sector or a lower-than-expected sugar cane price.
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KUNAL VORA, CFA
INDIA FOOD & BEVERAGE
19 JULY 2010
Contents
1) Sugar sector outlook: Maintain negative view.......................................................................................................................... 3 2) Domestic sugar production outlook.......................................................................................................................................... 4 3) International sugar demand supply and price outlook ............................................................................................................ 6 4) Why a negative price outlook at current levels ...................................................................................................................... 10 5) Deregulation: Potentially a game changer.............................................................................................................................. 13 6) Stable and inelastic demand .................................................................................................................................................... 15 7) Sugar Business Process And Comparison On Key Segments ............................................................................................. 17 8) Valuation: We prefer defensive ................................................................................................................................................ 22 9) Devils Advocate........................................................................................................................................................................ 26 10) Company updates ................................................................................................................................................................... 27
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Please see India Research Team list on page 37.
2 2
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Sugar sector outlook: Maintain negative view

India comfortably placed in terms of sugar availability
Sugar prices in India have retracted by ~30% from their highs since Feb2010. This has been due to a combination of domestic and international factors. India is now comfortably placed in terms of sugar availability in view of: 1) higher than expected production in 2010, 2) already contracted raw imports, 3) bulk users being allowed to import freely, 4) weak global sugar prices, 5) increase in land under sugar, 6) expectations of good monsoons 7) high inventory level with some of the sugar mills.
Current price could sustain in FY10; likely to decline in FY11

Though the sugar prices have retracted sharply from the peak, they continue to remain at a significant premium to the pre-rally prices. We believe that the current sugar price of ~INR27-29 will likely be sustained until the beginning of the next crushing season. We expect prices to decline to INR24-25 levels as the output from the FY11 (YE Sept 2011) sugar crushing comes out.
Sugar price still higher than pre-rally prices, but benefit already passed on to farmers
Sugar companies are unlikely to gain from the high sugar realisation in FY10 as the entire benefit of the high sugar price in FY10 has already been passed on to the farmers. Sugar mills were eyeing the 28-year high sugar prices during the early part of the crushing season, and acquired sugar cane at a 60% higher price in FY10 compared to FY09. However, sugar prices have collapsed subsequently and the companies are currently selling manufactured sugar near the cost of production.
Reducing sugarcane procurement cost key challenge for FY11

Due to political reasons, sugar cane prices have only been going in one direction, up. In FY10 sugar mills paid even more than government mandated prices due to sugar cane scarcity and high sugar prices. The key challenge for sugar mills in FY11 will likely be acquiring sugar cane at a significant discount to the current years sugar cane procurement price of INR240-280 per quintal. Though the companies are confident that the sugar cane price will come down to a marginal premium over FY10 UP state advised price (SAP) of INR165, we believe this will be a key challenge for the companies, especially the Uttar Pradesh based BJH and BRCM. At INR25-28/kg, Indian sugar production cost in FY10 was more than 2x the cost of production in Brazil, the largest sugar producer and exporter in the world.
By-products processing will be key in FY11

We expect a significant increase in sugar production in FY11. By-products are counter cyclical as their availability increases with high sugar production, while their prices are relatively stable compared to sugar prices. BJH, BRCM and SHRS are integrated sugar companies (they process by-products) but their ability to benefit from higher by-product availability differs. Balrampur Chini produces the highest quantity of power per tonne of sugar cane crushed cane, and is well positioned to benefit from higher sugar crushing. Renuka Sugars has set up secondary distilleries and power plants and processes byproducts procured from co-operative mills and is well positioned to improve its utilization level. Bajaj Hind has diversified into production of particle board segment which is yet to break even.
Sugar mills will be under pressure to liquidate inventory

Most sugar mills are still holding significant quantity of high cost sugar inventory. The companies will be under pressure to liquidate inventory as sugar prices are expected to decline further in FY11. Though the domestic production has been lower than consumption, most mills have high inventory levels since, in addition to manufactured sugar they are also holding processed sugar (processed from imported raw sugar).
Negative surprise from CS Brazil or India could change outlook

There are expectations of strong sugar production in central south Brazil in the current crushing season (April-October 2010) and Indias FY11 (YE Sep 2011) crushing season (November 2010 to April 2011). Despite the higher than expected sugar production in FY10, global inventory levels remain low and any negative production surprise from either India or Brazil could lead to a fresh rally.
3 3
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Domestic sugar production outlook

FY10 production (YE Sep10) surprise on higher yield, higher drawal, and better care of sugar-cane crop
Indian sugar production in FY10 at 18.5-19m tonnes has been significantly higher than the government or industry estimates, which were in the range of 15m-16m tonnes. The reasons for this have been: 1) higher yield per hectare in Maharashtra due to three rains, 2) better care of sugar cane crop by farmers in view of high sugar cane price, 3) lower diversion towards alternative industries like Gur and Khandsari primarily in western UP, and 4) improvement in sugar recovery.
We expect FY11 production to increase by 30% to 24m tonnes

In 2011, we expect the sugar production in India to increase to 24m tonnes. That is a 30% increase from the FY10 production. The Indian Sugar Mills Association, recently raised its FY11 sugar production estimate from 23m tonnes to 25m tonnes. The increase in production will come primarily from increase in area under sugar cane crop, other factors being higher recovery and higher drawal (proportion of sugar cane utilized in sugar manufacturing) on sugar.
FY11 production increase lead by increase in area under sugar

Most of the mills have cited a 15-20% increase in area under sugar cane crop in comparison with last year. Higher rainfall is expected to lead to improvement in recovery of sugar from sugar cane. Higher sugar cane production typically leads to lower diversion to alternative industry, which results in higher drawal of sugar. We expect yield per hectare to remain stable
Sugar cane remains an attractive crop in FY11

Sugar cane prices increased by more than 60% y-y in FY10. Sugar mills paid a premium over the government-regulated price, eyeing the record sugar price. High prices paid by mills made sugar cane crops attractive, compared to other food crops, and this is expected to result in a 15-20% increase in area under sugar cane. Food crops, which compete with sugar cane for land, are mostly sold at their minimum support price (MSPs), which have not seen any significant increase.
We dont expect a repeat of FY07; demand supply gap is lower

Despite a significant increase in sugar production we dont expect a repeat of FY07. In FY07, sugar production at 28m tonnes was 7m tonnes higher than domestic consumption. In FY11 we expect production at 24m tonnes, which is marginally higher than domestic consumption of 23.5m tonnes. Exhibit 1: India Sugar Demand Supply Estimates
India sugar production Cane area (000 hectares) Yield per hectare (tonnes) Cane production (m tonnes) Drawal (%) Cane crushed (m tonnes) Recovery of sugar % Sugar production (m tonnes) SY01 4,316 69 296 60 177 10.5 18.5 SY02 4,412 67 297 61 180 10.3 18.5 SY03 4,520 64 287 68 194 10.4 20.1 SY04 3,938 59 234 57 133 10.6 14.0 SY05 3,661 65 237 53 125 10.2 12.7 SY06 4,202 67 281 67 189 10.2 19.3 SY07 5,151 69 356 78 279 10.2 28.3 SY08 5,043 68 341 73 250 10.5 26.3 SY09 4,395 62 271 53 145 10.0 14.6 SY10E 4,250 69 293 65 191 9.7 18.5 SY11E 4,850 69 335 70 234 10.2 24.0
India demand supply of sugar (m tonnes) Opening stock Production Imports Total sugar availability Internal consumption Exports Closing stock
Sources: ISMA, BNP Paribas estimates
9.3 18.5 0.0 27.9 16.2 1.0 10.7
10.7 18.5 0.0 29.2 16.8 1.1 11.3
11.3 20.1 0.0 31.5 18.4 1.5 11.6
11.6 14.0 0.4 26.0 17.3 0.2 8.5
8.5 12.7 2.1 23.3 18.5 0.0 4.8
4.0 19.3 0.0 23.3 18.5 1.1 3.6
3.6 28.3 0.0 32.0 21.0 1.7 9.2
9.2 26.3 0.0 35.5 22.5 5.0 8.1
8.1 14.6 4.2 26.9 22.5 0.0 4.4
4.4 18.5 4.6 27.4 23.0 0.0 4.4
4.4 24.0 0.0 28.4 23.5 0.0 4.9
4 4
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Exhibit 2: India Sugar Demand/Supply And Surplus/Deficit Trend

(m tonnes) 30 25 20 15 10 5 0 (5) (10) (15) (20) FY61 (10) FY67 FY73 FY79 FY85 FY91 FY97 FY03 FY09 (5) 0 Difference (RHS) Production (LHS) Consumption (LHS)
Stable demand growth Supply leading to cyclicality
(m tonnes) 15 10 5
We expect Indian sugar production to marginally exceed consumption after two deficit years
Exhibit 3: India Sugar : Months Of Inventory

(months) 10 9 8 7 6 5 4 3 2 1 0 1960-61 1970-71 1980-81 1990-91 2000-01 2010-11
Sugar inventory levels are low. Negative production surprise could lead to a fresh rally in sugar prices.
5 5
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
International sugar demand supply and price outlook

In 1H10, Sugar prices declined by 41% after reaching a 28-year high. Over the last two months, on the back of buying from some of the Asian countries, the prices have recovered partially. Global inventory levels are still low, which is reflected in a high premium for white sugar and high spot-sugar prices. Sugar futures are now in marginal backwardation, indicating that the sugar supply situation is expected to improve over the next two years. Over the next year, we expect sugar prices to be driven based on the production in on going CS Brazil crushing season (April-October 2010) and upcoming Indian sugar crushing season (November 2010-April 2011).
We do not expect a significant increase in global prices from the current level
On the international side, Brazil the largest producer and exporter of sugar is likely to see a significant increase in production due to dry weather in its top sugarproducing areas. Brazil production should be helped by Bisada cane. Bisada cane is cane which was left uncrushed last year, due to heavy rains and has grown for two years and thus has higher yield per hectare. Indian sugar production estimate for FY11 was recently raised to 25m tonnes (from 23m tonnes) by Indian sugar mills association (ISMA) compared to 18.5m tonnes in FY10. This will likely rule out any further imports to India, which was amongst the largest importer in FY09 and FY10. Some of the Asian countries, such as China, Indonesia, and Pakistan, have been importers of sugar in 2010. Thailand, which is the second largest exporter of sugar, has reduced its sugar production estimate by about 1m tonnes. However, unless there is a negative production surprise from Brazil or India in the next crushing season, we expect the demand to be met as the two largest producers (Brazil and India) are expected to see between them 12m tonne increase in production. At current prices, domestic sugar price higher than import parity prices: Current international sugar futures at USD0.17/lb translates into INR21-22/kg post processing, which is still lower than domestic sugar prices at INR27-29. We therefore expect the import duty to be reinstated by the beginning of FY11 crushing season, which would support the domestic sugar prices. Exhibit 4: Long Term Sugar Price Trend
(USD/lb) 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 May-62
Global sugar prices retreating from 28 year high. Prices still at premium to historical average.
May-70
May-78
May-86
May-94
May-02
May-10
Sources: USDA; BNP Paribas
6 6
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Exhibit 5: Global Production And Consumption

(m tonnes) 180 160 140 120 100 80 60 40 20 0 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
Production
Consumption
Sugar production set to surpass consumption in FY11 after two consecutive deficit years
Exhibit 6: Global Inventory And Closing Inventory As % Of Consumption

('000 tonnes) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Closing stock (LHS) Months (RHS) (months) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Global sugar inventory levels still low. Negative production surprise from India or Brazil could trigger a fresh rally.
Exhibit 7: Top Global Sugar Producers And Production Trends

