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Sunday, March 13, 2011

Renuka Sugar's Brazilian focus-time to change auditors, listing & valuation norms?

While reading the Sep-10 Annual report of Renuka Sugars(available from the BSE site here), I noticed some indicators about the company's growing presence in Brazil(both on assets and revenue front. Given the supply constraint on Indian cane, the bulk of the physical cane production/crushing will continue to come from Brazil. 

This is further brought out by their revenue, cash flow and asset concentration as in the table below.  It is surprising that such a reputed listed company is not having the Indian auditor verify its Brazilian assets.
Shree Renuka Sugars 2009-10 Audit Status INR Million
Audited by             Revenue Cash Flow Assets
Indian Statutory Auditor 12230.06 -2627.94 7050.63
Brazilian Auditor 12457.89 3536.59 97142.12
Total 24687.95 908.65 104192.8  
Though the company does not disclose geographic segments, it seems quite likely that Brazil would make up a sizeable chunk of the overall valuation. Given that, and the geographic separation of Brazil from Indian investors, it may make sense to go for a Brazilian ADR, and appoint a global auditor(Big4/BDO etc) who have presence in both India and Brazil. This will allow
  1. Better valuation/price discovery for Renuka Sugars via hopefully better informed Brazilian investor base
  2. The audit opinion to get a better credibility. In my view, the audit opinion(specially based on such partial data) is not that reliable. I'm no fan of global auditing firms but in such circumstances there does not seem an option.
  3. Also, we should consider using SOTP approach to value Brazilian and Indian arms separately.

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