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INDIA’S largest refiner Shree Renuka Sugars (SRSL) has bought distressed Brazilian sugar and ethanol producer Vale Do Ivai (VDI) in a $82-million deal. This is the first time an Indian sugar company has bought an overseas firm and could well pave the way for more such acquisitions by SRSL in Brazil, the world’s biggest producer and exporter of sugar and ethanol.

   SRSL has bought 100% equity in VDI, owned by the Longo family, which gives it control over two ethanol and sugar factories that can together crush 3.1 million tonnes cane each year, 18,000 hectares land on long lease, along with strategic stake in godowns and loading facilities at Paranagua port, Narendra Murkumbi, managing director and chief executive of the company, informed.

   SRSL believes it has got a good bargain because by taking over the loan liability of VDI, it has paid only $82 million for a company whose assets are worth $240 million. SRSL will have to pay off VDI’s loans over the next eight years. The Indian company, which has a market capitalisation of $1.45 billion as on November 10, 2009, will pay for the acquisition from its own kitty as it has ample cash in hand.

   The acquisition’s timing has been important as despite sky-high global sugar prices, Brazilian industry is currently crushed by mounting loans and losses and promoters are finding it tough to survive. That has made it possible for large multinational companies such as France’s Louis Dreyfus Commodities and producers such as SRSL to sniff out good deals at basement prices.

   Meanwhile, VDI’s acquisition would help the Indian major in three ways. One, VDI itself is strategically poised to exploit the Brazilian market, which produces a third of the world’s sugar and sells four out of every 10 bags traded globally. The factories are located Parana state, the second largest exporter after Sao Paulo. The company gets 72% of its cane supply from its own land, which reduces raw material cost. The state itself has ample land available for increasing its farming operations. It is located close to port, which gives freight cost advantage in exports.

   Two, VDI would take independent trading decisions that would allow parent SRSL to enjoy gains from any shifts in global sugar and ethanol prices and not just those in India. “We are planning to increase its sugar capacity where we foresee a continued shortage in the world market. This will allow us to move more nimbly between ethanol, where currently prices are low, and sugar that is at historic highs,” Mr Murkumbi said.

   Instead of exporting all its sugar automatically to SRSL in India, VDI would sell to the highest buyer. “VDI will not be committed to exporting to India and sell wherever it makes most money. This way there are gains through efficiencies. To that extent, it is not going to be a routine and mindless backward integration,’’ he added.

   Similarly, the port facilities will be used not just for VDI’s sugar but also the sugar SRSL buys from Brazil.

   Three, running VDI would give SRSL the unique opportunity to gather first-hand understanding of rapidly changing policy and market moves in Brazil in a business where information arbitrage is key. Coupled with its size and experience in India, this would make SRSL the only company with operational understanding of the world’s two biggest sugar markets. “In this highly volatile and fast-moving business, that makes us a formidable rival for even the large MNCs because they don’t have assets in India,” Mr Murkumbi said.

   The market appears to have given the thumbs up to the deal, with SRSL scrip rising 1.8%. According to HSBC, the Brazilian acquisition may be a gain for the company. “Shree Renuka is the largest sugar importer in India. With the sharp rise in earnings, the company is likely to be debtfree by the end of FY10, while the RoE and RoIC of 41% are the highest among peers. The stock trades at attractive PB and EV/EBITDA multiples of 2.5x and 4.5x, which are below the three-year average, while FY10 earnings are likely to be robust. Any news of an acquisition in Brazil for backward integration is likely to be a key upside trigger,’’ the bank said in a research report.

   A fully integrated sugar company that also produces power and ethanol, SRSL operates eight mills in India. Between 2003 and 2008, it has had a CAGR of 167% in revenues and 198% in net profits.

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