('000 tonnes) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Brazil Thailand Australia India United States EU China Mexico
India and Brazil combined account for 40% of global sugar production. Indian sugar production is driving global sugar prices. India was a large buyer in FY09 and FY10 triggering rally in sugar prices. India unlikely to import in FY11
7 7
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Brazil: Dry weather and Bisada improves production outlook

Brazil is the worlds largest producer and exporter of sugar. The production in 2009 was negatively affected by almost double the average rainfall, which decreased sugar harvesting and crushing. In 2010, UNICA expects central south Brazil sugar production to increase by 5.5m tonnes, from 28.6m tonnes to 34.1m tonnes for 2010. Assuming the north-east production remains flat, at 4.3m tonnes; Brazil could produce 38m tonnes in 2010. Brazilian production in 2010 is expected the increase due to combination of dry weather, which will lead to a longer crushing season and to the BISADA cane, which is the sugar cane that should have been crushed in 2009 but was not crushed due to heavy rains and has grown for nearly two years. Cosan [CSAN3 BZ, Not rated, price 24BRL], the largest producer of sugar globally, has recently mentioned that sugar production in Brazil might be 2.5m tonnes lower than the UNICA estimate of 34.1mt as it expects sugar cane production to be lower around 580m tonnes, compared to UNICAs estimate of 595m tonnes. Central-south Brazil crushing season lasts from April to October and production from this region typically determines the sugar price trend. Exhibit 8: Top Sugar Exporting Countries
('000 tonnes) 30,000 25,000 20,000 15,000 10,000 5,000 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Brazil EU-27 Thailand India Australia
Brazil is the leading sugar exporter by a wide margin
Exhibit 9: Brazil Sugar Production Trend

(m tonnes) 45 40 35 30 25 20 15 10 5 0 90/91
Source: UNICA
(m tonnes) South Central (LHS) Change in Brazil production (RHS) 5 Significant increase in Brazil production 4 3 2 1 0 92/93 94/95 96/97 98/99 00/01 02/03 04/05 06/07 08/09 10/11E North East (LHS) 6
Brazil sugar production could expect by 5.5m tonne driven by dry weather and last years uncrushed cane which has grown for two years
8 8
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Exhibit 10: Sugar Producing Regions In Brazil
Currently, crushing season is on in Central South region which accounts for ~85% of Brazilian sugar production.
NE region crushing season: Oct-Mar
CS region crushing season: Apr-Nov
Source: UNICA
China: Production affected by severe drought

China has seen a severe drought in its South-West region this year and the government expects the countrys sugar production to decline from 12.4m tonnes to 11m tonnes. Drought has affected 5m hectares of arable land, which accounts for roughly 4% of Chinas arable land acreage. Affected provinces account for more than 70% of Chinas sugar production. China is the third-largest consumer of sugar, with a potential consumption of 14.5m tonnes.
Thailand: reducing production outlook

Thailand is the second-largest exporter of sugar in the world. Its sugar production in FY10 has been 6.9m tonnes, of which it exported 4.6m tonnes. In FY11 the sugar production is expected to decline to 6mt due to dry weather. However, the 1m tonne shortfall in Thailand sugar production should not have a significant impact on global sugar price as long as Brazilian and Indian sugar production are on track.
9 9
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Why a negative price outlook at current levels

We expect domestic sugar price to decline in FY11 because of higher expected production, lower sugar cane cost and comfortable inventory levels. Indian sugar production for FY10, which has now been revised to 18.5m-19.0m tonnes, has been significantly higher than initial estimates of 15m-16m tonnes. India has already imported 4.5m-5.0m tonnes of sugar and, together with the opening stock of 4.4m tonnes, has sugar availability of ~28m tonnes sufficient to meet its consumption requirement of 23m tonnes and leave a reasonable inventory level. Most sugar mills are holding high inventory levels and will be under pressure to liquidate the inventory in view of high sugar production estimates for FY11. The sugar futures curve is in marginal backwardation indicating that sugar supply will improve over the next two years. Alternative crops like wheat and paddy have seen good production and have not seen any significant increase in MSP. This will probably maintain the attractiveness of the sugar cane crop for farmers, since there wont be a significant monetary incentive for farmers to switch crops. India unlikely to be a buyer in FY11: With a higher Indian production of 18.5m-19m tonnes and already contracted imports of 4.5m-5.0m tonnes, and an opening stock of 4.4m tonnes, India is unlikely to be a buyer in the global sugar market. According to Vivek Saraogi, president ISMA, India is self-sufficient in terms of sugar and might not need to import any more sugar. The Sugar Industry is requesting reinstatement of import duties to ensure that domestic sugar prices hold up. Exhibit 11: Domestic And Import Parity Price Comparison
(INR/tonne) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Imported sugar - post processing M30 Sugar price
Sources: Bloomberg; BNP Paribas
Food crop reserves increasing; sugarcane an attractive crop for farmers: Wheat crop in the current rabi (spring) season has been good and the government is facing storage issues due to limited warehousing facilities. As a result, minimum support prices of food crops have not been increased significantly. This should maintain the relative attractiveness of sugar cane crop.
10 10
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Exhibit 12: India Minimum Support Price Trend; Sugar Cane Attractive
(%) 400 Sugarcane - SAP / CMP Bajra Maize Wheat Paddy Jowar Groundnut
300
Sugar cane is an attractive crop for farmers based on FY10 sugar cane prices paid by sugar mills. We expect sugar cane price to decrease in FY11 as sugar cane production increases.
200
100
0 SY98 SY00 SY02 SY04 SY06 SY08 SY10
Sources: Government of India; BNP Paribas
Indian production costs have increased significantly There has been a significant increase in the production cost for Indian sugar mills. Sugar cane costs have increased 60% y-y for the Indian sugar mills. Sugar manufacturing cost increase for the Indian mills is significantly higher than for the Brazilian mills. This should weigh on the profit margins of Indian sugar mills, especially as long as free imports are allowed. In the current year, we estimate the cost/kg of sugar for Indian mills is INR25-28, while the cost of production for a Brazilian sugar mills is about USD0.10-0.15/lb, which translates into INR10-15/kg. In addition to higher production cost, Indian sugar mills lose money on the levy sugar sale. Sugar futures indicates tightness will last until the end of Brazil crushing season At the end of 2008, sugar futures for most deliveries traded at USD0.14/lb. By the end of 2009, in view of strong import demand from India and tight supply situation, near term deliveries were trading at USD0.24-0.26. Even 2011 contracts were trading higher at USD0.18-0.20/lb. By April 2010, with significantly higher Indian sugar production and postponement of Imports by countries like Pakistan and Egypt, spot prices crashed to as low as USD0.13/lb while 2011 sugar prices were at USD0.16/lb. With the surge in demand from countries like China, Russia, Indonesia spot sugar prices rebounded sharply to USD0.17/lb. Sugar futures are in marginal backwardation indicating that sugar availability is expected to improve over the next 2 years. Amongst our coverage, SHRS will likely have the highest impact from change in global sugar prices as the company has subsidiaries in Brazil which will export raw sugar.
11 11
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Exhibit 13: How The Sugar Futures Curve Has Changed

(cents/lbs) 26 24 22 20 18 16 14 12 10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 31-Dec-08 30-Jun-10 31-Dec-09 14-Jul-10 31-Mar-10
FY11 sugar futures have declined from ~USD0.22/lb at the beginning of the 2010 to USD0.17/lb. However they are significantly higher than sugar futures in beginning of 2009. SHRS will be most impacted by the move in sugar futures due to its Brazilian subsidiaries.
Sources: Bloomberg; BNP Paribas estimates
Sugar mills will be under pressure to liquidate inventory Most sugar mills are holding significant quantity of high cost sugar inventory. The companies will be under pressure to liquidate inventory as sugar prices are expected to decline further in FY11. Though the domestic production has been lower than consumption, most mills have high inventory levels as in addition to manufactured sugar they are also holding processed sugar(processed from imported raw sugar). However, currently the sugar companies do not have a control over the quantity of sugar they can sell. Sugar sales in India are based on sugar release orders from the government. Sugar mills have requested for scrapping of sugar release mechanism so that they can plan their sales and have a better control over their cash flows. Exhibit 14: Monthly Sugar Release Data
(m tonnes) 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Oct nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 2003-04 2007-08 2004-05 2008-09 2005-06 2009-10 2006-07
Sugar mills have to sell sugar based on sugar release order from government. Sugar mills are requesting deregulation of sugar sales.
Sources: ISMA; BNP Paribas estimates
Reinstatement of Import duty would support domestic prices but a rally unlikely In view of the collapse in the domestic sugar price and high domestic cost of sugar production, we believe India will re-instate import duty at the latest by the beginning of the next crushing season. The rationale for the same is domestic cost of sugar production is significantly higher than the cost of production in Brazil. Indian sugar production was INR25-28/kg in FY10 and could go down to INR21-24 in FY11. However this will be significantly higher than Brazils cost of USD0.10-0.15 (INR1015/kg). In the absence of an import duty, the domestic sugar price will decline further and Indian sugar mills will be unable to pay the farmers.
12 12
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Deregulation: Potentially a game changer

The Indian Agriculture Minister recently mentioned that the government may consider de-regulating the sugar sector in view of the high sugar production outlook in FY11. Indian sugar industry is highly regulated and deregulation could be a significant positive for the sector. Regulations on sugar industry include: a levy quota, sugar release mechanism, regulations on bulk holding of sugar, regulation of sugar cane price, assignment of sugar are, and others. We do not expect a complete deregulation of the sugar sector. However, partial deregulation of some functions is likely. Any developments on freeing up sugar cane pricing or scrapping of levy quota would be a positive development for the industry. We expect Uttar Pradesh based players BRCM and BJH to benefit more from any developments in deregulation of the sector as 1) UP has higher regulations, especially on sugar cane pricing and 2) They derive higher proportion of their profits from traditional sugar business, compared to SHRS which derives a significant proportion of its profits from refining, trading etc which do not tend to benefit from deregulation. Exhibit 15: Regulation Of Sugar Industry In India
Levy Sugar
Levy quota of 20% (raised from 10%) to be sold to government for distribution through PDS Price for levy sugar determined by government Monthly levy sugar release determined by government
Sugar
Only certain types of sugar can be produced in India Sugar has to be packed in Jute bags
Non Levy Sugar

Monthly release quota for free sale
Farmer
Minimum price of cane regulated by central and state government (Statutory minimum price, state adviced price and recently introduced fair and remunerative price) Minimum support price fixed for competing crops like wheat and paddy has impact on cane
Mill
Assignment of command area, reserve area and regulation on minimum distance between mills Regulation that mills cannot own agricultural land State regulation on ownership of mills
Molasses
Part of molasses to be sold to country liquor manufacturers Movement of molasses restricted within some states
Excise duty and sugar cess levied on sugar Import export order required for sugar import or export
Ethanol Bagasse
Ethanol blending - E5 requiring oil marketing companies to blend 5% ethanol with petrol
Power
Open access regulation allowing sugar mills to sell power in open market Power purchase agreements
Sources: KPMG; BNP Paribas
13 13
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Deregulation: Potential measures and impact

