Stock Review: Bajaj Hindusthan

 

Though a fall in sugar prices may hit Bajaj Hindusthan's profits, its non-sugar businesses such as power and distillery may offer some cushion

 

BAJAJ Hindusthan (BHL), the country's largest sugar company by capacity, has delivered strong numbers in the past three quarters. It recorded a double-digit net profit growth in the March 2011 quarter. This is partly due to the merger with its own subsidiary, Bajaj Hindusthan Sugar Industries in April 2010. Even though numbers are not comparable due to merger, the company has put up stellar performance on the operational front by posting higher sugar volume growth and lower raw material cost.

   The current sugar season (October 2010-Septemeber 2011) is going to lead to a surplus year, which will have negative impact on the sugar prices in the near term. Though this may impact BHL's profits and profitability, its non-sugar businesses would offer some cushion.

BUSINESS:

BHL has the largest cane crushing capacity of 1,36,000 tonnes cane crush per day with the production of 63 lakh tonnes in the March 2011 quarter. The company operates through 16 mills, which are spread across Uttar Pradesh. Being an integrated player, BHL has a distillation capacity of 800 kilolitres per day. In order to reduce its exposure to the seasonality of sugar business, the company has expanded its presence in the power generation business. It has existing capacity of bagasse base plant of 428 megawatt (MW).

GROWTH:

With the expected increase in the sugar production due to increase in sugar cane plantation, BHL is expected to crush 12.2 to 13 metric tonnes of cane in the coming two years. With the recovery rate of 9.3%, the company will be able to record sugar production to 1.14 MT to 1.19 MT. Though this will improve the topline, the trend in cost of raw materials, including sugarcane, and prices of sugar will dictate the profitability trend in the coming years. BHL is planning to set up a thermal power plant of 4,410 MW in three phases. It will add to the revenue from FY13.

FINANCIALS:

The company's net sales grew at a compounded annual growth rate (CAGR) of 16% since 2006-07 to reach 3,201 crore for the year ended September 2010 on a consolidated basis. It also turned profitable during the period due to higher commodity prices. But at 41 crore, its FY10 net profit fell nearly 32% year-on-year due to higher input costs and relatively lower sugar prices. BHL has high debt on its balance sheet with the debt/equity ratio of 1.5, which is higher than its peer group. A major reason is BHL's lower capacity utilisation. The financial performance of BHL for the March ended quarter 2010 looks robust with 116% increase in the topline, while net profit grew by 131%.

VALUATIONS:

With the sugar production of 24.5 MT for the current sugar season (October 2010-Septemeber 2011), sugar prices are expected to remain in the range of 28-30/kg in the medium term. BHL may continue to witness poor earnings on sequential basis. Further, the high interest outgo can also put pressure in the net earnings. The losses from the sugar business can be nullify with contribution from non-sugar business such as power and distillery, which has posted healthy profits in the past two quarters.At 67, the scrip trades at 11.7 times its profit for the 12 months ended March 2011 on a standalone basis, which makes it expensive when compared with the industry average of 10.