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Shree Renuka Sugars Ltd's Brazilian plans on hold as global sugar price plummets

Company eagerly awaits policy changes in Brazilian elections slated on October 5 to divest two subsidiaries in that country

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A drastic fall in sugar prices globally has almost halved the market cap of Shree Renuka Sugars Ltd (SRSL) to just around Rs 1,500 crore over last three months as its new foreign owner Wilmar International (WIL) of Singapore took charge.

Drop in international sugar price has also put the Indian sugar major's plans of divesting its two Brazilian subsidiaries in jeopardy. The company is now eagerly waiting for the Brazilian general elections to be held on October 5 as it holds the key for an immediate change in sugar prices.

Shree Renuka, which is now equally owned by its initial promoters Murkumbi family and Wilmar International (WIL) of Singapore after a deal in February 2004, has seen its share price dwindle to 52-week low of Rs 16 on Wednesday, nearly 45% over last three months, in tandem with the sugar price fall.

Global sugar prices have dropped to nearly four-year low since June 2010 as Brazil production went up. "The prospect of runaway inflation in the country has forced the Brazilian government to keep the price of ethanol (which is used there as fuel in vehicles) flat. This, in turn, led to mills diverting most of their cane to sugar production, leading to a rise in sugar production," said an official close to SRSL. 

The Brazilian Sugarcane Industry Association recently said that mills in the main growing region produced 20.9 million tonne of sugar since the season began in April, up 4.4% over last year. The South American nation holds the key to the world sugar price as it accounts for more than 20% of world supply and almost 60% of global sugar trade flows. "The Brazilian elections slated for October 5 will decide the fate of global sugar prices in the immediate term. The opposition candidate who has courted popularity in the ethanol sector has pledged to hike gasoline prices if she is elected," said the official quoted above.

The uncertainty over sugar prices and drop in SRSL's valuation has forced the company to put its plans to sell Brazilian subsidiaries on the backburner. "As the sugar prices continue to remain low, there are no buyers for these companies."

In one of the Brazilian subsidiaries, Renuka do Brasil, formerly Equipav, which SRSL took over in 2010, the Indian company holds 59.4% stake. It has also acquired 100% stake in Renuka Vale do Ivai, another sugar major in Brazil. Meanwhile, SRSL is trying to bring down its debt burden.

"The promoters – Murkumbi family and Wilmar – are yet to complete the proposed rights issue, which is the third stage in their deal." According to the original plan, Wilmar and the existing promoters of SRSL would jointly participate in the rights issue to raise up to Rs 725.40 crore of primary equity capital for SRSL. 

"This money will reduce debt straight away," said the official.

Both Wilmar and Murkumbi family hold 27.72% each in SRSL.

Over last one year, foreign institutional investors (FIIs) have also dropped their total holding to 10.2% from 13.4%. ICICI Prudential Life Insurance Co continue to hold around 2.9% while Life Insurance Corporation 2%.

In its annual general meeting held last week, SRSL has decided to enter into an agreement with Adani Wilmar Ltd and Wilmar Sugar Pte Ltd for purchase/sale of sugar/coal. While the deal with Adani Wilmar is pegged at around Rs 1,700 crore annually, the deal with Wilmar is estimated at around Rs 2,150 crore. Adani Wilmar and SRSL are joint ventures of the same third party, Wilmar Group, while Wilmar Sugar is a subsidiary of the Singapore giant.

The AGM has decided to hike the borrowing limit to Rs 4,800 crore, after having sought shareholders' nod through a postal ballet. It has also decided to provide a loan, guarantee or security worth up to Rs 2,400 crore to any person or corporate entity.

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