CASE 9

Shree Renuka Sugars Ltd.: Narendra Murukambi the Turnaround Wizard

This case study is based on the video interview of Narendra Murkumbi, Co-founder, Vice Chairman and Managing Director of Shree Renuka Sugars Ltd.

SYNOPSIS

It was Narendra Murkumbi’s dynamic vision to turnaround distressed assets of leased co-operative sugar factories that earned him ‘The Entrepreneur of the Year’ award at The Economic Times Awards (ET awards), 2010. A year later, his company lifted ET’s ‘Emerging Company of the Year’ award for the year 2011. However, the latest quarterly results revealed that the Brazilian sugarcane crop had failed, resulting in huge losses in the Brazilian subsidiary. As a result, Renuka Sugars was saddled with massive debt. Narendra Murkumbi was in a dilemma as to what steps he should take to overcome this imminent crisis.

COMPANY’S VISION

‘To be among the top three integrated sugar and ethanol companies in the world by harnessing our strengths and realising synergies through our global presence.’ⁱ

Shree Renuka Sugars Ltd (SRSL) was founded as a result of this compelling vision of its Co-Founder, Vice Chairman and Managing Director, Narendra Murkumbi and his mother, Vidya Murkumbi, in 1998.

Murukumbi believed in leading from the front. He extended Renuka Sugar’s operations to include sugar refining, export of value-added refined sugar, ethanol manufacturing and captive power generation. The boldest move of his strategy was to expand SRSL through international acquisitions of sugar cane plantation and ethanol companies in Brazil, South America in 2010 (as shown in Figure 9.1).

This takeover and turnaround of distressed sugar factories catapulted SRSL from a virtual non-entity to become one of the foremost sugar companies in India. Its highly efficient sugar factories produced an output of around 5,000 tons per day (TPD), which was roughly one-sixth of that of Bajaj Hindustan and Triveni Engineering in 2005. SRLS’s output reached 35000 TPD in 2010. Its innovative strategy, among others, responsible for this meteoric growth was that it also invested in refineries capable of refining raw sugar, as against the traditional refiners which were cane based.

Today, Renuka Sugars has its corporate office in Mumbai and headquarters in Belgaum and it operates from Munoli, Athani, Havalga, Raibagh (Leased) and Gokak in Karnataka, and Arag (Leased) as well as Pathri in Maharashtra. The company possesses India’s highest sugar refining capacity (9,000 tons per day) across three integrated mills (1,000 TPD each at Munoli and Havalga, and 2000 TPD per day at Athani) and port-based stand-alone refineries (2,000 TPD at Haldia, West Bengal and 3000 TPD at Kandla in Gujarat).

SRSL’s acquisition of majority stake in KBK Chemical Engineering Pvt. Ltd helped to facilitate turnkey distillery, ethanol and bio-fuel plant solutions. SRSL also acquired a 100 KLPD distillery from Dhanuka Petrochem (Khopoli, Maharashtra) that converts rectified spirit into ethanol and increased its capacity to 300 KLPD.

INTRODUCING NARENDRA MURKUMBI

Narendra Murkumbi was born in Belgaum, Karnataka. His family had been traders for generations. His father was a distributor for Tata Tea and Tata Chemicals. In 1994, he graduated from IIM-Ahmedabad. He chose to opt out of the institute’s campus placement program and refused to take up a cosy job in any multinational company. He started working as an agri-business entrepreneur and dabbled in the bio-pesticides business. He soon shifted his interest to the sugar industry.

Having lived in Belgaum for most of his life, Murkumbi was familiar with the sugar business. But he did not have the resources needed to set up a sugar mill. It was in 1998 that the Government of India decided to de-license the sugar industry. This was followed by Nizam Sugar Factory, an Andhra Pradesh Government enterprise, being sold off in 1998 due to the recurring losses faced by the company. Renuka Sugars was the highest bidder in the tendering process. He shifted the complete unit to Belgaum which was a sugar-cane rich area. Although he convinced the institutional lenders for funding, he was ₹ 5 crore short. Hence, he thought-out-of-the box and approached the farmers in the district.

Co-opting Farmers as Shareholders: Dynamic Strategizing

‘In Maharashtra and Karnataka, the farmers were used to investing in milk, sugar, cotton and other kinds of co-operatives,’ says Murukumbi. So Renuka Sugars employed the same format in a public limited company.

Vidya Murkumbi, the Chairperson of SRSL, spoke to many farmers in over 80 villages and urged them to invest in the project. In return, it was promised that Renuka Sugars will buy their sugarcane produce and make prompt payments. Their pitch was simple. There was an oversupply of sugarcane in the district. Farmers were travelling as far as 70 km to Raibag in order to sell their sugarcane. Moreover, there were payment delays. This problem was solved when SRSL set up a plant in Belgaum. They gradually increased sugarcane off-take and made prompt payments. In return, each farmer was asked to buy at least 500 SRSL shares at ₹ 10 each. It was not easy convincing everyone and most of the farmers invested only after they saw the mill coming up. In the end, 9900 farmers bought the story and the stock. In many cases, the farmers had borrowed money to buy the shares of SRSL. This was the defining moment for Renuka Sugars.