We are highlighting some of the reforms which could be considered on the back of our discussion with the sugar industry: Freedom in sugar cane price: This measure is unlikely but could be a significant positive for the industry; especially Uttar Pradesh based sugar companies. Sugar companies in India need to pay minimum support price for sugar cane, which is prescribed by the government. In years of excess sugar cane production, sugar companies face declining sugar prices but fixed raw material cost, which lead them to make losses. Instead of minimum support price, ISMA has suggested a variable sugar cane pricing mechanism. SHRS already has a variable sugar cane price arrangement with farmers. We expect BJH and BRCM to benefit if there are any developments on this. Monthly release mechanism goes: Currently, sugar mills need to sell sugar based on monthly sugar release orders from the government. If sugar sale is deregulated, companies will be able to sell sugar based on their own assessment of sugar prices and their balance sheet strength. This could lead to some selling pressure from cash-strapped companies at the end of the crushing season, however, stronger companies can hold on to realize better price in off season. Cane area reservation system goes: Currently sugar mills are required to buy all sugar cane grown in their reserved area. This does not provide any incentive for farmers to ensure high quality. If the reservation system goes farmers will be incentivized to take better care of their crops to realize high prices from the sugar mills. Flip side to this could be an increase in competition to acquire cane in low sugar cane production years. Change in import/export regulation: India, generally, does not allow free import or export of sugar. The government, in view of domestic sugar deficit, had allowed free imports into India in FY10, which we expect will be stopped by beginning of the FY11 crushing season. We believe that the government would not change this policy significantly as free imports can not co-exist with minimum price assurance to farmers. Levy sugar requirement goes: Currently sugar mills have to give 10-20% of their production to the government at a price that is below their cost of production. Sugar mills are demanding that the government should buy sugar at market price, subsidize, and supply the same through public distribution system (PDS). In FY11, we expect the levy quota to reduce to 10%. If the levy quota goes and the sugar is sold at market price that could increase the EBITDA of BJH, BRCM and SHRS by 21%, 13% and 5% respectively (Exhibit 16). Exhibit 16: Impact Of Removal Of Levy Quota On FY11 EBITDA
Sugar production Levy quota Levy quota Levy price Non levy price Increase in realization / EBITDA Current EBITDA Revised EBITDA EBITDA Impact Revised EV/EBITDA
Sources: Company data; BNP Paribas estimates
000 tonnes % 000 tonnes INR/kg INR/kg INR m INR m INR m % x
BJH 1,414 10.0 141
BRCM 718 10.0 72
SHRS 612 10.0 61
18.0 26.0 1,132 5,295 6,426 21 7.2
18.0 26.0 574 4,492 5,067 13 5.8
18.0 24.5 398 7,458 7,856 5 6.1
14 14
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Stable and inelastic demand

Sugar production In India as well as globally has been inelastic. The demand for sugar in India has seen a stable increase on the back of increasing household incomes and low current per capita sugar consumption. As compared to stable demand, supply has been cyclical and has been the driver of price cyclicality. Sugar production in India depends on natural factors like monsoons as well as government-mandated minimum support prices. Stable consumption increase: India is the largest consumer of sugar in the world. Sugar consumption in India has been increased at a CAGR of 5.2% over FY61-08 and has increased by 4.1% over the last five years. Indias per capita sugar consumption of 20kg is still lower than most developed countries. We expect sugar consumption to continue to increase 3-4% annually on the back of population growth, substitution of byproducts and household-income growth. Exhibit 17: Per Capita Sugar Consumption
(kg) 70 60 50 40 30 20 10 0 Brazil Mexico Russia EU USA India China
Sources: FAPRI 2007 Agricultural Outlook; BHL; BNP Paribas estimates
Sugar demand inelastic due to lack of satisfactory substitutes and small portion of household income: Sugar demand in India and globally has been relatively inelastic. This is primarily because of the lack of satisfactory substitutes. Even from a household spending perspective, sugar accounts for a small portion of household income. At 8kg purchase per person (40% of per-capita consumption of 20kg), and a prevailing retail price of around INR30, annual spending on sugar per person is USD45, which is less than 1% of per capita income. Fragmented supply side: India has more than 500 sugar mills and the largest producer of sugar, BJH, produced 1m tonnes of sugar in its 14 mills in FY10. Its production was 5% of the 19m tonnes total sugar produced in the country. Most mills in Maharashtra, accounting for approximately 30% of production, are co-operative societies. Sugar has high weight in inflation measurement which leads to high regulation: Sugar has a disproportionately high weight in inflation: Its weight in Wholesale Price Index (WPI) is 3.61% compared to 1.38% for wheat. Due to high weight of sugar in WPI, the government has taken various steps to manage sugar prices. Last year, in view of the rising sugar prices government had introduced measures like banning sugar futures, bulk holding restrictions, increasing levy quota, and removal of import duty on sugar. With the sharp decline in sugar prices, some of these measures are being removed.
15 15
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Exhibit 18: WPI Sugar, Gur And Khandsari Price Trend

(%) 70 50 30 10 (10) (30) (50) May-95
5m surplus sugar production, export incentives provided bulk holding limits raised, monthly release reinstated, import duty could come back, potential deregulation Export subsidies announced, Revitalization package for sugar industry announced, E5 blending program Exports banned, SMP raised Futures trading banned, buffer stock dismantled, bulk holders asked to reduce inventory, cane support price hiked, levy quota hiked, imports eased
Jul-97
Sep-99
Nov-01
Jan-04
Mar-06
May-08
Jul-10
Sources: CMIE; Bloomberg; BNP Paribas estimates
Large demand from commercial, industrial users; low-income households get levy quota Only 41% of Indias sugar consumption is household consumption. Industrial users, which include restaurants, confectionaries, soft drink manufacturers, dairies, and others, account for 59% of total sugar consumption. Low-income households consume about 27% of the total sugar consumption and this is largely taken care of by the levy quota of 20%, which is distributed through the public distribution system. Exhibit 19: Sugar Consumption In India
Other industrial 18% Confectionary 6% Dairy 8% Reataurant & other small business 11%
Low income households 27%
Sweetmeat 16%
High income households 14%
Sources: A. C. Nielson; BNP Paribas
16 16
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Sugar Business Process And Comparison On Key Segments

Exhibit 20: Sugar Cane Value Chain; Cane Production Drivers And Value Realisation
Farmer decision (Impacted by MSP and cane arrears)
Sugar Cane - Retained as seed
Area under competing crops like wheat and paddy
Gur & Khandsari Industry Area under Sugar cane
Juice Cane production (based on yield per hectare cultivated)
Sugar Mill
Sugar (~100kg per tonne depending on sucrose content)
Bagasse (300Kg per tonne of cane)
Molasses (~45Kg per tonne of cane)
20% levy sugar sold through PDS
Direct sale
Burn to produce power (400 units for 1 tonne of bagasse)
Particle or MDF board manufacturing
10-20% to be sold to country liquor manufacturer
80% non levy sold in market
utilized for mills power requirement
surplus power
80-90% distilled (~225lt of alohol for 1 tonne molasses)
95% pure alcohol
97% pure alcohol sold as rectified spirit
99% pure alcohol sold as ethanol to OMC's
Source: BNP Paribas
17 17
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Sugar crushing capacity and utilization

BJH has the highest sugar crushing capacity and is the largest producer of sugar in India. BRCM has capacity of 73,500 and is second largest in terms of crushing capacity in India. SHRS sugar crushing capacity at 35,000 tonnes crushed per day (TCD). SHRS has the highest sugar production per TCD of capacity. SHRS has operations in Maharashtra and Karnataka, which have longer sugar crushing season and higher sugar recovery. This leads to higher asset utilization and ROE for SHRS. All three expanded their sugar crushing capacity over FY03-07 and none of them is making any fresh investment in increasing crushing capacity due to low asset utilization level. The sector is operating at low utilization level due to low sugar cane availability. Exhibit 21: Sugar Crushing Capacity Of Indian Sugar Companies
(TCD) 140,000 120,000 100,000 80,000 60,000 40,000 20,000 EID Parry 0 Dhampur Renuka (India) Triveni DSCL Bajaj Hindusthan Balrampur Chini Simbaoli Bannari amman Rana sugar 2012E Mawana 2010E
18 18
Sources: Company data; BNP Paribas
Exhibit 22: Sugar Production/Tonne Trend

(tonnes) 30 25 20 15 10 5 0 2005 2006 2007 2008 2009 2011E Bajaj Balrampur Renuka
Sources: Company data; BNP Paribas
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Power: BRCM has highest contribution from power segment

Balrampur Chini currently has the highest saleable power capacity in India. BRCM has 126MW of saleable power capacity compared to BJH at 106MW and SHRS at 95MW SHRS enjoys higher realization as it sells most of its power in the open market compared to BJH and BRCM, which sell most of thier power to government. BJH and BRCM will see an increase in power realization as UPERC has raised tariffs for existing Uttar Pradesh-based cogen plants by 30% in FY10. Sugar companies have also been allowed to sell part of their power produced in the open market. BRCM has signed a contract with Tata Power to sell power at INR6.5 per unit. SHRS has pioneered secondary power plants on BOOT basis at co-operative societies in Maharashtra BJH is in the process of setting up 450MW coal-fired power plant. The company has decided to demerge the coal-fired power plant into a separate company and is considering selling stake in the same to part finance the power plant. Exhibit 23: Salable Power Capacity
(MW) 160 140 120 100 80 60 40 20 0 2004 2005 2006 2007 2008 2009 2010E 2011E Bajaj Balrampur Renuka
Exhibit 24: Salable Power Units

(m units) 800 700 600 500 400 300 200 100 0 2005 2006 2007 2008 2009 2010E 2011E Bajaj Balrampur Renuka
19 19
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Alcohol: Ethanol price hike a likely positive

Alcohol production (in terms of litres) is ~10% of sugar production (in terms of KGs): Every tonne of sugar cane crushed results in 50KG of molasses. Molasses is either sold to a country liquor manufacturer or processed further in distillery to produce alcohol. 50KG of molasses yields 10 litres of alcohol. Alcohol production in terms of units is roughly 10% of sugar volume. Ethanol price revision could be a positive: India currently has a mandate for 5% ethanol blending. However, sugar companies have not been supplying Ethanol to oil marketing companies due to low ethanol price compared to alcohol price. However, Ethanol price is set to be raised from INR21.50 to INR27.00. This will be a positive for the sugar mills. INR1 increase in alcohol realization increases our FY11 EBITDA estimate for BJH, BRCM and SHRS by 4%, 1% and 2% respectively. SHRS production higher because of secondary distillery capacity: SHRS has secondary distillery capacity where they procure molasses from co-operative societies and process the same. This is in addition to their integrated distillery. The company benefits in years of high sugar cane availability as its asset utilization improves. Exhibit 25: Alcohol Production Capacity
(KLPD) 1,300 1,000 700 400 100 (200) 2005 2006 2007 2008 2009 2010E 2011E 2012E Bajaj Balrampur Renuka
Source: Company Reports; BNP Paribas
Exhibit 26: Alcohol Production

(m liters) 150 Bajaj Balrampur Renuka
100
50
0 2005 2006 2007 2008 2009 2010E 2011E 2012E
20 20
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Capex Plans: No green-field expansion of sugar capacity

Most sugar companies in India operated at low utilization levels in FY09 and FY10 due to low sugar cane availability. Also, most of the large sugar areas have been allocated to sugar mills, leaving little room for green-field expansion. BJH is currently focusing on building a coal-fired power plant. SHRS is focusing on Brazil and has acquired two companies in Brazil. BRCM does not have any significant capex plan. BJH has announced a 450MW thermal power plant within its existing premises. The company converted some of its boilers to multi-feed boilers to refine sugar during the off season when bagasse is not available. BRCM has no significant capex plans currently. In FY10 the company converted boilers at two of its power plants to multi-feed boilers at the cost of INR250m. SHRS has acquired two sugar companies in Brazil. The company has also set up sugar refineries at ports. SHRS is also setting up power plants at co-operative sugar mills on built own operate transfer (BOOT) basis. Exhibit 27: Sugar Capex Comparison
(INR m) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2005 2006 2007 2008 2009 2010E 2011E 2012E Bajaj Balrampur Renuka Capacity expansion in sugar Moderate capex with focus on by products like power and on sugar refining No greenfield capacity expansion. BJH looking at power, SHRS at Brazil
Sugar companies are no longer investing in Greenfield expansion. BRCM has no capex plan, BJH is investing in setting up coal fired power plants while SHRS has made two acquisitions in Brazil
21 21
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Valuation: We prefer defensive

