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We recently downgraded Cosan Limited (CZZ - Analyst Report) from Neutral to an Underperform recommendation.

Why the Downgrade?

Cosan is one of the leading sugar and ethanol producers in Brazil and is also well recognized worldwide. Apart from its core businesses, the company is also engaged in energy, food, logistics, infrastructure, and farmland development and management businesses.

It seems that things are not going too much in favor of Cosan, and being wary of the present scenario we have now taken a bearish stance on it. If we steal a look into the last reported fiscal quarter results, we find that costs have been increasing for the company over time. A hike of 29% in the cost of sales and services and roughly 51% in selling, general and administrative expenses were registered in the quarter.

Apart from costs, long-term debt is also rising and it more than doubled in the third quarter 2013. Further increases in costs and debts are likely to weaken margins and put pressure on the financials of the company.

To add to the peril, Cosan faces risks from adverse weather conditions that had impacted production and crushing activities badly in the past few quarters. Also, geopolitical and FX variation risks arising from the company’s presence in international markets as well as increasing competitiveness in the industry are major impediments to growth.

Other Stocks to Consider

Cosan currently has a market capitalization of $5.2 billion. Other players that are worth a mention in the industry are Monsanto Company (MON - Analyst Report), Hillshire Brands Company (HSH - Snapshot Report) and The Andersons, Inc. (ANDE - Analyst Report), each holding a Zacks Rank #2 (Buy).
 

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