INDIAN SUGAR INDUSTRY: A VIEW FROM THE TOP

India contributes to about 12 percent of the world sugar production with an expected annual sugar production of 25 million tons (as per Indian Sugar Mills Association) in 2010–11 (see Table 9.1).

The following are the key points of Indian Sugar industry:

• There are five million hectares of land that have been allocated for sugarcane cultivation with a productivity of 69 tons on each hectare.
• There are 624 sugar factories dispersed over Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu and other states, with an average sugarcane crushing capacity of approximately 3500 TCD (tons crushed per day).
• It is the second largest agro-based processing industry after the cotton textiles industry in the country, involving more than 4.5 crore farmers in sugarcane cultivation.ⁱⁱ

 

SRSL’S STRATEGIES: HOW IT ALL BEGAN

By September 2008, SRSL emerged as the most valuable sugar company in India with a market capitalization of ₹ 28,400 million. In doing so, it enhanced the value of shareholding of all those who invested in the IPO (Initial Public Offering) in 2005 by 261 percent (from the date of listing), even as the Bombay Stock Exchange index increased by only 63 percent and the sugar industry passed through a challenging downtrend.^iv

The company’s business operations were segregated into five divisions as shown in Figure 9.1:

• Sugar Milling Division
• Ethanol Division
• Power Division
• Sugar Refining Division
• International Sugar Trading Division

Narendra Murkumbi tirelessly worked towards making Renuka Sugars a fully-integrated company, giving it a unique competitive edge.

SRSL was able to outperform the broad stock market index and the industry valuation for two important reasons: adopting a unique differentiated corporate strategy and its effective execution.

Differentiated Strategy^v

Shree Renuka Sugars had always believed that the older an industry, the greater the room for differentiated strategy. The reason for this belief was because business was always done in a conventional way. The sugar industry in India was a relevant example. Even as global commerce evolved rapidly the changes that filtered down to the Indian sugar industry were few and cosmetic. The result was a widening divergence between industry reality and possibility.

Shree Renuka Sugars responded proactively to this mismatch. For example:

• The industry believed ethanol and power were by-products, which reflected in their investment size and commitment. SRSL placed equal importance to these products and the revenue and profit earned through sugar. While other sugar companies struggled to setup ethanol capacities, SRSL transformed the problem into an opportunity through the proactive acquisition of a majority control of KBK-Chem. Engineering Ltd, an ethanol technology company, Pune.
• The industry’s assets idled for a major part of the year when sugarcane could not be harvested. SRSL utilized its idling assets at the mills by converting raw sugar into the final refined products.
• The industry preferred the green field route for increasing scale and bought either the assets or the companies outright. SRSL preferred to lease assets of sick sugar mills, thereby saving the high acquisition costs as well as leveraging its turnaround capabilities.
• The industry preferred to focus on sales of general sugar varieties to the larger consumer market. SRSL started selling refined sugar products to industrial/institutional customers like Nestle, Cadbury, Dabur and other pharmaceutical and chemical companies.
• The industry largely focused on the large and growing domestic market. SRSL explored the European market for export of their products

Differentiated Execution^vi

SRSL reinforced its organizational differentiation through the successful implementation of the following:

• SRSL successfully transitioned from direct sugar manufacture to trading, refining and downstream processing of products to sell ethanol and power via co-generation. This enabled SRSL to have multiple revenue streams.
• SRSL transitioned from scaling up profitable plants to the turnaround of losing plants, a far more challenging exercise involving the effective management of diverse site blockers. In doing so, SRSL enhanced the average utilization levels from 30 percent (pre-lease) to an average of 110 percent in two years and reached breakeven point within a year of acquiring management control.
• SRSL produced more output (20 MT of sugar per TCD, i.e. Tons Crushed per day Capacity) than its industry peers. This was twice the average output of the sugar industry in Uttar Pradesh (UP) and 20 days longer per season compared to most regional peers. At SRSL, the sugar season lasted an average of 200 Days.
• SRSL expanded its focus from the Indian market to the global market and accounted for the major share of India’s international sugar trade.
• SRSL’s sugar factories are strategically located in western India where the average sugar recovery rate is 11 to 12 percent. This is higher than the recovery rate for sugar mills in UP.
• Thus, SRSL was able to combine and cater to three different industries: sugar, bio-fuels, power co-generation.

