SRSL - EQUIPAV compat

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    STRATEGIC MANAGEMENT

    ASSIGNMENT

    INDIAN COMPANIES

    GOING GLOBAL

    SUBMITTED TO SUBMITTED BY

    PROF. B.K.KUMAR SMRITY TIWARI (42)

    GURMEET KAUR (55)

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    SREE RENUKA SUGAR LIMITED

    ACQUIRES EQUIPAV

    ABOUT SHREE RENUKA SUGAR LIMITED (SRSL):

    Shree Renuka Sugars Limited (SRSL) was found in 1998 by Narendra Murkumbi and Vidya

    Murkumbi. Narendra Murkumbi, 39, is the master of makeover. Instead of setting up new

    factories, he acquires old and preferably ailing sugar mills, or leases them if buying is not a

    possibility. Out of his eight factories in India, seven have been acquired from a slew of owners

    that range from state governments, cooperatives, public sector and private companies.

    This inorganic growth catapulted the engineering graduate from Belgaum with an IIMA degree

    in just 11 years from picking up the pieces of a failed biopesticides company to running a Rs

    6,000-crore Indian conglomerate, with interests in sugar, fuel, energy and international

    commodity trading.

    SRSL was not born out of necessity but the result of a compelling vision.

    To emerge as the most efficient sugar processor and the largest marketer of sugar andethanol in India.

    To consolidate a large renewable business and drive an aspiring business model.

    SRSL has its corporate office in Mumbai and headquarters in Belgaum (Karnataka). Its cane

    crushing operations are located in Karnataka and Maharashtra (Munoli, Athani, Havalgah and

    Gokak sugars in Karnataka and Ratnaprabha sugars in Maharashtra). It also operates three leased

    facilities at Arag(Maharashtra) and Alan and Raibag(Karnataka).

    The company possesses Indias largest sugar refining capacity (4000 tons per day) across two

    integrated refineries (1000 TPD each at Munoli and Athani) and a port based refinery at

    Haldia(2000 TPD). The acquisition of a majority stake in KBK Chem Engineering Pvt Ltd

    facilitates turnkey distillery, ethanol and bio fuel plant solutions. SRSL also acquired a 100

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    KLPD distellary fron Dhanuka Petroleum (Khopali Maharashtra) that converts rectified sprit into

    ethanol and increased its capacity to 300 KLPD

    PRODUCTS:

    Sugar

    Power

    Ethanol

    Bio fertilizers

    Renuka sugars produces EC grade 2 refined sugar confirming to EU norms(less than 50ICUMSA). The companys phosphorisation process produces sulphurless sugar for directconsumption and industrial usage in Europe and Africa.

    ABOUT THE ACQUISITION:

    On 24 february 2010, SRSL signed a deal to acquire 51% stake in Equipav S.A. Acar e lcool

    for $329 million, or Rs 1,530 crore, and become the third largest producer in the world. And the

    remaining stake in the venture will be held by the Equipav group OF Brazil.Equipav is one of the largest sugar and ethanol companies in Brazil. It has two mills with

    integrated co-generation facilities in Sao Paulo. They have a combined cane crushing capacity of

    10.5 million tonnes per annum (mtpa), or 4,400 tonnes crushed per day (tcd). Equipav also has a

    co-generation capacity of 203 mega watt (mw). The plan is to expand the combined capacity of

    the mills and power production to 12mtpa (56,600 tcd) and 295mw, respectively. Equipavs

    requirement of cane comes from around 1,15,000 hectares of land, of which nearly two-thirds are

    cultivated by the company. It also had a net debt of approximately $822 million, (Rs 3,821 crore)

    as of December 2009. The company will fund the deal through internal accruals and money

    raised earlier via a qualified institutional placement issue

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    Brazil is the largest producer and exporter of sugar in the world, and India is the largest

    consumer. The acquisition comes at a time sugar prices are ruling firm both in the international

    and domestic markets

    The company said the buyout would bolster its presence in the central and southern region ofBrazil and enhance its competitiveness and size, globally.