We expect 2HFY10 to be weak due to high-cost sugar inventory and low sugar prices. We expect FY11 sugar production to increase by 30% to 24m tonnes and sugar price to decline further in FY11. We expect FY11 profitability for the sector to be driven by byproducts. We prefer BRCM, which has a strong balance sheet, high contribution from by products and low capex plans. We initiate coverage on BRCM with a BUY rating and TP of INR100.00: Our TP is based on 6.5x FY11E EV/EBITDA. At our TP, BRCM will trade at 2x FY11 book value compared to its average P/BV of 2.3x. Our analysis of BRCM EV post capacity expansion indicates that the stock is near its bottom EV, which we believe presents a good buying opportunity. We like BRCM for its high contribution from its counter cyclical power segment, low leverage, and lack of capex plan and expected high FCF. Post the correction in stock price, BRCM management has bought BRCM shares in the secondary market and increased their stake by 1% in 3QFY10. We initiate coverage on SHRS with a HOLD rating and TP of INR75.00: Our TP of INR75 is based on 6.5x FY11E EV/EBITDA. Our TP translates into 2.1x FY11 book value compared to its average P/BV of 2.2x. SHRS has been the innovator in the Indian sugar industry and generates highest return on capital employed. We like the domestic sugar business of the company. However, the company has made two large acquisitions in Brazil that will increase the FY11 net debt to equity from 0 to 2.1x and FY11 net debt to EBITDA from 0.3x to 2.9x. We maintain REDUCE on BJH; cut TP from INR120 to INR95.00: We maintain our negative view on BJH. We change our valuation methodology from EV/EBITDA to P/BV in view of its deteriorated profitability outlook. We value BJH based on 0.9x FY11E BV compared to its average P/BV of 1.9x. At our TP, BJH will trade at 8.8x FY11E EV/EBITDA. BJH is the most-leveraged sugar company with FY11 net debt to EBITDA of 5.3x and its leverage is set to increase as it is investing in a 450MW power plant. Sugar stocks appear to be near bottom on disintegration of EV: We have broken up the sugar stocks EV between their debt and equity value (market cap) to look at signs of the sector bottom (Exhibit 30 and 31). Our analysis indicates that BJH and BRCM are trading near their bottoms. EV though the stock prices are much higher than their previous bottom. This is because of decline in debt level which has resulted from additional equity infusion and FCF generation. Maintain negative view on the sector; significant downside unlikely: We maintain our negative view on the sugar sector as we expect the near term profitability to be under pressure due to high cost inventory and depressed sugar prices. However, we do not see a significant down side for the sector from current levels. We do not expect FY11 down cycle to be as severe as in FY07. In FY07 production was 7m tonnes higher than consumption, while in FY11 we expect the gap to be about 1m tonne.
22 22
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Sugar Sector Valuations Comparison On Key Metrics

Exhibit 28: Sugar Sector Valuation At A Glance
BJH Recommendation Rating Target price (INR) Capacity based valuation At target price Crushing capacity FY11E (TCD) Sugar production FY11 (000 tonnes) Cane crushing FY11 (m tonnes) Valuation comparison by operating metrics EV/TCD capacity - (USD) EV/ tonne sugar produced - (USD) EV/cane crushed - (USD) EV/EBITDA At target price EBITDA FY10 (INR m) EBITDA FY11E (INR m) BRCM SHRS
REDUCE 95
BUY 100
HOLD 75
136,000 1,414 14.1
76,500 718 7.2
35,000 612 5.3
7,658 736 74
8,613 918 92
30,902 1,768 203
4,560 5,295 10.2 8.8
3,201 4,492 9.2 6.5
9,499 7,458 5.1 6.5
EV/EBITDA FY10 (x) EV/EBITDA FY11E (x)

EV/EBITDA historical trading range Average (x) Max (x) Min (x) Price to book valuation At target price Book value FY11E (INR) P/BV FY11 (x) P/BV historical trading range Average (x) Max (x) Min (x) Balance sheet Net debt/EBITDA FY11 (x) Net debt/Equity FY11 (x)
Source: BNP Paribas estimates
21.6 55.2 3.5
10.4 37.0 3.4
9.5 28.3 4.2
108 0.9
50 2.0
36 2.1
1.9 5.4 0.3
2.3 5.5 0.7
2.2 3.7 0.9
5.3 1.3
0.8 0.3
2.9 2.1
Sensitivity Of EBITDA and EPS to key variables

Exhibit 29: EPS And EBITDA Sensitivity Comparison
BJH EBITDA BRCM SHRS
Sugar price INR 1 decrease per KG Sugar cane price INR 10 decrease per QTL Ethanol price INR 1 decrease per liter Power INR 1 decrease per unit Production 10% decrease
EPS
(23) 20 (4) (5) (11)
(14) 14 (1) (15) (8)
(7) 7 (2) (8) (4)
Sugar price INR 1 decrease per KG Sugar cane price INR 10 decrease per QTL Ethanol price INR 1 decrease per liter Power INR 1 decrease per unit Production 10% decrease
Source: BNP Paribas estimates
(187) 163 (31) (39) (91)
(21) 21 (1) (23) (13)
(9) 9 (2) (11) (5)
23 23
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Disintegration of EV indicates stocks are near the bottom

We have looked at the EV (enterprise value) trend of BJH and BRCM and also into the disintegration of EV into debt and market cap to figure out whether the valuations have bottomed out. Our analysis indicates that though the stock prices are higher than their bottom in October 2008, EVs have almost bottomed. Debt levels have declined on the back of equity issuance and profits. Key takeaways from our analysis are: BRCM is also trading near its lowest EV post-expansion of capacity. We believe the stock offers a good entry point as the company is well positioned to benefit from increased sugar cane availability in FY10, has strong balance sheet and no significant capex plans. We also observe a tight correlation between the levels of EV of BRCM and BJH. We believe BRCM should outperform BJH in view of its stronger balance sheet and better outlook for FY11. BJH is trading near its October 2008 bottom EV. However, we believe the stock could continue to be under pressure due to its already high debt levels which are set to increase further on the back of its power foray and upcoming [Foreign Currency Convertible Bonds] FCCB repayment. Exhibit 30: BJH EV Disintegration
(INR m) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Net debt Market cap
BJH near bottom EV it has traded since its capacity expansion. However, stock could decline further due to weak outlook for FY11 and increase in debt levels due to power capex.
Source: Company reports; BNP Paribas estimates
Exhibit 31: BRCM EV Disintegration

(INR m) 60,000 50,000 40,000 30,000 20,000 10,000 0 Dec-03 Net debt Market cap
B RCM is trading near the flo o r EV po st its capacity expansio n
BRCM trading near its bottom EV since capacity expansion. We believe current levels provide good entry point as its balance sheet is stronger and and business outlook is better than previous bottoms
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Source: Company reports; BNP Paribas estimates
24 24
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Exhibit 32: Global Comps

BBG Company code Share price (LC) India sugar companies Market cap (USD m) P/E 09 (x) 10E (x) 11E (x) EV/EBITDA 09 (x) 10E (x) 11E (x) Price/sales 09 (x) 10E (x) 11E (x) P/BV 09 (x)
Bajaj Hindusthan * Balrampur Chini * Shree Renuka * Triveni Engineering
BJH IN BRCM IN SHRS IN TRE IN
120.1 83.6 69.7 103.7
493 465 1,002 574
Neg 11.0 17.9 15.3
Neg 18.7 7.7 12.8
47.0 9.8 10.6 13.4
13.6 6.3 11.2 8.2
12.5 8.8 5.5 8.2
9.7 5.6 6.0 6.5
1.1 1.2 1.7 1.4
0.4 1.0 0.8 1.1
0.6 0.9 0.8 1.1
1.0 1.9 2.9 2.3
Mean Median
14.7 13.1
13.0 10.2
20.2 12.0
9.8 9.7
8.8 8.5
6.9 6.3
1.4 1.3
0.8 0.9
0.8 0.8
2.0 2.1
Global sugar companies
Cosan Sao Martino Acucar Guarani Agrana Beteil Tate & Lyle Tongaat Hulett Illovo Sugar Khon Kaen Sugar Xiwang Sugar Nanning Sugar
CSAN3 BZ SMTO3 BZ ACGU3 BZ AGR AV TATE LN TON SJ ILV SJ KSL TB 2088 HK 000911 CH
24.0 14.0 3.9 69.5 4.8 107.3 29.4 11.3 1.9 15.2
5,536 897 634 770 1,431 1,475 1,792 543 234 642
9.9 17.1 45.9 13.7 144.7 3.9 18.2 19.5 15.4 35.3
12.2 17.9 9.7 14.6 11.2 15.7 15.4 21.4 7.1 18.2
15.7 22.9 13.7 12.6 10.4 13.8 13.3 16.1 5.9 22.5
8.5 6.3 5.6 8.7 21.0 7.8 8.8 20.4 11.1 12.8
6.6 5.2 3.8 8.0 7.2 7.8 7.0 14.5 5.9 22.5
7.0 5.0 4.1 7.6 6.9 7.1 6.1 12.2 4.5 nm
0.6 1.3 0.8 0.5 0.6 1.2 1.6 1.5 0.7 1.2
0.6 1.2 0.7 0.5 0.7 1.2 1.4 1.4 0.6 1.1
0.5 1.1 0.7 0.5 0.7 1.1 1.3 1.2 0.5 1.2
1.6 0.9 0.9 1.1 2.0 1.8 0.1 1.7 0.9 2.4
Mean Median
32.4 17.6
14.3 15.0
14.7 13.7
11.1 8.7
8.9 7.1
6.7 6.9
1.0 1.0
0.9 0.9
0.9 0.9
1.3 1.3
Sources: * BNP Paribas estimates; all others (Not rated) are Bloomberg consensus estimates
25 25
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Devils Advocate
Negative production surprise from Brazil or India
According to industry estimates, Brazils sugar production could increase from 32.9m tonnes in CY09 to 38.4m tonnes in CY10 and India sugar production could increase from 18.5m tonnes in FY10 (YE Sep 2010) to 25m tonnes in FY11. Global sugar inventory levels are low on the back of two years of low production in India. Any significant negative production surprise from either India or Brazil could lead to a fresh sugar rally as global sugar inventory levels are still low.
Deregulation of sugar industry

Indian sugar industry is highly regulated. There are regulations on the price that needs to be paid to farmers for sugar cane; there is a levy quota under which sugar mills need to sell 20% of their production to government at a price that is currently lower than the cost of production. The Indian sugar mills association is demanding deregulation of the sector. The Indian Agriculture minister has mentioned that the government will consider deregulation of the sector in the current year. Any move to deregulate sugar price, scrapping levy quota etc could be positive for the industry.
Lower than estimated sugar cane procurement price

We expect the Uttar Pradesh based sugar mills to pay sugar cane price of INR190 per quintal in FY11, compared to INR240-250 in FY10. Our assumption is based on some increase in cost over and above the UP state-advised price of INR165 in FY10. However, if the companies manage to bring down the sugar cane cost below our estimate it will be a positive for the sector.
High import duty and increase in domestic sugar price