With such clever strategizing, Murkumbi, armed with a management degree from Indian Institute of Management, Ahmedabad, turned SRSL into one of India’s largest sugar companies. With a market capitalization of ₹ 6,600 crore, it also became India’s most valuable sugar company in just over a decade (see Table 9.2). It was reported that the stock market value of the company was higher than the market cap of companies like Bajaj Hindustan (₹ 2,750 crore), Balrampur Chini (₹ 2,400 crore), Triveni Engineering (₹ 3,000 crore) and E.I.D. Parry (₹ 3,100 crore).

 

SRSL: STAYING AHEAD OF COMPETITION^VIII

Through extensive integration, SRSL extracted the maximum value out of the sugarcane extraction process not only in order to produce sugar, but also power and ethanol from molasses and bagasse. Hence, its revenue from the non-sugar business increased from 15 percent in 2006–2007 to 28 percent in 2008.

SRSL also became the most preferred supplier for reputed multinational clients like Coca Cola, Pepsi, ITC, Britannia, Nestle and Cadbury among others. Corporate sales constituted about 20–25 percent of SRSL’s gross sugar sales.

SRSL’s unique turnaround strategy to lease sick sugarcane factories rather than build green field factories led to several advantages:

• It reduced the lead time required to commission a new sugar mill.
• It also completely circumvented the need for fixed cost.
• Moreover, with variable costs being directly under its control, it had greater leverage on mill profitability. The cumulative effect of these benefits translated into lower capital investments and a quicker time-to-market.

The effective implementation of this contrarian strategy was reflected in the meteoric rise of SRSL. Over the last ten years SRSL turned around every single one of its sick leased units, creating viability out of a liability.

The company enjoyed one of the industry’s highest capacity utilisation and asset turnover ratios on the back of a longer operating season, higher sugarcane availability in cane and dual raw material capability. It produced 20 tons of sugar per TCD capacity, unlike the top four sugar companies in India, which produce ten tons of sugar per TCD capacity.

SRSL tied up with the Britain-based multinational company, Tate and Lyle plc, which was a £ 4.07 billion organisation and one of Europe’s largest sugar refiners for the company’s refinery business. The international partner provided SRSL robust technical expertise in refining on an on-going basis.

De-risking Strategy

In a conventional sugar mill, the primary product is sugar and the bi-products are bagasse and molasses, which are sold to third parties. However in an integrated sugar mill, it is able to extract the maximum value out of sugarcane by being able to produce value-added products like ethanol, power, and bio-fertilisers from molasses, bagasse and press mud respectively. SRSL is able to process sugarcane into all three co-products i.e. sugar, power, and ethanol. This helped to counter cyclicality of sugar business. Further, the company’s integrated distillery provides several advantages, such as:

• There was no need to sell molasses to third parties.
• Ready power and steam was available for ethanol from the co-generation plant.
• A number of sugar mills in the region do not have attached distilleries. This enables it to have access and to buy molasses as and when required.

Reduced Impact of Seasonality: Processing of Raw Sugar

The manufacturing process at the Munoli and Athani facilities are designed such that they can produce refined sugar from sugarcane and subsequently from raw sugar.

The company’s unique business model operates on two feedstock: sugarcane and/or raw sugar. SRSL, in the intermediate stage, extracts raw sugar from canes and then processes this intermediate raw sugar into refined white sugar. In the off-crushing season, the company runs the second intermediate process, producing refined white sugar on a raw sugar feed. The benefits of such dual feeding are multipronged:

• Greater fixed asset utilisation and distribution of fixed overheads.
• Reduced impact of seasonality of the sugarcane crops.
• Higher level of operations.

The company is one of the few mills in the country to leverage double feed operations

Sales Focused Towards Corporate and Industrial Buyers

Sugar was traditionally sold in the wholesale market to agents and dealers. SRSL believes in marketing sugar directly to corporate and industrial buyers to capture a larger market share. Dealing with corporate and industrial buyers has several benefits like:

• Committed and timely off-take of sugar;
• Scope to fix price in advance and reduce price risk;
• Reduced working capital cost due to increased comfort for working capital lenders; and
• Reduced dependence on brokers for sale of sugar.

Excellent Relationship with Sugarcane Farmers and Extensive CSR Activities

SRSL places huge importance on sugarcane farmers. Being shareholders of the company, these farmers also partake in the company’s profits. It is also ensured that farmers are paid in a timely manner. The company’s trust, Shree Renuka Sugars Development Foundation, focuses on promotion of education, healthcare, overall betterment of the farmers and the local community. It believes this strong relationship is a significant competitive advantage because farmers have no obligation to grow sugarcane and many switch to crops that may be more profitable. It also coordinates and manages the harvesting and transportation of cane, which saves the farmer effort, time and money. This also enables procurement of fresh and mature sugarcane, which increases the recovery of sugar.

Committed and Experienced Management Team

Since the inception of the company, all operations have been executed in a systematic manner. This helped in increasing the manufacturing capacities and gain advantages of economies of scale. Murkumbi pioneered the strategy of acquiring and putting to use leased assets for sugar manufacturing from the loss making co-operative mills at very low costs. This helped the company to scale up its operations within a short span of time.

