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 and
ethanol 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 India’s 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 50

ICUMSA). The company’s phosphorisation process produces sulphurless sugar for direct
consumption 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. Açúcar e Álcool
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. Equipav’s
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 of
Brazil 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 global
consumption. 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 million
hectares.

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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 production
increased 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-range
product 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 sugar spot
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 (world’s 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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PROBABLE PROBLEMS TO BE FACED BY THE
COMPANY:
1. The acquisition was based on the assumption that sugar prices would continue to rise
globally in coming years due to the increase in consumption. But the prices of sugars may
also come down due to many reasons. this would result in decreased profitability

2. Problems faced by local community as was evident in the TATA Singur project, on the
grounds of employment etc

3. Increased competition

4. Repayment of Equipavs debt worth Rs. 3821 crores

5. Capital restructuring to be done

6. Dilution in existing shareholders stake as the company plans to fund the acquisition
through qualified institutional placement worth Rs 500 crore.(Qualified institutional
placement (QIP) is simply the means whereby a listed company can issue equity shares,
fully and partly convertible debentures, or any securities other than warrants which are
convertible to equity shares to a Qualified Institutional Buyer)

7. Rs 500 crores to be injected towards increasing the working capital of equipav.

8. Adherence to the legal regulations of two countries

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