In view of the higher sugar production estimate we expect the government to re-instate the import duty on sugar. Import duty could lead to decoupling of domestic sugar price and global sugar price. High domestic sugar price could be the biggest catalyst for the sugar sector.
26 26
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
Company updates
Bajaj Hindusthan .........................................................................................................................................................................28 Balrampur Chini Mills..................................................................................................................................................................31 Shree Renuka Sugars .................................................................................................................................................................34
27 27
BNP PARIBAS
Bajaj Hindusthan
INDIA / FOOD BEVERAGE & TOBACCO HOW WE DIFFER FROM THE STREET
BNP Consensus Target Price (INR) EPS 2010 (INR) EPS 2011 (INR) 95.00 (3.37) 2.55 Positive Market Recs. 1 93.50 8.87 6.13 Neutral 5 % Diff 1.6 nm (58.4) Negative 14
BJH IN
TARGET PRIOR TP CLOSE UP/DOWNSIDE
INR95.00 INR120.00 INR120.10 -20.9%
REDUCE
UNCHANGED
INDUSTRY OUTLOOK
CHANGE IN NUMBERS
Headwinds ahead
Weak 2HFY10E, estimates cut on lower sugar price assumptions. High sugar-price sensitivity, due to operating & financial leverage. Power business and FCCB repayment to pressure balance sheet. Retain REDUCE; cut TP to INR95.00 based on 0.9x FY11E P/BV.
KEY STOCK DATA

YE Sep (INR m) Revenue Rec. net profit Recurring EPS (INR) Prior rec. EPS (INR) Chg. In EPS est. (%) EPS growth (%) Recurring P/E (x) Dividend yield (%) EV/EBITDA (x) Price/book (x) Net debt/Equity ROE (%) 2010E 51,306 (620) (3.37) 10.63 (131.7) (58.2) (35.6) 0.7 13.0 1.1 162.8 (3.0) 2011E 39,783 488 2.55 10.46 (75.6) (175.8) 47.0 0.7 10.3 1.1 132.1 2.4 2012E 37,867 1,514 7.93 14.11 (43.8) 210.2 15.2 0.7 8.3 1.0 114.2 7.1
Weak 2HFY10 ahead We expect a weak 2HFY10 for Bajaj Hindusthan (BJH) as it is holding high cost inventory (~INR28/kg) and sugar prices have declined. We expect BJH to break even or make losses on its sugar inventory. BJH is sitting on huge inventory and we believe will be under pressure to liquidate this as sugar prices are likely to decline further given the industrys high Kunal Vora, CFA production estimate for FY11. We raise +91 22 6628 2453 our FY10 assumptions of sugar cane kunal.d.vora@asia.bnpparibas.com prices (from INR230/quintal to INR245) and cut those for sugar realization (from INR32.6 to INR30.3). We expect BJH to report a loss in FY10. FY11 outlook: low by-product profitability to hurt In FY11, we expect a significant volume increase as sugar cane availability increases. BJH sugar production increased from 0.61m tonnes in FY09 to 1.03m tonnes in FY10, and we expect it to increase further, to 1.41m tonnes in FY11. However, we expect sugar prices to fall further to INR24-26/kg as production increases. We estimate sugar cane price will decline to INR190/quintal in FY11, from INR245 in FY10. The key to profitability in FY11 is by-products, in our view. BJH utilizes part of the bagasse for its particle-board business, which has yet to break even. Balrampur Chini Mills (BRCM), by comparison, utilizes most of its bagasse in power generation, which is highly profitable. Debt still high; power foray to increase leverage BJHs high leverage will likely remain a concern in view of its deteriorating profitability outlook and its capex on setting up an 450MW green field power capacity. BJH has high net debt-to-equity of 1.6x in FY10, and net debt-to-EBITDA of 7.5x. The company has announced the demerger of its coal-based power plant business, and it is trying to reduce its stake in the business by getting an equity infusion. Power capacity is due to come online by end of FY11. BJH also has FCCBs outstanding, amounting to INR5b, which are due in February 2011. Maintain REDUCE, cut TP to INR95.00 on lower profit We maintain our REDUCE rating on BJH and cut our TP from INR120 to INR95.00, due to the earnings revision. We are changing our valuation methodology from EV/EBITDA to P/BV in view of BJHs deteriorating profit outlook. We value BJH on 0.9x FY11E P/BV (8.8x implied EV/EBITDA), at the low end of its historical trading range of 0.3-5.4x P/BV. Risks to our TP include lower sugar production driving up sugar prices deregulation of the sugar sector, and equity infusion in the power business.
(INR) 200 100 0 Jul-09
Bajaj Hindusthan Rel to MSCI India
(%) (4) (24) (44)
Oct-09
Jan-10
1 Month 4.9 1.0
Apr-10
3 Month (16.3) (13.3)
(64) Jul-10
12 Month (37.6) (64.7) July 2010 492 6.5 63
Share price performance Absolute (%) Relative to country (%) Next results Mkt cap (USD m)
3m avg daily turnover (USD m) Free float (%) Major shareholder 12m high/low (INR) 3m historic vol. (%) ADR ticker ADR closing price (USD)
Sources : Bloomberg consensus; BNP Paribas estimates
Shishir Bajaj (26%) 236.80/100.35 37.6 -
RECENT COMPANY & SECTOR RESEARCH

Sweet times ahead ................................................ 8 Jan 2010 Sweetness will last............................................. 24 Nov 2009 Still more to come ................................................ 12 Jul 2010 Extreme reactions .................................................. 7 Jul 2010
28
19 July 2010
KUNAL VORA, CFA
BAJAJ HINDUSTHAN
19 JULY 2010
FINANCIAL
STATEMENTS
Bajaj Hindusthan
Profit and Loss (INR m) Year Ending Sep
Revenue Cost of sales ex depreciation Gross profit ex depreciation Other operating income Operating costs Operating EBITDA Depreciation Goodwill amortisation Operating EBIT Net financing costs Associates Recurring non operating income Non recurring items Profit before tax Tax Profit after tax Minority interests Preferred dividends Other items Reported net profit Non recurring items & goodwill (net) Recurring net profit
Per share (INR) Recurring EPS * Reported EPS DPS Growth Revenue (%) Operating EBITDA (%) Operating EBIT (%) Recurring EPS (%) Reported EPS (%)
2008A
20,701 (13,693) 7,008 0 (5,571) 1,437 (2,799) 0 (1,361) (1,570) 0 0 204 (2,727) 980 (1,747) 173 0 0 (1,574) (204) (1,779) (12.58) (11.13) 0.70 16.3 (24.6) (559.3) (8,665.1) (7,677.5)
2009A
20,259 (12,209) 8,051 0 (3,838) 4,213 (3,457) 0 757 (1,565) 0 0 1,859 1,051 (456) 595 22 0 0 618 (1,859) (1,242) (8.07) 4.01 0.56 (2.1) 193.1 (155.6) (35.9) (136.1) 22.7 20.8 3.7 (6.1) 43.4 0.5 261.4 9.4 266.2 0.9 (9.7) 0.9 (9.7) (7.5) (0.3)
2010E
51,306 (42,351) 8,954 0 (4,394) 4,560 (3,282) 0 1,278 (2,053) 0 0 0 (775) 155 (620) 0 0 0 (620) 0 (620) (3.37) (3.37) 0.82 153.2 8.2 68.9 (58.2) (184.0) 11.1 8.9 2.5 (1.2) 0.6 73.8 6.2 79.0 1.4 (9.1) 1.4 (9.1) (3.0) 1.0
2011E
39,783 (29,620) 10,163 0 (4,868) 5,295 (2,974) 0 2,321 (1,670) 0 0 0 651 (163) 488 0 0 0 488 0 488 2.55 2.56 0.82 (22.5) 16.1 81.6 (175.8) (175.8) 18.1 13.3 5.8 1.2 25.0 32.1 1.4 92.3 10.2 136.6 2.9 (7.6) 2.9 (7.6) 2.4 2.2
2012E
37,867 (27,003) 10,864 0 (4,740) 6,124 (2,802) 0 3,322 (1,303) 0 0 0 2,018 (505) 1,514 0 0 0 1,514 0 1,514 7.93 7.93 0.82 (4.8) 15.7 43.1 210.2 210.2 21.3 16.2 8.8 4.0 25.0 10.3 2.5 95.7 9.2 157.0 4.4 (6.1) 4.4 (6.1) 7.1 3.4
FY10 revenue growth driven by processed raw sugar
Operating performance Gross margin inc depreciation (%) 20.3 Operating EBITDA margin (%) 6.9 Operating EBIT margin (%) (6.6) Net margin (%) (8.6) Effective tax rate (%) Dividend payout on recurring profit (%) Interest cover (x) (0.9) Inventory days 163.4 Debtor days 14.8 Creditor days 212.9 Operating ROIC (%) (1.7) Operating ROIC WACC (%) (12.3) ROIC (%) (1.7) ROIC WACC (%) (12.3) ROE (%) (13.6) ROA (%) (1.4) * Pre exceptional, pre-goodwill and fully diluted
Low EBITDA margin due to high sugar cane cost and low sugar prices in FY10
Revenue By Division (INR m)

Sugar Molasses Alcohol Power Others Less: excise duty
Sources: Bajaj Hindusthan; BNP Paribas estimates
2008A
17,486 410 3,549 349 383 (1,475) -
2009A
18,346 358 1,274 293 881 (893) -
2010E
47,773 45 2,490 996 1,550 (1,549) -
2011E
34,581 58 3,313 1,054 2,229 (1,452) -
2012E
32,744 53 3,010 1,035 2,340 (1,316) -
6 29
BNP PARIBAS
KUNAL VORA, CFA
BAJAJ HINDUSTHAN
19 JULY 2010
Bajaj Hindusthan
Cash Flow (INR m) Year Ending Sep
Recurring net profit Depreciation Associates & minorities Other non-cash items Recurring cash flow Change in working capital Capex - maintenance Capex new investment Free cash flow to equity Net acquisitions & disposals Dividends paid Non recurring cash flows Net cash flow Equity finance Debt finance Movement in cash
Per share (INR) Recurring cash flow per share FCF to equity per share
2008A
(1,779) 2,799 (173) 408 1,255 (4,742) 0 (3,216) (6,703) 135 (98) (515) (7,182) 50 6,198 (934) 8.88 (47.41)
2009A
(1,242) 3,457 (22) 1,729 3,922 (5,172) 0 (1,660) (2,910) 56 (98) (461) (3,413) 7,222 (4,277) (468) 25.48 (18.91)
2010E
(620) 3,282 0 0 2,663 3,128 0 (580) 5,211 0 (156) 0 5,054 14 (900) 4,168 14.48 28.33
2011E
488 2,974 0 0 3,462 3,395 0 (680) 6,177 0 (156) 0 6,021 0 (4,000) 2,021 18.12 32.34
2012E
1,514 2,802 0 0 4,316 (1,186) 0 (714) 2,416 0 (156) 0 2,259 0 (5,000) (2,741) 22.59 12.65
Our capex estimate does not include capex on the 450MW power plant BJH is in process of setting up
Balance Sheet (INR m) Year Ending Sep
2008A
2009A
2010E
2011E
25,972 (14,836) 11,137 38,905 50,041 0 0 1 0 50,042 (7,463) 28,658 7,005 28,200 486 0 20,704 651 50,041
2012E
25,270 (12,947) 12,322 36,817 49,139 0 0 1 0 49,140 (4,722) 23,658 7,005 25,941 486 0 22,062 651 49,139
Working capital assets 24,181 28,658 26,414 Working capital liabilities (11,693) (10,997) (11,882) Net working capital 12,488 17,660 14,532 Tangible fixed assets 41,848 43,901 41,199 Operating invested capital 54,336 61,561 55,731 Goodwill 0 0 0 Other intangible assets 0 0 0 Investments 1 1 1 Other assets 0 0 0 Invested capital 54,337 61,562 55,731 Cash & equivalents (1,740) (1,273) (5,442) Short term debt 36,637 28,658 28,658 Long term debt * 6,714 11,905 11,005 Net debt 41,610 39,290 34,221 Deferred tax 39 486 486 Other liabilities 0 0 0 Total equity 12,014 21,135 20,373 Minority interests 673 651 651 Invested capital 54,337 61,562 55,731 * includes convertibles and preferred stock which is being treated as debt
Per share (INR) Book value per share Tangible book value per share Financial strength Net debt/equity (%) Net debt/total assets (%) Current ratio (x) CF interest cover (x)
84.97 84.97 328.0 61.4 0.5 (1.2)
120 120 180.3 53.2 0.8 0.2
107 107 162.8 46.8 0.8 3.8
108 108 132.1 39.0 0.8 5.1
116 116 114.2 38.8 0.8 3.4
High debt levels, set to increase further on investment in coal based power
Valuation
2008A
2009A
2010E
2011E
47.0 37.2 47.0 0.7 6.6 3.7 1.1 1.1 10.3 9.4 1.0
2012E
15.2 12.0 15.2 0.7 5.3 9.5 1.0 1.0 8.3 7.5 1.0
Recurring P/E (x) * neg neg neg Recurring P/E @ target price (x) * neg neg neg Reported P/E (x) 29.9 neg neg Dividend yield (%) 0.6 0.5 0.7 P/CF (x) 13.5 4.7 8.3 P/FCF (x) (2.5) (6.4) 4.2 Price/book (x) 1.4 1.0 1.1 Price/tangible book (x) 1.4 1.0 1.1 EV/EBITDA (x) ** 38.2 14.3 13.0 EV/EBITDA @ target price (x) ** 35.7 13.3 12.0 EV/invested capital (x) 1.1 1.0 1.0 * Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income
Sources: Bajaj Hindusthan; BNP Paribas estimates
7 30
BNP PARIBAS
Balrampur Chini Mills