Human Resources and Prudent Management of Financial Resources

It has a highly qualified and well-trained work force. It believes that it is one of the few sugar companies in India to have in place an Employee Stock Option Plan (ESOP) which rewards the performance of its employees.

SRSL believes that the optimal utilization of financial and other resources is a key element for achieving success in this industry. Its strategy is to focus on capital utilization and structure, so as to optimize returns. It is also actively engaged in the analysis and identification of sugar mills, which would maximize returns, and accord priority to acquire such mills.

SRSL has implemented internal reporting systems that enable it to carefully monitor cash flows regularly. The aim is not to over-extend financial resources in any single project, while at the same time assisting adequate cash flow to be generated for the work to progress. It also endeavours to minimize the cost of capital by regularly reviewing capital requirements.

SRSL’S VENTURE INTO ETHANOL

The Cabinet Committee on Economic Affairs mandated 5 percent blending of ethanol with petrol in November 2009. The ethanol blending program is primarily based on indigenously produced ethanol from sugarcane molasses, which, besides augmenting fuel availability in the country, would also provide better returns for sugarcane farmers. The Indian ministry also recommended an interim ethanol price at ₹ 27 per litre for three years in December 2009, which came into effect from October 2010.

There is a strong demand for baggasse for the paper and biomass-based power projects for producing all grades and kinds of paper. Currently, bagasse accounts for just 0.6 percent of the total power generated, but it has the potential to generate six percent of future power requirements by 2017. The State Electricity Regulatory Commission (SERCs) encouraged the co-generation projects by increasing prices and providing permission to sell a part of power produced through open access in the market.^ix

SRSL introduced integrated ethanol facilities which provided several advantages like:

• It was able to add value to molasses produced from its plants without needing to sell them to third parties.
• Cheap power and steam was available for the distillery from the co-generation plant.
• Effluent (spent-wash) could be processed with press mud into bio-fertilizers and compost.
• A number of sugar mills in its region did not have attached distilleries. This enabled it to buy molasses, if required.

Fuel Ethanol Plants Attached to the Distillery

It is one of the few distilleries which are equipped to manufacture fuel ethanol from ethanol. Fuel ethanol is gaining momentum due to the rising international oil prices. The Government of India is encouraging the use of fuel ethanol as a motor fuel since it is considered to be less polluting. Ethanol is also a renewable source of energy as it is sourced from an agriculture product that can be re-grown. The Indian government has also mandated blending of fuel ethanol in petrol of an average of 5 percent across the country. It supplies fuel ethanol for blending in petrol to various oil companies, such as IOCL, HPCL and BPCL.

SRSL created India’s largest ethanol capacity (930 KLPD) in response to the growing optimism, following Government of India’s statutory directive for blending five percent ethanol with petrol. The company supplied 39 million litres of ethanol in 2007–2008. For every litre of alcohol produced, the company generated a mere three litres of liquid waste (compared with the industry average to 10 to 12 litres).

During the year 2009–2010, the company received letters of intent for supply of 118 million litres of ethanol to the oil marketing companies (Indian Oil Corporation Ltd, Hindustan Petroleum Corporation Ltd, and Bharat Petroleum Corporation Ltd) for supplying ethanol to the states of Karnataka, Andhra Pradesh, Kerala, Goa and Maharashtra for a period of one year.^x

Government Policy Encourages Co-Generation

The Government of India has prescribed that a certain percentage of energy from alternative sources has to be purchased by distribution companies and also allowed open access. This would enable SRSL to sell power to third parties also. The electricity regulatory commissions of Maharashtra and Karnataka have also prescribed preferential tariffs for electricity produced from renewable energy sources including co-generation.

RENUKA SUGARS: THE BRAZIL CHAPTER

Sugar is one of the world’s major agro-based industries as shown in Table 9.3. In November 2010, global sugar production stood at 168.95 million tons, increasing 5.27 percent over that of the previous year. Brazil is the largest and among the lowest cost producers of sugar in the world, followed by India (which is also the world’s largest consumer), the European Union and China. This country accounts for over 70 percent of global raw sugar exports.

High global prices have encouraged Brazil to produce sugar for export. (The Brazilian government gives sugarcane growers the freedom to allocate their resources either to produce sugar or ethanol depending on their relative international prices. During 2010–11, Brazil produced 33.5 million MT of sugar out of which around two-thirds of the production was exported, accounting for more than 48 percent of the global trade flow. In 2009–10, India had become the largest sugar importer.

 

 

Brazil is also the second largest producer of ethanol preceded only by the USA. The demand of ethanol has increased in Brazil with the advent of flexible-fuel vehicles in 2003. Currently, Brazil’s sugar/ethanol production mix is 55 percent skewed in favour of ethanol production. Ninety percent of the ethanol produced in Brazil is consumed domestically. The industry also helps the country to de-risk itself from the rising crude oil prices by providing bio-ethanol for fuelling of flexible-fuel vehicles. Flexible-fuel cars represent around 40 percent of the Brazilian fleet (see Table 9.4).

