Stock Review: Bajaj Hindusthan

 

Bajaj Hindusthan, the country's largest sugar company by capacity, has continued to post triple-digit net profit growth in the third quarter of the current sugar season, largely due to lower raw material costs. It has outperformed its peers by retaining topline growth close to 50% in the past two quarters. However, the stock of the company has not budged, which is partially explained by the downturn in the sugar cycle.

The company's revenue rose 47% due to stable realisations. A stock adjustment in the current quarter reduced its operating cost to negligible levels during the quarter, which spruced up operating margin by 900 basis points from the year ago.

However, with the expansion in the power segment, Bajaj Hindusthan has continued to record higher interest outlay since the past two quarters. Despite this, the company earned a marginal net profit of . 1 crore compared with a loss of . 14 crore a year ago.

Although sugar companies are able to make reasonable profits, the fundamentals of the sector look grim due to better production estimates in the current sugar season (October'10-September'11). As per latest estimates by ISMA, the sugar association, the estimated sugar production in the domestic market is 25 million tonnes as compared to 23 million tonnes of the consumption. On the international front, Brazil is expected to record a 3% decline as per UNICA over the last year, which can push up the raw sugar prices in the international market. The drop in the international sugar market production may result in an export rally from India. If that happens, it would help domestic sugar prices to stay firm, thereby supporting profitability of Indian sugar companies.

The outlook of the company depends upon the sugar realisation, which is expected to trade in the range of . 28-30 per kg in the coming quarters since the production is going to be higher in the current sugar season. At the trailing priceearnings (P/E) ratio of 9.7, the stock's valuation is lower than the average industry P/E of 13. Investors need to wait for the uptrend in the sugar cycle to take an exposure in the company.