BNP Consensus Target Price (INR) EPS 2010 (INR) EPS 2011 (INR) 100.00 4.48 8.55 Positive Market Recs. 9 82.90 7.60 9.50 Neutral 7 % Diff 20.6 (41.1) (10.0) Negative 8
BRCM IN
TARGET PRIOR TP CLOSE UP/DOWNSIDE
INR100.00 N/A INR83.55 +19.7%
BUY
INDUSTRY OUTLOOK
INITIATION
Time for power play

We expect sugar volume and power revenue to drive FY11 profits. Strong free cash flow as no capex; leverage below peers we cover. Beneficiary of potential deregulation; trading near bottom EV. Initiate with BUY; TP: INR100 based on 6.5x FY11E EV/EBITDA.
KEY STOCK DATA

YE Sep (INR m) Revenue Rec. net profit Recurring EPS (INR) Prior rec. EPS (INR) Chg. In EPS est. (%) EPS growth (%) Recurring P/E (x) Dividend yield (%) EV/EBITDA (x) Price/book (x) Net debt/Equity ROE (%) 2010E 21,076 1,150 4.48 N/A (41.3) 18.7 3.6 9.3 1.9 59.0 10.0 2011E 22,404 2,194 8.55 N/A 90.7 9.8 3.6 5.9 1.7 28.3 17.9 2012E 22,971 2,570 10.01 N/A 17.1 8.3 3.6 4.8 1.5 8.4 18.7
Defensive in a cyclical industry We recommend Balrampur Chini Mills (BRCM) as our top pick in the Indian sugar sector. BRCM is a relatively defensive stock in the cyclical sugar industry, in our view, due to its low financial and operating leverage. We have a negative outlook for the sector, but we believe the downcycle in FY11 will not be as severe as the one we saw in FY07, as we expect the production-consumption gap to be about 1m tonne versus the 7m tonne gap in FY07.
Kunal Vora, CFA

(INR) 160 110 60 Jul-09
Balrampur Chini Mills Rel to MSCI India
(%) 24 4 (16) (36) (56) Jul-10

12 Month (6.8) (50.5) July 2010 460 6.1 64
Oct-09
Jan-10
1 Month (21.3) (14.4)
Apr-10
3 Month (38.9) (45.1)
FY11 will likely be driven by higher volumes and power We expect BRCMs FY11 sugar production to increase 47%, aided by higher cane crushed and higher recovery. With highest saleable power capacity, we believe the company is well positioned to capitalize on higher bagasse availability. We expect the sugar cane price to decline from INR240 to INR190 per quintal. We assume non-levy sugar realisation at INR26/kg in FY11. We expect EBITDA margin to improve from 15.2% to 20.1% on lower raw material costs and higher contribution from the power segment. Strong FCF generation as no capex ahead We expect BRCM to generate strong FCF on higher profits and negligible capex in FY11. We expect net debt/equity to decline from 0.6x in FY10 to 0.1x by FY12. Beneficiary of potential sector de-regulation Indian Agriculture Minister has said that the government will consider deregulating the sector in view of the high sugar production in FY11. Government could consider moves like scrapping levy quota, sugar release mechanism, and bulk holding restrictions. The industry is also demanding a variable sugar cane pricing arrangement with farmers. Scrapping of levy sugar obligation would add 13% to our FY11 EBITDA estimate. Change in sugar cane pricing could be a structural positive. Initiate with BUY; TP of INR100.00 We initiate coverage on BRCM with a BUY rating and TP of INR100.00. Our TP is based on 6.5x FY11 EV/EBITDA which is in line with global peers. Our analysis of BRCMs EV indicates that the stock is trading near its bottom EV, which we believe is a good buying opportunity. BRCMs promoters increased their stake in the company by 1% in 3QF10 via secondary market purchases, which we view as a positive sign. Risks to our thesis are higher-than-expected sugar cane price and lower-thanexpected sugar realization.
Sources: Bloomberg consensus; BNP Paribas estimates
Saraogi family (36%) 154.75/72.15 40.6 -
31
19 July 2010
KUNAL VORA, CFA
BALRAMPUR CHINI MILLS
19 JULY 2010
FINANCIAL
STATEMENTS

Per share (INR) Recurring EPS * Reported EPS DPS Growth Revenue (%) Operating EBITDA (%) Operating EBIT (%) Recurring EPS (%) Reported EPS (%)
2008A
14,909 (9,062) 5,847 0 (2,708) 3,139 (1,253) 0 1,886 (849) 0 0 2 1,039 (256) 783 0 0 0 783 (2) 781 3.10 3.11 0.50 6.9 281.3 (3,627.8) (227.5) (263.1)
2009A
17,471 (10,640) 6,831 0 (2,357) 4,473 (1,160) 0 3,314 (986) 0 0 138 2,465 (370) 2,095 (4) 0 0 2,091 (138) 1,953 7.63 8.16 3.00 17.2 42.5 75.7 145.8 162.6 32.5 25.6 19.0 11.2 15.0 39.3 3.4 160.4 7.2 53.7 9.4 (4.6) 9.2 (4.9) 18.3 9.7
2010E
21,076 (15,245) 5,831 0 (2,630) 3,201 (1,094) 0 2,107 (669) 0 0 0 1,438 (288) 1,150 0 0 0 1,150 0 1,150 4.48 4.48 3.00 20.6 (28.4) (36.4) (41.3) (45.1) 22.5 15.2 10.0 5.5 20.0 67.0 3.1 76.7 3.2 45.2 6.8 (7.2) 6.4 (7.6) 10.0 6.1
2011E
22,404 (15,124) 7,281 0 (2,788) 4,492 (1,048) 0 3,445 (520) 0 0 0 2,925 (731) 2,194 0 0 0 2,194 0 2,194 8.55 8.55 3.00 6.3 40.3 63.5 90.7 90.7 27.8 20.1 15.4 9.8 25.0 35.1 6.6 62.4 3.4 65.8 12.4 (1.6) 11.7 (2.4) 17.9 9.5
2012E
22,971 (15,122) 7,849 0 (2,909) 4,940 (994) 0 3,946 (520) 0 0 0 3,427 (857) 2,570 0 0 0 2,570 0 2,570 10.01 10.01 3.00 2.5 10.0 14.6 17.1 17.1 29.8 21.5 17.2 11.2 25.0 30.0 7.6 56.0 3.5 73.1 15.4 1.3 14.3 0.3 18.7 10.2
Higher sugar production volume to be offset by lower realization in FY11E
Operating performance Gross margin inc depreciation (%) 30.8 Operating EBITDA margin (%) 21.1 Operating EBIT margin (%) 12.7 Net margin (%) 5.2 Effective tax rate (%) 24.7 Dividend payout on recurring profit (%) 16.1 Interest cover (x) 2.2 Inventory days 206.4 Debtor days 12.0 Creditor days 104.5 Operating ROIC (%) 5.3 Operating ROIC WACC (%) (8.8) ROIC (%) 5.3 ROIC WACC (%) (8.8) ROE (%) 8.4 ROA (%) 4.9 * Pre exceptional, pre-goodwill and fully diluted
We expect FY11 margin to improve due to lower sugar cane cost and higher contribution from power segment

Sugar Alcohol Power Others Less: excise duty
Sources: Balrampur Chini Mills; BNP Paribas estimates
2008A
12,050 1,863 1,739 164 (906) 0
2009A
15,356 1,347 1,248 254 (734) 0
2010E
17,459 1,306 2,663 279 (631) 0
2011E
18,090 1,545 3,200 364 (796) 0
2012E
18,467 1,622 3,296 393 (807) 0
Strong growth in power segment revenue aided by increase in power tariffs, higher crushing and coal-based power.
23 32
BNP PARIBAS
KUNAL VORA, CFA
BALRAMPUR CHINI MILLS
19 JULY 2010

2008A
781 1,253 0 212 2,246 (2,761) 0 (843) (1,358) 15 0 (10) (1,354) 678 874 198 8.92 (5.39)
2009A
1,953 1,160 4 (784) 2,333 1,975 0 (117) 4,191 28 (149) (261) 3,809 55 (3,900) (37) 9.11 16.36
2010E
1,150 1,094 0 0 2,244 1,700 0 (320) 3,624 0 (901) 0 2,723 0 (1,450) 1,273 8.74 14.11
2011E
2,194 1,048 0 0 3,241 1,007 0 (150) 4,098 0 (901) 0 3,197 0 0 3,197 12.63 15.96
2012E
2,570 994 0 0 3,564 106 0 (345) 3,325 0 (901) 0 2,424 0 0 2,424 13.88 12.95
Strong FCF as no significant capex plans
2008A
2009A
2010E
2011E
4,891 (4,194) 697 16,639 17,336 0 0 1,222 4 18,563 (4,811) 8,425 31 3,644 2,039 0 12,880 0 18,563
2012E
4,994 (4,403) 591 15,990 16,581 0 0 1,222 4 17,808 (7,235) 8,425 31 1,220 2,039 0 14,549 0 17,808
Working capital assets 8,004 6,082 5,499 Working capital liabilities (2,626) (2,679) (3,795) Net working capital 5,378 3,403 1,704 Tangible fixed assets 19,447 18,311 17,537 Operating invested capital 24,824 21,714 19,241 Goodwill 0 0 0 Other intangible assets 0 0 0 Investments 16 1,222 1,222 Other assets 17 4 4 Invested capital 24,857 22,941 20,467 Cash & equivalents (378) (342) (1,614) Short term debt 12,773 9,875 8,425 Long term debt * 1,031 31 31 Net debt 13,426 9,564 6,841 Deferred tax 1,426 2,039 2,039 Other liabilities 0 0 0 Total equity 10,006 11,338 11,587 Minority interests 0 0 0 Invested capital 24,858 22,941 20,467 * includes convertibles and preferred stock which is being treated as debt
39.16 39.16 134.2 48.2 0.5 0.4
44.16 44.16 84.4 36.8 0.5 5.4
45.13 45.13 59.0 26.4 0.6 6.9
50.17 50.17 28.3 13.2 0.8 9.2
56.67 56.67 8.4 4.1 1.0 8.1
Balance sheet strengthening on the back of strong FCF
Valuation
2008A
2009A
2010E
2011E
9.8 11.7 9.8 3.6 6.6 5.2 1.7 1.7 5.9 6.9 1.4
2012E
8.3 10.0 8.3 3.6 6.0 6.5 1.5 1.5 4.8 5.7 1.3
Recurring P/E (x) * 26.9 11.0 18.7 Recurring P/E @ target price (x) * 32.2 13.1 22.3 Reported P/E (x) 26.9 10.2 18.7 Dividend yield (%) 0.6 3.6 3.6 P/CF (x) 9.4 9.2 9.6 P/FCF (x) (15.5) 5.1 5.9 Price/book (x) 2.1 1.9 1.9 Price/tangible book (x) 2.1 1.9 1.9 EV/EBITDA (x) ** 10.9 7.4 9.3 EV/EBITDA @ target price (x) ** 12.2 8.3 10.6 EV/invested capital (x) 1.4 1.4 1.4 * Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income
Sources: Balrampur Chini Mills; BNP Paribas estimates
24 33
BNP PARIBAS
Shree Renuka Sugars