 

THE BRAZIL FORAY

In 2006, Narendra Murkumbi got tired of running the sugar business in India, parts of which he was unable to control, due to excessive interference from government agencies. He decided to lessen the risk by going to other sugar-rich countries. He initially zeroed in on Mozambique and Zimbabwe in Africa but rejected the idea since these countries were political tinderboxes. Australia was too far and did not have a big enough market. Brazil, though relatively far away like Australia, was chosen because it was and still is the largest producer of sugar in the world (20 percent of global production). Its government welcomed foreign investments and most importantly, it was a free market. In 2006, when he decided on Brazil, the world economy was on a roll and the South American nation was discovering that ethanol, a by-product of sugar, could be blended with fuel on a commercial scale. Ethanol-blended fuels were cleaner and cheaper. This made sugar companies coveted assets and very expensive to buy. ‘Also, we were small then,’ adds Murkumbi, ‘so, we didn’t do anything that time.’

SRSL and Brazil: Complimentary Strengths

Three years later, in 2009, Murkumbi made his move. The time was ripe. SRSL’s net worth and cash had both increased six-fold in 2009. The Brazilian sugarcane crop was a washout due to excess rainfall. This was burdensome for the Brazilian sugar companies since they were already in debt. The Brazilian Real had depreciated against the dollar, increasing the value of the loans taken by these companies. Many defaulted, and amassed huge losses. ‘We looked at 5 to 6 companies and selected two of them,’ says Murkumbi.

In November 2009, SRSL acquired complete control of Vale do Ivai SA Acucar e Alcool (VDI). This is a sugar and ethanol producing company, which has two production facilities. It has a combined sugarcane crushing capacity of 3.1 million tons per annum. Vale also has a share in logistics assets, including terminals for storage and loading of sugar and ethanol, at the port of Parangua. SRLS paid ₹ 380 crore for full control of an enterprise which was valued at ₹ 1100 crore. It was decided that the balance of debt would be paid over the next 8 years with the proviso that the company will use the proceeds generated from the existing business in the first three years to expand capacities in the company.

In February 2010, SRSL signed an agreement to buy a 50.34 percent equity stake in Equipav SA Acucar e Alcool (Equipav), a leading sugar and ethanol producing company. After re-negotiating the price in view of the changed global scenario, the company paid $250 million. Equipav has two modern sugar-cum-ethanol producing plants in Sao Paulo with a combined cane crushing capacity of 10.5 million tons per annum. It also had a co-generation capacity of 295 MW. The balance equity stake will be held by the Equipav group. SRSL increased its stake in Equipav to 59.4 percent in 2011–12.

In India, SRSL was struggling to put in place an assured and cost-efficient supply of raw materials. This would either be sugarcane or its next stage, raw sugar (which eventually gets refined into the sugar we eat).

‘Our Indian mills are running at 50–60 percent capacity due to a shortage of cane,’ says Murkumbi. The Brazilian acquisitions would fill this void. ‘This investment brings us closer to building a global sugar and ethanol business combining the most cost-efficient and scalable production areas in the world along with a leading presence in the largest ethanol and sugar markets of the world,’ adds Narendra Murkumbi.

On 5^th February 2009, Group Equipav had shortlisted five companies that were bidding for Equipav SA.Shree Renuka Sugars outbid Noble Group (Hong Kong) which had an equity investment from the Chinese Government. By now, Shree Renuka was being seen as a serious bidder in Brazil (see Figure 9.2). In the great Brazilian distress sugar sale it was rubbing shoulders with the likes of Louis Dreyfus of France and Bunge from the US (the largest and second largest sugar companies in the world).^xiii

THE SECRET BEHIND THE BRAZILIAN ACQUISITIONS

‘Equipav has one of the biggest and most vertically integrated, modern, operations in Brazil, with economies of scale and opportunities to form a cluster of contiguous mills; hence the partnership with Group Equipav,’ said Murkumbi.

International bidders like Louis Dreyfus of France, Bunge from the US and the Noble Group from China wanted to buy Equipav SA. But Shree Renuka’s track record in India-of using acquisitions to become the largest producer and the way it structured the deal for Equipav tilted the scales in its favour. First off, it agreed to buy only 50.34 percent, and not 100 percent. ‘They (the promoters of Grupo Equipav) did not want to sell their entire business at distress value,’ says Murkumbi. However, he has the option to acquire the balance over a period of five years.

Next, Shree Renuka said it would invest and retire debt, and strengthen the business. Of the $85million to be paid for Vale do Ivai (VDI), $65 million would be used to retire debt, and $20 million to meet capital expenditure and working capital. Similarly, for Equipav, Shree Renuka would be paying $250 million. The entire capital would be infused in Equipav towards new capacities, working capital and pre-payment of debt.

