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Shree Renuka Sugars: Brazilian acquisitions a game changer, buy says Motilal Oswal.

Brazilian acquisition: In FY10 SRS acquired 100% in Vale do Ivai and 50.34% in Renuka do Brasil (the erstwhile Equipav) which propelled it from a leading Indian sugar company to among the largest integrated global sugar players. SRS now stands to benefit from the ongoing recovery in the global sugar industry. Brazilian acquisitions are characterized by (i) assured low cost cane availability for 6-12 years, and (ii) a settled balance sheet with debt at less-than-market costs and repayment over years. Cash flows from the Brazilian operations would be self sufficient to meet obligations and yield a surplus. We model a payback period of four years for VDI and seven for Renuka do Brasil. Renuka's Brazil business (seventh largest by size) has potential to list and unlock value for Renuka shareholders in the medium term.

SRS's integrated, diversified and flexible business model makes it more resilient to cyclical downsides. Over FY06-10, SRS grew from a relatively small domestic sugar play to a global giant, maintaining average RoE of 32.4% and EPS CAGR of ~20% in a cyclical industry, which speaks volumes about its innovation, vision and capabilities.

View & Valuations: SRS is the best proxy to play the global sugar industry recovery and is a direct play on rising sugar/ethanol prices. Strong cash flow visibility will allow it to de-leverage itself and address concerns regarding its high leverage. We expect SRS to post revenue and net profit CAGR of 19% and 20% respectively, over FY10-12. Motilal Oswal value SRS at Rs119, based on EV/EBITDA of 6 times FY12 EBITDA an upside of 32%. Initiate coverage with Buy.