BNP Consensus Target Price (INR) EPS 2010 (INR) EPS 2011 (INR) 75.00 9.06 6.60 Positive Market Recs. 7 65.40 12.10 7.40 Neutral 6 % Diff 14.7 (25.1) (10.8) Negative 5
SHRS IN
TARGET PRIOR TP CLOSE UP/DOWNSID
INR75.00 N/A INR69.70 +7.6%
HOLD
INDUSTRY OUTLOOK
INITIATION
Taking a big leap

SHRS provides exposure to top sugar producer & consumer. Innovative business model; sugar refining a good investment. Brazilian acquisitions increase leverage and risk profile. Initiate with HOLD and TP of INR75, based on 6.5x FY11E EV/EBITDA.
KEY STOCK DATA

YE Sep (INR m) Revenue Rec. net profit Recurring EPS (INR) Prior rec. EPS (INR) Chg. In EPS est. (%) EPS growth (%) Recurring P/E (x) Dividend yield (%) EV/EBITDA (x) Price/book (x) Net debt/Equity ROE (%) 2010E 61,911 5,904 9.06 N/A 132.2 7.7 1.7 5.5 2.3 26.4 33.1 2011E 59,909 4,420 6.60 N/A (27.2) 10.6 1.7 6.5 1.9 (8.7) 19.9 2012E 58,335 4,046 6.04 N/A (8.4) 11.5 1.7 6.6 1.7 (18.9) 15.8
Innovative sugar business We initiate on Shree Renuka Sugars (SHRS), the most-diversified sugar company in India (Exhibit 3). The company has owned and leased sugar mills, integrated and secondary distilleries and has set up strategically located standalone sugar refineries. In FY10, SHRS has made two large acquisitions in Brazil, which will make it the only sugar company globally with a large presence in the top global producer (Brazil) and top consumer (India) of sugar.
Kunal Vora, CFA

(INR) 130 110 90 70 50 Jul-09
Shree Renuka Sugars Rel to MSCI India
(%) 31 11 (9) (29) (49) Jul-10

12 Month (17.7) (41.0) July 2010 1,002 15.1 62
Weak 2HFY10 ahead; better positioned in FY11 SHRS, like most other sugar mills, is carrying high-cost white sugar inventory. Sugar in Maharashtra is trading at INR26-27/kg, which is near SHRSs cost of production of INR25/kg. In FY11, we believe SHRS is better positioned in terms of sugar cane cost compared to the UttarPradesh-based companies, due to its variable sugar cane cost arrangement with farmers. Standalone refineries; well positioned if spreads hold SHRS has set up two strategically located sugar refineries. We believe the refineries can operate at high utilization level in most scenarios (regardless of whether India imports or exports). We believe SHRSs refining profitability will depend on raw-white spread, which is currently high due to the high demand for white sugar. We expect refining spreads to decline over the next few months as supply situation eases. Acquisitions increase debt level and risk profile With the recent Brazilian acquisitions of VDI and Equipav, SHRSs FY11E net debt/equity will increase from 0 to 2.1x and net debt/EBITDA from 0.3x to 2.9x (detailed analysis in Exhibit 20). SHRS will need to make further investment in operations of Brazilian operations to turn around the operations. Given the high global sugar production we estimate, sugar prices could decline and we believe SHRS is vulnerable because of Brazilian subsidiaries and sugar refineries. Valuation We initiate coverage on SHRS with a HOLD rating and TP of INR75.00, based on our target FY1E EV/EBITDA of 6.5x, in line with global peers on Bloomberg consensus estimates (Exhibit 27). At our TP, SHRS would trade at 2.1x FY11E P/BV. Although we like SHRSs business model, we believe the increase in leverage will weigh on the stock price until the sugar cycle turns. We believe an upturn in the sugar cycle is unlikely in FY11. Risks include a possible decline in sugar prices.
Oct-09
Jan-10
1 Month (21.5) (14.7)
Apr-10
3 Month (41.0) (41.8)
Sources: Bloomberg consensus; BNP Paribas estimates
Murkumbi Family (38%) 122.43/53.10 42.7 -
34
19 July 2010
KUNAL VORA, CFA
SHREE RENUKA SUGARS
19 JULY 2010
FINANCIAL
STATEMENTS
Shree Renuka Sugars

Per share (INR) Recurring EPS * Reported EPS DPS Growth Revenue (%) Operating EBITDA (%) Operating EBIT (%) Recurring EPS (%) Reported EPS (%) Operating performance Gross margin inc depreciation (%) Operating EBITDA margin (%) Operating EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout on recurring profit (%) Interest cover (x) Inventory days Debtor days Creditor days Operating ROIC (%) Operating ROIC WACC (%) ROIC (%) ROIC WACC (%) ROE (%) ROA (%) * Pre exceptional, pre-goodwill and fully diluted
2008A
21,143 (15,767) 5,376 0 (2,850) 2,526 (369) 0 2,157 (548) 0 0 183 1,791 (427) 1,365 (25) 0 0 1,339 (183) 1,156 2.15 2.49 0.10 122.4 91.4 101.5 23.9 43.6 23.7 11.9 10.2 5.5 23.8 4.5 3.9 37.7 21.3 16.3 10.4 (6.8) 10.2 (7.0) 18.1 9.3
2009A
28,160 (20,204) 7,956 0 (3,300) 4,656 (675) 0 3,980 (1,012) 0 0 (8) 2,960 (720) 2,240 (5) 0 0 2,235 8 2,243 3.90 3.89 0.09 33.2 84.3 84.6 81.2 55.9 25.9 16.5 14.1 8.0 24.3 2.2 3.9 117.2 21.8 83.4 12.6 (4.6) 12.4 (4.9) 19.0 9.6
2010E
61,911 (48,065) 13,846 0 (4,347) 9,499 (849) 0 8,650 (882) 0 0 0 7,769 (1,864) 5,904 0 0 0 5,904 0 5,904 9.06 9.06 1.17 119.9 104.0 117.3 132.2 133.0 21.0 15.3 14.0 9.5 24.0 12.9 9.8 83.5 16.5 66.2 22.6 5.3 22.1 4.9 33.1 15.1
2011E
59,909 (47,998) 11,911 0 (4,453) 7,458 (1,043) 0 6,415 (599) 0 0 0 5,815 (1,396) 4,420 0 0 0 4,420 0 4,420 6.60 6.60 1.17 (3.2) (21.5) (25.8) (27.2) (27.2) 18.1 12.4 10.7 7.4 24.0 17.7 10.7 81.0 22.8 79.1 17.4 0.1 17.0 (0.2) 19.9 9.8
2012E
58,335 (47,189) 11,147 0 (4,582) 6,565 (1,047) 0 5,518 (194) 0 0 0 5,324 (1,278) 4,046 0 0 0 4,046 0 4,046 6.04 6.04 1.17 (2.6) (12.0) (14.0) (8.4) (8.4) 17.3 11.3 9.5 6.9 24.0 19.4 28.4 77.5 22.6 89.6 16.2 (1.0) 15.8 (1.4) 15.8 7.7
Revenue growth in FY10 driven by processed raw sugar. Our estimates do not include Brazilian subsidiaries.
Relatively stable margin due to variable sugar cane cost

Sugar Alcohol Power Others Less: excise duty
Sources: Shree Renuka Sugars; BNP Paribas estimates
2008A
18,020 1,203 995 1,478 (553) 0
2009A
23,437 1,686 1,504 2,459 (927) 0
2010E
56,582 2,564 2,097 1,838 (1,169) 0
2011E
51,949 3,630 3,226 1,640 (536) 0
2012E
49,436 3,811 3,804 1,742 (458) 0
Higher than industry ROE due high asset utilization
25 35
BNP PARIBAS
KUNAL VORA, CFA
SHREE RENUKA SUGARS
19 JULY 2010
Shree Renuka Sugars

2008A
1,156 369 25 1,153 2,704 (2,349) 0 (5,205) (4,851) 15 (54) (104) (4,993) 2,184 2,120 (690) 5.03 (9.03)
2009A
2,243 675 5 (294) 2,629 (2,897) 0 (4,705) (4,973) 24 (55) (167) (5,171) 5,178 4,678 4,685 4.57 (8.65)
2010E
5,904 849 0 0 6,753 (1,376) 0 (1,500) 3,877 0 (784) 0 3,093 0 0 3,093 10.36 5.95
2011E
4,420 1,043 0 0 5,463 3,948 0 (1,100) 8,311 0 (784) 0 7,528 0 0 7,528 8.16 12.41
2012E
4,046 1,047 0 0 5,093 (76) 0 (1,155) 3,862 0 (784) 0 3,079 0 0 3,079 7.60 5.77
Capex on sugar refinery and increasing power cogeneration capacity.
2008A
2009A
2010E
2011E
18,923 (13,948) 4,975 17,442 22,417 0 0 477 28 22,922 (15,533) 421 13,006 (2,105) 821 0 24,059 147 22,922
2012E
18,823 (13,773) 5,051 17,550 22,601 0 0 477 28 23,106 (18,611) 421 13,006 (5,184) 821 0 27,321 147 23,106
Working capital assets 7,436 17,719 20,338 Working capital liabilities (2,786) (10,172) (11,415) Net working capital 4,650 7,548 8,924 Tangible fixed assets 12,728 16,734 17,385 Operating invested capital 17,378 24,281 26,309 Goodwill 0 0 0 Other intangible assets 0 0 0 Investments 310 477 477 Other assets 16 28 28 Invested capital 17,704 24,786 26,813 Cash & equivalents (227) (4,912) (8,005) Short term debt 264 421 421 Long term debt * 8,331 13,006 13,006 Net debt 8,368 8,516 5,422 Deferred tax 467 821 821 Other liabilities 0 0 0 Total equity 8,336 15,302 20,422 Minority interests 533 147 147 Invested capital 17,704 24,786 26,813 * includes convertibles and preferred stock which is being treated as debt
15.10 15.10 94.3 40.4 2.5 1.6
24.14 24.14 55.1 21.4 2.1 0.7
30.49 30.49 26.4 11.7 2.4 7.1
35.92 35.92 (8.7) (4.0) 2.4 16.7
40.79 40.79 (18.9) (9.3) 2.6 26.9
Leverage set to increase with the Brazilian acquisitions not currently in the estimates
Valuation
2008A
2009A
2010E
2011E
10.6 11.4 10.6 1.7 8.5 5.6 1.9 1.9 6.5 7.0 2.0
2012E
11.5 12.4 11.5 1.7 9.2 12.1 1.7 1.7 6.6 7.1 1.8
Recurring P/E (x) * 32.4 17.9 7.7 Recurring P/E @ target price (x) * 34.8 19.2 8.3 Reported P/E (x) 27.9 17.9 7.7 Dividend yield (%) 0.1 0.1 1.7 P/CF (x) 13.8 15.2 6.7 P/FCF (x) (7.7) (8.1) 11.7 Price/book (x) 4.6 2.9 2.3 Price/tangible book (x) 4.6 2.9 2.3 EV/EBITDA (x) ** 17.3 10.8 5.5 EV/EBITDA @ target price (x) ** 18.4 11.4 5.9 EV/invested capital (x) 2.7 2.1 1.9 * Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income
Sources: Shree Renuka Sugars; BNP Paribas estimates
26 36
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
India Research Team

