Brazil, the world’s biggest sugar producer, is finally set to dance with India,

the world's biggest sugar consumer — through Renuka do Brasil

BY Dibeyendu Ganguly

Show girls in Passista bikinis and feathered headresses do the samba on dance floor.
The bar serves up Caipirinha, a mix of cacasha, sugar and lime, Brazil's national cocktail.
Shree Renuka Sugars (SRS) is throwing a party to celebrate its acquisitions in Brazil
and the roomy interiors of Dragonfly, a south Mumbai hot spot, is filled with investment
bankers, commodity traders, stevedores, consultants. Sitting in a wheelchair near the
dance floor, Vidya Murkumbi, executive chairperson of SRS, graciously accepts
congratulations from her guests. The doughty 66 year old has a fractured toe, but has
nevertheless flown in from Belgaum to attend. What does she think of SRS's transition
from an earthy, farmerowned company named after the local goddess to a swinging
multinational with half its assets located abroad? "It was the only way to grow," she
shouts over the music. "I think it is an achievement." The chairperson is not boasting, at
least, not personally. Still based out of Belgaum, where the company started, Vidya
Murkumbi has never been to Brazil and has very little to do with the acquisitions. The
achievement she's talking about belongs to step-son Narendra Murkumbi, the vive-
chairman & managing director of the company.

Murkumbi has always been big on size. Returning home to Belgaum with an MBA from
IIM-Ahmedabad in 1994, he started a fairly successful bio-pesticide venture which he
later gave up because it had hit a revenue ceiling of Rs five crore and he "couldn't scale
up." So he moved into sugar — a major industry in the Maharashtra-Karnataka border
region where Belgaum is located — which the government had just opened up to private
investment. Sugar definitely lends itself to "scaling up" and in 12 years, SRS has grown
to become India's biggest sugar company, overtaking old-timers like the Shrirams and
Bajaj. How did he do it? "I guess we just got caught up in the mood of confidence in the
country," says Murkumbi.

Murkumbi is a man in a massive hurry. Only one of SRS's seven manufacturing units in
India has been built from scratch while all the others have been acquired or leased.
Murkumbi entered the business at a time when numerous mills in the co-operative sector
were up for sale and this enabled him to ramp up capacities rapidly. By 2009, SRS had
swallowed all that was available, but it was still hungry. That's when it turned its sights
on the world's largest sugar producing nation — Brazil. "At that point we wanted to take
a quantum leap through one big acquisition," says Murkumbi.

Once again, the timing was just right. The Brazilian sugar industry was reeling from the
recession and several companies had defaulted on their debt. In May 2009, Murkumbi
sent Gautam Watve, head of strategy & planning, to scout around for potential targets.
After preliminary meetings with merchant bankers, consultants and people from the
Brazilian industry, it became obvious that SRS had quite a choice. "There were lots of
companies up for sale, but few buyers," says Watve. "These companies had invested in
expanding their operations through the boom years, using foreign debt. Many had run
into problems with currency derivatives after the meltdown. They were all strapped for
cash."

Armed with this knowledge, SRS raised Rs 500 crore though a qualified institutional
placement (QIP) in July 2009. It also budgeted Rs 800 crore of internal accruals and Rs
185 crore through conversion of warrants into equity. Chief Financial Officer KK
Kumbhat, who was responsible for administering the money, says: "When we raised the
funds there was still no specific acquisition target. We had to hold on to the money for
eight months. It was quite a relief for me to deploy it."

SRS's first acquisition in Brazil was Vale Do Ivai (VDI), a company that had, ironically,
run into problems because of the debt it had taken on for an expensive acquisition of its
own. Rabo Bank had a sell mandate on the company, but had found no buyers till SRS
came along and offered to pay $82 million for a 100% stake. What gave Murkumbi the
confidence to bid for a company that no one else wanted? "It's because I know this
business," he says. "VDI owns a share in the loading terminal at Paranagua, Brazil's
largest port for agricultural exports. Given that logistic costs generally form 30% of the
total cost of sugar, it's an important asset."

Even as SRS was wrapping up the VDI deal, another Brazilian sugar company was
placed on the block, and this time there was world-wide interest. Equipav is one Brazil's
largest, most modern sugar companies, with a cane crushing capacity larger than SRS's
own. This time around, SRS roped in Brazil's largest bank and law firm of Veirano
Advogados as its advisors. "It was a very steep learning curve for all of us," says Watve.
"In Brazil, English is only spoken in the cities. Elsewhere, everyone speaks Portuguese,
which we had not enough time to learn. All the documents were in Portuguese and our
consultants had to translate the critical documents and give us a gist of everything else."

