Shree Renuka Sugar Inks Deal With Wilmar

Shree Renuka Sugars (SRS) has announced to sell 27.5% of its stake to Wilmar Sugar Holding(WSH), a 100% subsidiary of Wilmar International. The company is investing in primary capital of SRS. The investment will be completed in two steps. In the first step, Rs 25.75 crore of equity will be allotted to WSH at the rate of Rs 20.08 per share. After this preferential allotment, SRS and WSH will hold 27.5% each of extended share capital. 

The second step of investment would be complete through right issue of Rs.725.4 crore in which existing promoter of SRS and WSH will jointly participate. Currently, the company is suffering from huge debt due to its domestic expansion and overseas acquisition in past. The move of SRS is thus, mostly motivated to pay-off its debt.

The balance sheet figures as on 31 March, 2013 shows that the company is having debt burden of Rs 8000 crore, out of which 80% is external borrowing and rest 20% is domestic borrowing. 

For domestic borrowing, the company has to provide collateral, currently 42% of total shareholding of promoters and promoter group is pledged with financial institutions. The deal is subjected to approval of shareholders of SRS, anti-trust clearance in India and Brazil.

SRS is into agribusiness and bio-energy. The company operates in sugar, ethanol and power sectors. It is also into bio fertilisers. The company has a strong domestic as-well-as global presence with a total crushing capacity of 20.7 million tonne per annum. With this strategic deal, we are not expecting synergy in near term as sugar prices in international market is down from 25%.

On valuation front, SRS is currently trading at Rs. 21.15, down by 5.58% from its previous close. From the last three quarters the company is making losses, and shares of the company have hugely underperformed in the market. It has given negative return of 26.86% in the last one year. If the company uses the raised money to pay off its loan, an improvement can be seen in its EPS after adjusting exceptional loss of Rs 122 crore in the December quarter. The net earnings came at Rs -0.58 per share. Post debt payoff, the net earnings will come at Rs -0.48 per share (not annualised). The deal is mostly in favour of Wilmar International because after infusing Rs. 850-900 crore, it is getting 42% stake in the company (including right issue) which the investors of SRS may not like.