    ANALYSIS OF THE DEAL:

    INDUSTRY ANALYSIS:

    GLOBAL SCENARIO

    Supply and demand

    In 2007-08, global sugar consumption totalled 157.6 million tonnes vis-a-vis 167.2 million tonnes

    of global production, creating a 9.6-million tonnes surplus. In 2008-09, however, a reversal of this

    trend was seen. According to the Czarnikow Research, 2008-09 sugar production is expected to

    reach 153.5 million tons, down 13.7 million tons from the previous year. The deficit is expected

    to be around 7.1 million tons. The world consumption is projected at 160.6 million tons, up 1.9%

    from 2007-08.

    India and Brazil continued to dominate global sugar production, followed by EU27, China,

    Thailand and the US. In SY 2007-08, India and Brazil contributed 61.6 million tonnes, compared

    with a cumulative 166.7 million tonnes of global production.

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    Currently 69% of the world's sugar is consumed in the countries of origin, while the balance is

    globally traded. India is the largest global sugar consumer while Asia has surpassed globalconsumption. The long-term potential for consumption growth, particularly in southern African

    countries, remains positive. Besides, Chinese consumption has increased, thanks to a resurgent

    economy.

    DOMESTIC SCENARIO

    Indian sugar industry, 2007-08

    India is the largest consumer and second largest producer of sugar in the world (Source: USDA

    Foreign Agricultural Service). In SY 2007-08 India, produced 26.3 million tons and consumed

    22.5 million tons of sugar. With an opening stock of 9.55 million tons in 2008-09, India will end

    the year with stocks of around 4 million tons. India is the world's largest sugar consumer,

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    accounting for 15% of global consumption. It is also a huge 'swing producer' - severe year-to-year

    production fluctuations affects its trade status (and often the world's net balance by extension), as

    it alternates as a massive importer to small sugar exporter. The following table shows the supply

    demand imbalance since 2004-05. India had swung itself from a net importer to a potentially big

    exporter in two years. It has once again become a net importer and is importing in 2009. This

    demonstrates the domestic sugar industry's extreme cyclicality. The main contribution to the

    world sugar deficit this year is the large production shortfall in India. Latest estimates from

    India's Sugar Mills Associations suggest sugar output will fall to about 15 MT, down 43% from

    the 26.3 MT achieved in 2007-08. Following unprecedented output growth, India is now entering

    the down phase of its production cycle. Higher alternative crop prices began influencing cane

    growers back in 2006-07, causing a large switch to other crops like paddy and wheat. India's cane

    area fell 16% to 4.41million hectares in 2008-09 from the record area in 2007-08 of 5.29 millionhectares.

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    The Indian sugar industry remains the second largest rural agro-industry, with a Rs. 700 billion

    annual turnover, contributing almost Rs. 22.5 billion to the central and state exchequer as tax,

    cess, and excise duty annually (Source: Ministry of Food, Government of India). It is the second

    largest agro-processing industry in the country after cotton textiles. With over 600 operating

    sugar mills across India, the industry remains a potent rural economy driver. About 50 million

    sugarcane farmers and a large number of agricultural labourers are involved in sugarcane

    cultivation and ancillary activities, constituting around 7.5% of the rural population. Besides, the

    industry employs around 2 million rural skilled/semi-skilled workers, among others (Source:

    ISMA).

    Production

    The Indian sugar industry remains the second largest rural agro-industry, with a Rs. 700 billion

    annual turnover, contributing almost Rs. 22.5 billion to the central and state exchequer as tax,

    cess, and excise duty annually (Source: Ministry of Food, Government of India). It is the second

    largest agro-processing industry in the country after cotton textiles. With over 600 operating

    sugar mills across India, the industry remains a potent rural economy driver. About 50 million

    sugarcane farmers and a large number of agricultural labourers are involved in sugarcane

    cultivation and ancillary activities, constituting around 7.5% of the rural population. Besides, the

    industry employs around 2 million rural skilled/semi-skilled workers, among others (Source:

    ISMA).

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    Current industry status

    In 2005-06, there were 581 sugar mills across India's 18 states with a cumulative 190 lakh MT

    sugar capacity, of which only 455 are now operating. Around 312 of the total installed mills were

    in the cooperative sector, 205 in the private sector and 64 in the public sector (Source: Directorate

    of Sugar). The number of factories in the private sector increased by more than 15%, indicating

    the corporatization. But majority of the industry is still fragmented with more than 50% of the

    industry represented by co-operatives.

