Merill Lynch has downgraded Shri Renuka Sugars on a number of factors – Indian govt steps to reduce buffer stock of about 5mn tonne sugar to reign in inflation coupled with prospect of good monsoon has increased supply side risk. Over 15% additional sugar cane production in Brazil has raised supply pressure and US Congress approval of farm bill on 15th May08 maintaining import tariff barrier on ethanol a deterrent too.
Renuka faces the risk of higher molasses cost to double production to 900KLPD in FY09E as its internal production of molasses could meet only half of its capacity. Price molasses has gone up by over 50% recently due to lower stock and may increase further due to lower production.
Renuka Sugar is already trading at a PE of 14.3x FY09E and close to estimated fair value of Rs139. Investors can Book Profit and Exit the stock and look at other promising growth stories.