The terms of the deal worked out with the Brazilian Banks were:

• The debt of ₹ 3,800 crore from the two acquisitions would be restructured. Shree Renuka would repay the debt over period of eight years, after a three-year moratorium. The average debt cost worked out to 7.5–8 percent.
• Shree Renuka would be using a mix of internal accruals (in the previous year, it had a cash profit of ₹ 1,200 crore) and share reserves (₹ 685 crore raised over the past year) to pay for the deal.

The cost of acquisition for VDI worked out to $77 per ton of sugarcane crushing capacity, which was lower than the replacement cost of $120–$130 per ton. The initial cost of acquisition of Equipav was higher at $119 per ton. During the next six months as the world sugar market went into a downturn, Renuka Sugars renegotiated the deal with Equipav group and reduced the final price for Equipav SA to ₹ 1200 crore.

Backward Linkages

The two acquisitions would place SRSL in a different league all together. For one, it would secure backward sugar linkages for SRSL. The two companies in Brazil have a captive access to sugarcane cultivation. Equipav has a captive supply of 115,000 hectares of which two-third is cultivated by the company through mechanised harvesters. One lakh hectares is on long lease. VDI has access to a cultivable area of 28,000 hectares.

Renuka Sugar’s Brazilian Edge

As per the Brazilian practice of ‘Consecana’ cane farmers and mill-owners share a 60–40 ratio of price realization of sugar. This is a payment model, which acts as an arrangement between sugar and ethanol producers and sugarcane growers to share risks and profits.^xiv This is worked over a 12-month cycle. Given the favourable growth environment, the yield per hectare in Brazil is much higher than India, as the planted crop can be cut 8–10 times as against 2–3 times in India. The average yield in India is about 60 tons, whereas Brazil produces 80 tons per hectare. Recovery of sugar from the sugarcane is also higher at 13–14 percent as compared to an average of 10 percent in India.

‘The sugar industry is to Brazil what IT is to India,’ remarks Murkumbi. Nearly 60 percent of sugar from Brazil is exported to the Middle East, East Africa and South East Asia besides India. Brazil is also the largest producer of ethanol, accounting for 55 percent of the world’s production. Brazil’s exports of refined and raw sugar account for roughly $4 billion.

Depending on the global prices, sugar producers in Brazil have the freedom to change the sugarbiofuel mix to get the best realisation from cane crushing. Ethanol, which is marketed as ‘alcool’, is used in large quantities as automobile fuel, either as an additive or stand-alone fuel. Nearly 90 percent of the new cars in Brazil have flexi-fuel capabilities, allowing them to run on either petrol or alcool, depending on the prices (see Table 9.5).

 

SRSL also has the option to export raw sugar from its Brazilian plants to its refineries in India and sell refined sugar in domestic markets. It can also export to nearby countries in the Middle East or South East Asia. While the margins in processing raw sugar are lower, as compared to those from crushing cane, the refineries at Haldia and Kandla help generate good volumes throughout the year when the sugarcane crop in India is impacted by dry weather. Raw sugar refining capacity also ensures a better capacity utilization of the assets as against those which depend totally on the sugarcane crop. This ensures that Renuka’s sugar mills in India run all year round compared to the latter case when the assets are utilized just 150 days in a year.

Creating a Sugar Trading Hub: The Dubai Chapter

Apart from securing raw material linkages, SRSL has also setup a trading hub in Dubai to leverage on the trading opportunities in one of the largest producing and consuming markets. Brazil consumes nearly 12.25 million tons of the estimated 32 million tons it produces and exports the rest. SRSL is also looking at exploiting opportunities in Africa through its unit in Mauritius.

Murkumbi does not believe that he will be spreading himself too thin by extending his exposure across multi-locations. He intends to retain the same management teams for Vale do Ivai and Equipav in Brazil. Shree Renuka enjoys another advantage from its Brazilian acquisitions. It is the presence among the main ethanol producing countries in the world. Even the US is veering around to the view that ethanol produced from sugar cane is the most viable variety, as compared to corn. It has been categorized as an ‘advance fuel’ and is one of the reasons for many global companies, such as Royal Dutch Shell, Cargill and Petrobras, making a bee-line to take over sugar companies in Brazil.

The Brazilian buys enable Shree Renuka to bring one million tons of raw sugar (75 percent of which comes from its own farms) into India per year, which can service its entire current refining capacity. The off-take of refined sugar should not be a problem. The demand for sugar in India and in nearby countries is growing by one million tons a year.

Murkumbi’s Dilemma in Brazil

The Brazilian subsidiary made a substantial loss of ₹ 57.03 crore for the quarter ending September 2011. This was the result of the failure of the sugarcane crop in Brazil. ‘Our sugarcane crushing figures for the year is now expected to be 8.3 million tons versus 10 million tons which we were expecting earlier. Renuka do Brasil is particularly making losses. Though it’s still making cash profit, but on a Profit After Tax (PAT) basis it is a loss,’ said Narendra Murkumbi (Profit after Tax.)