    Sugarcane availability

    Sugarcane occupies about 4.2% of the total cultivable kharif area and is one of the most important

    cash crops in the country. The sugarcane acreage has gradually increased from 2.70 million

    hectares in 1980-81 to 5.29 million hectares in 2007-08, owing to enhanced land diversion from

    other crops for economic reasons. From 154 MMT in 1980-81, the sugarcane productionincreased to 241 MMT in 1990-91 and to 263 MMT in 2007-08.

    Production mix

    Most of the sugar in India is manufactured and sold as 'Plantation White Sugar', produced by the

    double sulphitation process, while developed nations produce refined sugar through the phosphor

    flotation process. Plantation White Sugar (100 to 150 ICUMSA) represents a middle-rangeproduct between raw and refined sugar. This coloured sugar enjoys attractive demand in India for

    domestic consumption, but cannot be used for industrial usage. Therefore, the EC-II grade sugar -

    refined sugar compliant with EU norms - enjoys greater global demand.

    Mills which are equipped to produce refined sugar can manufacture sugar not only from

    sugarcane but also from raw sugar (which can be imported). Therefore, such mills can run their

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    production all year round, as opposed to single-stage mills, which are dependent upon seasonal

    sugarcane supply. Thanks to healthy demand and bulk requirement, a lot of millers have

    demonstrated an interest in producing raw sugar this year. It remains to be seen if this latent

    demand can be converted into an opportunity and India can establish itself as a bulk raw sugar

    exporter.

    COMPANY ANALYSIS:

    The sugar industry is a capital intensive industry requiring substantial investment of time and

    resources in setting up the sugar mills. SRS uses a combination of owned and leased mills for its

    capacity expansion. Out of its 10 mills, 5 are leased. Leased mills enable quicker time-to-market

    and higher profitability as the variable cost are directly under the control of the management.SRS has developed an expertise in buying or leasing sick mills and then converting them in to

    profitable units. In India, the sugar season lasts for 150 days. In order to extend this sugar season,

    SRS invested in multi-feed sugar refineries. During the season it uses sugarcane juice to produce

    sugar and during off season it uses raw sugar. This has enabled SRS to have doubled the asset

    utilization rate as that of the industry peers. The company has a locational advantage as all its

    units are located in Maharashtra and Karnataka where the crushing season lasts longer and where

    the sugar yield from the sugarcane is also 10-12% higher than in other parts of India. In these

    regions, the sugarcane price is correlated with the sugar price and is protected from sugarspot

    price variations. In other sugar producing states the state dictated minimum procurement price

    makes the sugar cane prices much more inflexible

    TRENDS IN SUGAR INDUSTRY:

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    BENEFITS TO SRSL AFTER THE DEAL:

    1. Increase in sugar production capacity.

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    2. Access to additional 10.5 million tons of annual crushing capacity.

    3. Availability of raw material even at the time of global sugar deficit

    4. Now ranked amongst top three players of sugar globally

    5. Increase in exports. The buyout would bolster its presence in the central and southern

    region of Brazil and enhance its competitiveness and size, globally

    6. Easy access to the main ports of Santos and Paranagua facilitating exports to other

    countries

    7. Cheaper and plentiful availability of raw materials (Brazilian sugar cane is available for

    Rs1,000 per tonne; in India the price is in the range of Rs1,800-2,300 per tonne) thereby

    providing a competitive edge to the company.

    8. Access to arbitrage opportunity as India is expected to import 7 million tons of raw sugar

    and white sugar in the current fiscal year.( arbitrage exists due to the price differentials of

    sugar cane in brazil and India as mentioned above)

    9. Increase in profitability as the shortage of sugar in india (worlds largest consumer of

    sugar) resulted in turning india from net exporter of sugar to net importer. This has

    consequently has pushed up the sugar prices globally.

    10. Ownership of 76667 hectares of cultivable land in Brazil.

    11.Got stakes in logistic assets, including terminals for storage and loading of sugar and

    ethanol at the Paranagua port.

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