MANISHI RAYCHAUDHURI
Head of India Research BNP Paribas Securities India Pvt Ltd +91 22 6628 2403 manishi.raychaudhuri@asia.bnpparibas.com
GAUTAM MEHTA
Associate BNP Paribas Securities India Pvt Ltd +91 22 6628 2413 gautam.mehta@asia.bnpparibas.com
VISHAL SHARMA, CFA

Infrastructure - E&C BNP Paribas Securities India Pvt Ltd +91 22 6628 2441 vishal.sharma@asia.bnpparibas.com
SHASHANK ABHISHEIK
Infrastructure - E&C (Associate) BNP Paribas Securities India Pvt Ltd +91 22 6628 2446 shashank.abhisheik@asia.bnpparibas.com
AVNEESH SUKHIJA
Real Estate (Associate) BNP Paribas Securities India Pvt Ltd +91 22 6628 2432 avneesh.sukhija@asia.bnpparibas.com
LAKSHMINARAYANA GANTI
Capital Goods/Cement BNP Paribas Securities India Pvt Ltd +91 22 6628 2438 lakshminarayana.ganti@asia.bnpparibas.com
CHARANJIT SINGH
Capital Goods/Cement (Associate) BNP Paribas Securities India Pvt Ltd +91 22 6628 2448 charanjit.singh@asia.bnpparibas.com
GIRISH NAIR
Utilities BNP Paribas Securities India Pvt Ltd +91 22 6628 2449 girish.nair@asia.bnpparibas.com
AMIT SHAH
Oil & Gas BNP Paribas Securities India Pvt Ltd +91 22 6628 2428 amit.shah@asia.bnpparibas.com
SRIRAM RAMESH
Oil & Gas (Associate) BNP Paribas Securities India Pvt Ltd +91 22 6628 2429 sriram.ramesh@asia.bnpparibas.com
ABHIRAM ELESWARAPU
Tech - IT BNP Paribas Securities India Pvt Ltd +91 22 6628 2406 abhiram.eleswarapu@asia.bnpparibas.com
AVINASH SINGH
Tech - IT (Associate) BNP Paribas Securities India Pvt Ltd +91 22 6628 2407 avinash.singh@asia.bnpparibas.com
SAMEER NARINGREKAR
Tech - Telecom BNP Paribas Securities India Pvt Ltd +91 22 6628 2454 sameer.naringrekar@asia.bnpparibas.com
KUNAL VORA, CFA

Tech - Telecom (Associate) BNP Paribas Securities India Pvt Ltd +91 22 6628 2453 kunal.d.vora@asia.bnpparibas.com
VIJAY SARATHI, CFA

Financial Services BNP Paribas Securities India Pvt Ltd +91 22 6628 2412 vijay.sarathi@asia.bnpparibas.com
ABHISHEK BHATTACHARYA
Financial Services (Associate) BNP Paribas Securities India Pvt Ltd +91 22 6628 2411 abhishek.bhattacharya@asia.bnpparibas.com
JOSEPH GEORGE
Consumer BNP Paribas Securities India Pvt Ltd +91 22 6628 2452 joseph.george@asia.bnpparibas.com
MANISH A GUPTA
Consumer (Associate) BNP Paribas Securities India Pvt Ltd +91 22 6628 2451 manish.a.gupta@asia.bnpparibas.com
ALOK RAWAT
Metals & Mining BNP Paribas Securities India Pvt Ltd +91 22 6628 2417 alok.rawat@asia.bnpparibas.com
KARAN GUPTA
Metals & Mining (Associate) BNP Paribas Securities India Pvt Ltd +91 22 6628 2427 karan.gupta@asia.bnpparibas.com
28 37
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
HISTORY
OF CHANGE
IN
INVESTMENT
RATING
AND/OR
TARGET
PRICE
Bajaj Hindusthan (BJH IN)
(INR) 435.00 385.00 335.00 285.00 235.00 185.00 135.00 85.00 35.00 Jul-06
Bajaj Hindusthan
Target Price
Date 24-Nov-09 17-Apr-10
Reco BUY REDUCE
TP 270.00 120.00
Jul-07
Jul-08
Jul-09
Jul-10
Kunal Vora started covering this stock from 24 November 2009 Price and TP are in local currency Valuation and risks: Risks to our P/BV-based TP include lower sugar production driving up sugar prices deregulation of the sugar sector, and equity infusion in the power business Sources: Bloomberg, BNP Paribas
29 38
BNP PARIBAS
KUNAL VORA, CFA
19 JULY 2010
DISCLAIMERS
&
DISCLOSURES
ANALYST(S) Kunal Vora, CFA, BNP Paribas Securities India Pvt Ltd, +91 22 6628 2453, kunal.d.vora@asia.bnpparibas.com. This report was produced by a member company of the BNP Paribas Group (Group)1. This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set out herein. The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein are expressions of belief based on such information. No representation or warranty, express or implied, is made that such information or opinions is accurate, complete or verified and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipients own independent verification or taken in substitution for the exercise of judgement by the recipient. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Any reference to past performance should not be taken as an indication of future performance. No member company of the Group accepts any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed herein. This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on securities and providing automated trading services. This report is being distributed in the United Kingdom by BNP Paribas London Branch to persons who are not private customers as defined under U.K. securities regulations. BNP Paribas London Branch, a branch of BNP Paribas, is regulated by the Financial Services Authority for the conduct of its designated investment business in the U.K. This report may be distributed in the United States by BNP PARIBAS SECURITIES ASIA or by BNP Paribas Securities Corp. Where this report has been distributed by BNP PARIBAS SECURITIES ASIA it is intended for distribution in the United States only to major institutional investors (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Where this report has been distributed by BNP Paribas Securities Corp, a U.S. broker dealer, it will have been reviewed by a FINRA S16 qualified registered supervisory analyst or a S24 qualified and authorized person, in accordance with FINRA requirements concerning third party affiliated research. All U.S. institutional investors receiving this report should effect transactions in securities discussed in the report through BNP Paribas Securities Corp. BNP Paribas Securities Corp. is a member of the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. Reproduction, distribution or publication of this report in any other places or to persons to whom such distribution or publication is not permitted under the applicable laws or regulations of such places is strictly prohibited. Information on Taiwan listed stocks is distributed in Taiwan by BNP Paribas Securities (Taiwan) Co., Ltd. Distribution or publication of this report in any other places to persons which are not permitted under the applicable laws or regulations of such places is strictly prohibited. 1 No portion of this report was prepared by BNP Paribas Securities Corp personnel. Disclosure and Analyst Certification BNP Paribas represents that: BNPP or its affiliates beneficially own 1% or more the market capitalization of Balrampur Chini and Shree Renuka Sugars. BNPP or its affiliates had an investment banking relationship with Bajaj Hindusthan in the last 12 months. Within the next three months, BNPP or its affiliates may receive or seek compensation in connection with an investment banking relationship with one or more of the companies referenced herein. The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities and companies mentioned in this report; (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, relate to the specific recommendation or views expressed herein; and (iii) BNPP is not aware of any other actual or material conflicts of interest concerning any of the subject securities and companies referenced herein as of the time of publication of the research report. Recommendation structure All share prices are as at market close on 16 July 2010 unless otherwise stated. Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. *In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Rating distribution (as at 15 July 2010) Out of 487 rated stocks in the BNP Paribas coverage universe, 324 have BUY ratings, 110 are rated HOLD and 53 are rated REDUCE. Within these rating categories, 2.47% of the BUY-rated companies either currently are or have been BNP Paribas clients in the past 12 months, 0.91% of the HOLD-rated companies are or have been clients in the past 12 months, and 5.66% of the REDUCE-rated companies are or have been clients in the past 12 months. Should you require additional information please contact the relevant BNP Paribas research team or the author(s) of this report. 2010 BNP Paribas Group
30 39
BNP PARIBAS
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INDIA/FOOD & BEVERAGE

Bajaj Hindusthan Balrampur Chini Mills Shree Renuka Sugars

BJH IN BRCM IN SHRS IN

REDUCE BUY HOLD

Prices as at 16 July 2010; Source: Bloomberg, BNP Paribas estimates

PREPARED BY BNP PARIBAS SECURITIES ASIA

KUNAL VORA, CFA

INDIA FOOD & BEVERAGE

Asia Pacific Sector Swap

Please see India Research Team list on page 37.

KUNAL VORA, CFA

INDIA FOOD & BEVERAGE

Sugar sector outlook: Maintain negative view

Current price could sustain in FY10; likely to decline in FY11

Reducing sugarcane procurement cost key challenge for FY11

By-products processing will be key in FY11

Sugar mills will be under pressure to liquidate inventory

Negative surprise from CS Brazil or India could change outlook

KUNAL VORA, CFA

INDIA FOOD & BEVERAGE

Domestic sugar production outlook

We expect FY11 production to increase by 30% to 24m tonnes

FY11 production increase lead by increase in area under sugar

Sugar cane remains an attractive crop in FY11

We dont expect a repeat of FY07; demand supply gap is lower

9.3 18.5 0.0 27.9 16.2 1.0 10.7

10.7 18.5 0.0 29.2 16.8 1.1 11.3

11.3 20.1 0.0 31.5 18.4 1.5 11.6

11.6 14.0 0.4 26.0 17.3 0.2 8.5

8.5 12.7 2.1 23.3 18.5 0.0 4.8

4.0 19.3 0.0 23.3 18.5 1.1 3.6

3.6 28.3 0.0 32.0 21.0 1.7 9.2

9.2 26.3 0.0 35.5 22.5 5.0 8.1

8.1 14.6 4.2 26.9 22.5 0.0 4.4

4.4 18.5 4.6 27.4 23.0 0.0 4.4

4.4 24.0 0.0 28.4 23.5 0.0 4.9

KUNAL VORA, CFA

INDIA FOOD & BEVERAGE

Exhibit 2: India Sugar Demand/Supply And Surplus/Deficit Trend

Sources: ISMA, BNP Paribas estimates

Exhibit 3: India Sugar : Months Of Inventory

Sources: ISMA, BNP Paribas estimates

KUNAL VORA, CFA

INDIA FOOD & BEVERAGE

International sugar demand supply and price outlook

Sources: USDA; BNP Paribas

KUNAL VORA, CFA

INDIA FOOD & BEVERAGE

Exhibit 5: Global Production And Consumption

Exhibit 6: Global Inventory And Closing Inventory As % Of Consumption

Sources: USDA; BNP Paribas

Exhibit 7: Top Global Sugar Producers And Production Trends

Sources: USDA; BNP Paribas

KUNAL VORA, CFA

INDIA FOOD & BEVERAGE

Brazil: Dry weather and Bisada improves production outlook

Brazil is the leading sugar exporter by a wide margin

Sources: USDA; BNP Paribas

Exhibit 9: Brazil Sugar Production Trend

KUNAL VORA, CFA

INDIA FOOD & BEVERAGE

Exhibit 10: Sugar Producing Regions In Brazil

CS region crushing season: Apr-Nov