During the financial year ending in September 2010, SRSL’S consolidated adjusted debt increased to ₹ 6,508 crore from ₹ 1,343 crore in the previous year. It comprised of ₹ 4,580 crore of long term debt and ₹ 1,928 crore of short term debt.

This increase in debt was due to the company’s acquisition of Renuka Vale do Ivai (acquired in March 2010) and Renuka do Brazil (acquired in July 2010) as well as its working capital requirements. The heavy increase in debt resulted in increase in SRSL’S financial leverage.

Narendra Murkumbi and Gautam Watve, Renuka Sugar’s Head of Strategy and Planning, strategized on taking immediate steps to resolve this urgent crisis.

SRSL: CASE UPDATE

During the 18 months ending on 31st March 2012, SRSL was continuously challenged by the adverse weather conditions in Brazil and a grim global macro-economic environment. It reported a consolidated net loss of ₹ 302 million for the 18-month period (see Table 9.6).

 

 

Its bigger Brazilian subsidiary, Renuka do Brasil SA reported operating EBITDA (Earnings before interest, taxes, and depreciation) of ₹ 7,798 million but a net loss of ₹ 3,995 million for the 18-month period. The standalone indian business, international trading business and the other Brazilian subsidiary, Renuka Vale do Ivai remained profitable. In terms of overall operations, the company was profitable with a consolidated EBITDA (Earnings before Interest, Taxes, and Depreciation) margin of 16.3 percent for the 18-month period as compared to 15.9 percent for the previous financial year.

FURTHER ISSUES IN BRAZIL: SUBDUED PERFORMANCE

The Company fell short of its expectations in Brazil—specifically in Renuka do Brasil. Two successive years of drought in 2010 and 2011, followed by two instances of frost (the temperature went below 4°C) and flowering, had affected the productivity of sugarcane and thereby, availability of cane for crushing. The entire industry in Brazil, including Shree Renuka Sugars, became victim to the drop in yields, which was higher than what most companies expected.

CHANGE OF EVENTS: SRSL’S TURNAROUND STRATEGIES

The 18-month period saw a turnaround of its other subsidiary in Brazil, Renuka Vale do Ivai. With good operating performance and lesser impact of the adverse weather, Renuka Vale do Ivai performed significantly well with EBITDA margins of 38 percent for the 18-month period. Both Renuka do Brasil and Renuka Vale Do Ivai undertook an accelerated sugarcane plantation programme, cumulatively planting 25,000 hectares of land. This was relatively higher than the industry average in Brazil. Hence, SRSL expected improved cane availability to lead to higher asset utilisation. Operational turnaround of Renuka do Brasil would require two seasons of assured cane availability. SRSL implemented a comprehensive cost reduction programme in Renuka do Brasil to bring down overheads and costs, which in turn would improve its profitability.

Favourable Developments in India

In Renuka (India), SRSL’s cost of production is one of the lowest in the country. In its milling division, it witnessed the best recoveries it ever had in the history of the company. The overall recovery percentage of sugar while crushing sugarcane was 12.02 percent. Recent changes in Indian export policy augur well for the domestic business. As on 12^th May 2012, the Government of India opened the door for sugar exports. Shree Renuka Sugars benefited from the new open export policy as its refining and milling assets are close to the port and are capable of producing high quality refined sugar for the discerning markets in the Middle-East and Asia Pacific.

Establishing a New Profit Centre with Refining Operations

SRSL revolutionised the traditional Indian sugar industry by setting up two port-based refineries at Kandla and Haldia to produce high quality refined sugar from raw sugar which can be procured from both the domestic and global market. The locations of these refineries gave it the opportunity to access markets in Asia and the Middle-East. The flexibility of procuring raw sugar from either the domestic or global market helped it benefit from the price differentials.

Given the favourable export market conditions, SRSL expects refining to play a positive role in its future performance.

THE WILMAR INTERNATIONAL DEAL

In February 2014, Singapore - based agri-business group Wilmar International, the world’s largest palm oil manufacturer, acquired a strategic stake in SRSL for ₹ 1200 crore helping it to cut debts and forge a global alliance. ‘This is a path-breaking move in the sugar business which would create a very strong partnership in some of the key global markets for sugar. Wilmar’s leadership position in the edible oil business globally and its strong reach in several countries across the world would be synergistic with our large footprint in India and Brazil, the two largest sugar producers in the world’ said Narendra Murkumbi.

 

 

SRSL slipped into the red after its Brazil deals sharply raised its finance cost. Presently its debt is above ₹ 8,700 crore. The deal with Wilmar will help cut its debt by ₹ 1240 crore.

