Sweet fortune turned sour in Brazil

Forty-eight-year-old Narendra Murkumbi is different from his counterparts in the sugar industry. Unlike most of them, Murkumbi happens to be a first-generation entrepreneur who set up one of the most profitable sugar companies along with his mother, Vidya Murkumbi.

Renuka Sugars was founded in 1998, four years after Murkumbi graduated from Indian Institute of Management (IIM) Ahmedabad. Having travelled widely in the farmland with his father, a distributor for Tata Chemicals, Murkumbi was keen to be in the agri-business. For a short while, he ran a bio-pesticides business, which was eventually closed down.

Renuka Sugars is named after the goddess in the Belgaum district, the home town of the Murkumbis.

After the stint with the pesticides business, Murkumbi turned to sugar. The Andhra Pradesh government had floated a tender to sell an old sugar mill. Murkumbi collected funds from the bio-pesticides business, raised debt and approached relatives for help.

But he was still short of funds. He approached farmers with the cooperative model and sought contributions from them in lieu of shares. It worked and Murkumbi managed to purchase the mill for ~500 million. These farmers, who had paid ~10 for a share, reaped rich dividends when Renuka Sugars listed in 2005 at a price of ~285 a share.

In the next few years, the mill produced more sugar than it did in the previous two decades. In 2002, when sugar prices crashed, Murkumbi ventured into sugar trading in the overseas market. It helped Renuka Sugars remain profitable at a time when the entire industry was making losses.

Since sugar is a cyclical business (sugar is produced only for six months in a year), Murkumbi utilised the lean season to convert raw sugar into refined sugar. Instead of making large investments in setting up sugar plants, Murkumbi hired assets and operated them. Between 2006 and 2008, he took two sugar mills on lease. From a single mill in 1997, the company grew to seven mills in the country. The year 2009-10 was the best year for the company and it earned a profit of ~4.1 billion on sales of ~55 billion. It was also the year when Renuka Sugars ventured into acquisition of mills in Brazil, the world’s largest sugar producing country. Murkumbi believed sugarcane availability in India would be an issue and his mills in Brazil would secure raw sugar supplies for Renuka’s refinery business in India.

Renuka’s first acquisition in Brazil happened in November 2009. Three months after taking control of VDI, Murkumbi went for another Brazilian acquisition, Equipav SA, in early 2010. Renuka Sugars was investing ~19 billion in these two deals, which also made him the fifth-biggest sugar maker in Brazil and second-biggest in India. Murkumbi became the poster boy of the domestic sugar industry, his company enjoyed a market capitalisation of ~76 billion in early 2010. It is ~14.7 billion now.

The debt-driven acquisition of these two loss-making companies, however, did not work well. Brazil suffered a drought in 2011 and production was affected badly. The global surplus in volume weighed on sugar prices. In early 2014, Renuka’s debt swelled to ~87 billion, of which ~52 billion was in Brazilian operations.

The local currency debt turned bigger with a sharp depreciation of the Brazilian real. Murkumbi struggled to sell some of the company’s assets there. He then brought on board Wilmar, which invested ~5.17 billion in 2014 for a 27.5 per cent stake. Murkumbi has now decided give up the position of vice-chairman and managing director at Renuka, ceding all control to Wilmar. In hindsight, one can blame Murkumbi for being ambitious and entering Brazil (Bajaj Hindusthan had explored such an idea in 2006 and gave up later) at a time when valuations were high. “But many big global names like Noble Resources were in the fray to acquire Equipav.

It appeared to be a smart move then. A businessman is a businessman because of his risk-taking abilities,” a sugar industry executive said. Murkumbi may not find sweetness in sugar anymore, but those who know him bet that this is not the end of the road for the former sugar baron.