Brazil-based Cosan, Ltd. (CZZ) announced its preliminary results for the second quarter of fiscal year 2011. Net revenue in the quarter totaled R$4,723.1 million (US$2,683.6 million), up 32.1% year over year.

In the second quarter, CAA (Cosan Açúcar e Álcool) accounted for approximately 37.2% of the net sales with revenue totaling R$1,758.5 million (US$999.1 million), an increase of 45.1% year over year.

Sugar revenue surged 42.7% to R$1,107.0 million (US$629.0 million), primarily due to a 14.5% increase in sugar prices and 24.6% hike in sales volume. Ethanol revenue was up 62.4% to R$532.4 million (US$302.5 million) due to a 41.8% rise in volume and 14.5% increase in prices.

Rumo (Rumo Logística) revenue in the quarter totaled R$144.6 million (US$82.2 million), up 236.3% year over year and accounted for 3.1% of net sales. The increase was primarily driven by the transportation agreement between Rumo and ALL.

Cosan Combustíveis e Lubrificantes (CCL) revenue was R$3,017.0 million (US$1,714.2 million), a growth of 25.1% year over year and accounted for about 63.9% of net sales. Fuels and Lubes revenue rose by 25.8% and 19.7% year over year, respectively.

Cosan is slated to release its first quarter results on November 10 after markets close.

For fiscal year 2011, management anticipates revenues to be in the range of R$16.5 –R$18.5 billion (US$9.1 –US$10.2 billion), EBITDA in the range of R$2.0 – R$2.4 billion (US$1.1 – US$1.3 billion), and capital expenditure in the range of R$1.9 – R$2.3 billion (US$1.0 –US$1.3 billion). Crushed cane volumes are expected to range within 58 – 62 million tons, sugar volume sold within 4.7 –5.1 million tons, and ethanol volume sold in the range of 2.0 –2.2 million liters.

Cosan Ltd. owns the major shareholding (roughly 62.5%) of Cosan S.A., one of the world’s largest producers of sugar and ethanol. We believe Cosan has been growing through acquisitions and other expansion strategies.

The company is well positioned to deliver good results yet again for fiscal year 2011 with an expected increase in sugar and ethanol production, supported by favorable weather conditions (higher level of rains) and higher yield of sucrose in the cane.

Moreover, Cosan’s joint venture with Shell, a leading energy and petrochemical player, is expected to create better access to ethanol consumer market, enhanced competitiveness in biofuels and fuel distribution businesses, offer greater scope for development of second generation technology, improved debt ratios through more capital and rise in cash profile, and superior growth prospects.

However, the company is highly exposed to the volatility in domestic and international supply and demand. Ethanol pricing is largely affected by changes in supply and demand for gasoline, while highly regulated market and speculation risks influence sugar prices. Besides, customer concentration risks and sensitiveness to currency fluctuations impact the company’s financial results in adverse conditions. 

Cosan’s prime competitors include Archer Daniels Midland Company (ADM) and Copersucar – Cooperativa de Produtores. We currently maintain our Neutral recommendation on Cosan, supported by Zacks #3 Rank (Hold).

 
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