Nine global companies lined up for the preliminary due diligence and six made non-
binding offers for Equipav. When the list of contenders was announced, SRS was
competing with American agro-processing giant Bunge and the Noble group of China.
After a confirmatory due diligence, the three companies made their binding offers in
February. Thereafter, SRS announced that it had won the bid and would be buying a
51% stake in Equipav for $329 million. Three months later, with the deadline for
completing the transaction passed, the news was out that deal had fallen through and
was being renegotiated. What exactly happened?

Watve says the delay in completing the transaction within the initial deadline was due to
the three Brazilian families who own Equipav having last-minute differences. Murkumbi
refuses to comment at all, saying the Brazilian families remain partners and he doesn't
want to upset them. Be that as it may, SRS obviously benefited big-time from the
renegotiation. With world sugar prices falling by half in the intervening period, the
company finally clinched the deal for $250 million.

The promoters of Equipav invited both Bunge and Noble back to the negotiating table
and the fact that they still went with the revised SRS offer, down by $79 million, speaks
for the company's ability to build relationships. "Our terms were still the best," says
Watve. "One of the other bidders wanted a 100% stake, which the promoters didn't want
to give. The other wanted 51% with limited minority shareholder rights. We've given our
Brazilian partners full rights with the option of an exit route in three years."

This time around there were no delays in completing the transaction. Once it had taken
over management control of Equipav, the SRS team in Sao Paolo began negotiating
with 27 banks to restructure the company's debt. The final deal: a three year moratorium
on repayment of principal, to be followed by a phased seven year payback. In the
coming years, half of SRS's consolidated turnover will come from its operations in Brazil.
And profits? "These were distressed companies when we bought them, so it will take
time before they start contributing to the bottom line. But the turnaround is happening
faster than I expected. We should see a full operational turnaround in less than a year,"
says Murkumbi.

SRS is now the biggest Indian investor in Brazil and its assets there include hi-tech
sugar mills, large swaths of leased land under sugarcane and some very talented people.
The company's rapid growth has often made for a managerial talent crunch in the past.
Most of the top executives at SRS, including those that led the Brazil acquisition, have
been with the company for less than five years. For example, CFO KK Kumbhat, an old
hand in the sugar industry, left Bajaj Hindustan to join SRS in 2008. Gautam Watve —
now SRS’s man-on-the-spot in San Paolo — is a post-graduate in project management
from the Stevens Institute of Technology, New York, and joined SRS five years ago. But
now Murkumbi has access to a whole league of Brazilian managers and says, "Our next
COO may very well be Brazilian."

The acquisition also marks the interesting — some might even say inevitable — coming
together of the world's largest sugar producer and the world's largest consumer. Brazil
accounts for 20% of global sugar production while India accounts for 15% of global
consumption. SRS has long been a major importer of raw sugar from Brazil, which it
converts into white crystalline sugar. The company has a dedicated refinery for this
purpose at the port of Haldia and is set to commission a second one at Kandla next year.
"The Haldia unit supplies to the east, which is a sugar deficient market since no cane is
grown there. Our supplies have greatly reduced the price volatility in this markets. The
Kandla unit will soon do the same for the western region of Delhi Rajasthan, Punjab and
Haryana," says Kumbhat.

SRS's move into Brazil is also a consequence of government control over the industry
and the limited prospects for added sugarcane cultivation in India. "India and Brazil are
complimentary economies," says Murkumbi. "Brazil is an agricultural powerhouse, with
lots of rain and no irrigation constraints. India is the opposite."

In the first week of September, just in time for the Dragonfly party, Equipav was formally
renamed Renuka do Brasil. Now while Murkumbi goes about consolidating an operation
that has more than doubled in size, his chairperson is making other, altogether different
plans.

SRS generates 175 MW of electricity through small bagasse-based power plants, but in
chronically power deficit Northern Karnataka, this is not enough. Vidya Murkumbi is
planning to set up a full fledged coal-fired power plant in Belgaum and has already
begun the process of acquiring land. Why power? "It's always been my dream," she
shouts over the music.
dibeyendu.gangly@timesgroup.com