STRUCTURE OF THE WILMAR DEAL

The three part transaction is structured in such a manner that the Singapore-based, agri-business major and the Murkumbi Family will hold equal stakes varying between 27.5% and 37.5% in the company.

The first part of the deal will see Wilmar subscribing to 257.5 million prefential equity shares of Renuka Sugars at a price of ₹ 20.08 per share for a total investment of above ₹ 517 crore. After this transaction, Wilmar and the Murkumbi family will hold 27.5% each in the company.

The second step will involve an open offer for up to 26% of the expanded equity share capital of the company at a price of ₹ 21.89 per share. Wilmar and the existing promoters of Renuka Sugars, will then jointly participate in a rights issue to raise up to ₹ 725 crore.

The pricing of the rights issue will be decided later. The promoters will subscribe to the unsubscribed part of the rights issue to maintain their equal stakes.

FOOD FOR THOUGHT

Shree Renuka Sugars’ deal with Wilmar International Ltd has two main issues that is hurting the share price. First is the price at which Wilmar brought a 27.5% stake in Renuka Sugars.

The second issue which will have a longer term impact on the company’s stock as well as financial performance. Had Renuka Sugars raised the $200 million from a financial investor, there would have been little problem. But Wilmar International is a completely different cup of tea.

Wilmar International is ranked amongst the largest listed companies in terms of market capitalisation on the Singapore Stock Exchange. It is the largest producer of palm oil in the world and along with Renuka Sugars is among the top 10 sugar producers in the world. With a turnover of nearly $45 billion, it completely overshadows Renuka Sugars’ $1.8 billion sales.

Purely in terms of sugar business, Renuka Sugars is bigger than Wilmar, however, its precarious financial position has resulted in the company management conceding its freedom to operate. A financial investor would have towed the line Renuka Sugar management wanted it to, but with Wilmar sitting in the co-pilot seat, it would be difficult if not impossible for Renuka Sugars to expand without hampering Wilmar’s plan.

For Wilmar, Renuka Sugar allows it to establish its footprint across the world. Being on the Eastern side of the globe, Wilmar’s revenue from sugar business comes in the last two quarters of the calendar year. But with Renuka Sugars under its belt, it can show revenues from sugar for the entire year (India 1st and 4th quarter and Brazil 2nd and 3rd quarter). Further Wilmar through Renuka Sugars gets an entry into India—the world’s largest sugar consumer.

The only short term advantage Renuka Sugar has is that it will bring down its mountain of debt of ₹ 8,848 crore by ₹ 1,200 crore. This, however, will not be sufficient to make the company profitable, given the supressed sugar sector cycle and its own high level of interest outgo and depreciation.

Did Renuka Sugars commit the two cardinal sins of investment banking?

It bought assets at the peak of the commodity cycle and sold its stake at the bottom of the cycle. Are its shareholders now paying the price?

QUESTIONS FOR DISCUSSION

1. What was the unique strategy which catapulted Renuka Sugars to the No.1 position in the Indian Sugar Industry within just 15 years?
2. Comment on Narendra Murkumbi’s Strategy of including sugar cane farmers as stakeholders in SRSL.
3. What was unique about SRSL’s differentiated strategy? What factors contributed to its successful implementation?
4. What steps did SRSL take to ensure that its Sugar Factories could run all year round?
5. As part of its derisking strategy, what steps did SRSL take to transform itself from a direct Sugar Manufacturer to trading, refining, and downstream processing of products to sell ethanol and power via Co-generation and to create multiple revenue streams?
6. Why did SRSL venture into Brazil?
7. In view of the Iraq crisis and rising crude prices, what steps should India take to emulate Brazil’s strategy of blending more and more ethanol with petrol for automobiles to boost India’s troubled Sugar Industry?
8. What gave SRSL the edge in taking over the two Brazilian Sugar companies inspite of stiff competition from large MNC’s like Louis Dreyfus of France, Bungee of the USA and the Chinese government owned Noble Group of Hongkong?
9. What are the main features of SRSL’s unique Business Model?
10. Discuss the merits and demerits of the SRSL-Wilmar deal.

END NOTES

1. (Shree Renuka Sugars Limited)
2. (SRSL Annual Report, 2009–2010)
3. (SRSL Annual Report, 2009–2010)
4. (SRSL Annual Report, 2007–2008)
5. (SRSL Annual Report, 2007–2008)
6. (SRSL Annual Report, 2007–2008)
7. (Peer Group Comparison, 2009)
8. (SRSL Annual Report, 2007–2008)
9. (SRSL Annual Report, 2009–2010)
10. (SRSL Annual Report, 2009–2010)
11. (SRSL Annual Report, 2009–2010)
12. (SRSL Annual Report, 2009–2010)
13. (Murukumbi)
14. (SRSL Annual Report, 2009–2010)
15. (Shree Renuka Sugars Limited )
16. (Shree Renuka Sugars Annual Report, 2010–2011)