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Bajaj Hindusthan - 4QSY2010 Result Update
Angel Broking maintains a Neutral on Bajaj Hindusthan.
Bajaj Hindusthan (BJH) reported lower-than-expected performance for SY2010
mainly due to the increase in cane cost and higher contribution from levy sales.
Total sales grew 58% yoy to `3,201cr in SY2010, while it reported losses of
`130cr. We have revised downwards our SY2011 estimates to factor in the new
SAP declared by the UP state government. At current levels, with the BJH stock
trading at fair valuations, we maintain our Neutral view on it.
High raw material cost, levy sales impact margins: Gross margin declined by
700bp to 33% in SY2010 from 40% in SY2009 due to increased cane cost and
higher contribution from levy sales. BJH incurred `2,470/tonne on cane in
SY2010 as against `1,494/tonne spent in SY2009, an increase of 65% yoy.
Further, BJH booked losses of `9/kg (on revised levy price of `18/kg) because of
the higher levy quota sales.
Outlook and valuation: Going ahead, we expect the sugar prices to remain in the
region of `28-30/kg. The domestic ex-mill prices have corrected from the highs of
`42/kg to `28-29/kg, while the cost of inventory is at `28/kg. However, due to
declaration of SAP by the UP government, margins in the sugar business are likely
to be under pressure. At current levels, the stock is trading at fair valuations of
1.1x P/B and 1.0x enterprise value/invested capital on SY2011 estimates. Hence,
we maintain our Neutral view on the stock.
Growth across divisions drives top-line growth
BJH posted net sales of `3,201cr in SY2010 as against `2,026cr in SY2009, a
strong growth of 58% yoy driven by all the key segments like sugar, power and
distillery. The sugar division posted yoy growth of 60% on the back of the 38% and
29% growth in volumes and realisations, respectively. The distillery division
recorded sales of 63.1mn litres in SY2010 as against 49mn litres in SY2009, and
the power division witnessed 78% yoy increase in volumes along with 29% increase
in realisations
High raw material costs, contribution of levy sales impact margins: BJH’s gross
margin fell by a substantial 900bp to 31% in SY2010 from 40% in SY2009 on
account of the increase in cane costs and higher contribution of levy sales. We
estimate the company incurred `2,470/tonne of cane in SY2010 as against
`1,494/tonne in SY2009, an increase of 65% yoy. Cane prices increased due to
the high demand from the mill operators – while the sugar prices kept increasing,
the area under cane cultivation declined during the season. Levy quota (sale to
PDS) increased to 20% in SY2010 from 10% in SY2009 due to the tight sugar
production. During the year, levy sugar was sold at a fixed price of `18/kg (revised
price), which led to a loss of `9/kg for the company.
Investment Arguments
Domestic sugar supply easing
India's sugar production is estimated to have increased by 27% to 18.5 –19mn
tonnes in SY2010 as against 14.6mn tonnes in SY2009 on account of higher
drawal rate of 65% (53%), as the mills offered higher compensation to the farmers
compared to the unorganised sector. Cane realisations for the farmers in the
current rally increased 73% to `2,600/tonne, while in the previous rally they
moved up 18% in SY2004, 7% in SY2005 and 10% in SY2006. In anticipation of
the current positive trend extending, increasing number of farmers are expected to
switch over to cane cultivation resulting in the area under cane cultivation once
again likely to hit the SY2007 peak levels of 5.2mn hectares (mn ha) in SY2011.
Given that increasing number of farmers are switching over to cane cultivation,
sugarcane supply is expected to further ease in SY2011. This would result in cane
realisations from the unorganised sector becoming unattractive and force the
famers to shift over to the mills for better realisations. Hence, we expect the drawal
rate to once again hit the SY2007 peak level of 78% in SY2011, resulting in total
sugar production of 26.7mn tonnes. Moreover, with consumption likely to be
24mn tonnes in SY2011, India would end the year with overall inventory of 7.5mn
tonnes, equivalent to 3.8 months of consumption, an improvement over SY2010.
Low contribution from high-margin power business compared to peers
BJH, though the largest sugar manufacturer in India, has lagged competition in
terms of diversifying and enhancing its revenue and profitability profile compared
to peers. BJH was also a late entrant in the high-EBITDA margin (60%) power
generation (external sales) business. Pertinently, every sugar manufacturing
process has bagasse as a by-product, which can be used as feedstock to generate
power. In case of BRCM, it forayed into the power segment as early as 2003, while
BJH’s power division logged in its first full year of performance only in SY2008.
Prior to setting up its power division, BJH sold bagasse in the open market. BJH’s
power division has total installed capacity of 428MW with external saleable
capacity of 105MW or 25% of installed capacity. BRCM has total installed capacity
of 180MW and external saleable capacity of 126MW or 70% of installed capacity.
Thus, as is apparent, BJH has high internal power consumption resulting in lower
external sale of power.
Outlook and Valuation
BJH’s SY2010 performance was below expectation. Going ahead, the sugar prices
are likely to be under pressure because of the higher-than-estimated sugar
production in India and Brazil. Hence, the sugar demand-supply would achieve a
balance in SY2011, resulting in further softening of prices. The domestic ex-mill
prices have corrected from highs of `42/kg to `28–29/kg, while inventory is in the
range of `28/kg. We have revised downwards our SY2011 estimates to factor in:
(a) revised cane price based on SAP, and (b) revised sugar realisation. At current
levels of `115 the stock is trading close to its fair valuations of 1.1x P/BV and 1.0x
enterprise value/invested capital on SY2011 estimates. Hence, we maintain our
Neutral view on the stock.
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