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Bajaj Hindusthan – 1QSY2011 Result Update
Bajaj Hindusthan (BJH) reported poor performance for 1QSY2011 (consolidated)
on the back of higher cane costs and lower sugar realisation. BJH reported 141%
surge in total revenues to `1,483cr for the quarter, while PAT declined by 32% to
`58cr. We are rolling over to SY2012 estimates. At current levels, with BJH
trading at fair valuations, we remain Neutral on the stock.
High raw material cost, low sugar realisation impact margin: Gross margin
plunged by 2,035bp to 27% in 1QSY2011 from 47% in 1QSY2011 owing to the
rise in cane cost and lower realisation. During the quarter, BJH incurred
`2,090/tonne of cane, and realisation stood at `27.5/kg (`31.6/kg).
Outlook and valuation: Going ahead, we expect the sugar prices to remain at
`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 would be
under pressure. At current levels, the stock is trading at fair valuations of 0.7x
P/BV and 0.8x EV/invested capital on SY2012 estimates. Hence, we maintain our
Neutral view on the stock.
Growth across segments
BJH posted net sales of `1,476cr (`615cr) in 1QSY2011 on the back of higher
volumes reported by the distillery and power divisions. Sugar volumes for the
quarter increased by 95.5% to 0.36mn tonnes, the distillery division posted sales of
31.1mn litres (5.8mn litres), and the power (cogen) division witnessed a 73%
increase in sales to 50mn units.
High raw material costs, contribution of levy sales impact margins: BJH’s gross
margin fell by a substantial 2,035bp to 27% in 1QSY2010 from 47% in
1QSY2010. Margins were hit by increased cost of cane, higher contribution of levy
sales and lower sugar realisation. The company incurred `2,090/tonne of cane in
1QSY2010. During the quarter, levy sugar was sold at a fixed price of `18/kg
(revised price), which led to a loss of ~`5/kg for the company. Lower sugar
realisation of `28 during the quarter also contributed to the decline in gross
margins.
Domestic sugar supply easing
India's sugar production is estimated to increase by 40% to 26mn tonnes in
SY2011 as against 18.5mn tonnes in SY2010 on account of higher drawal rate of
78% (65%), as mills offer higher compensation to farmers compared to the
unorganised sector. Cane realisations for farmers in the current rally increased by
73% to `2,600/tonne in SY2010; in the previous rally, they moved up by 18% in
SY2004, 7% in SY2005 and 10% in SY2006. In anticipation of this positive trend
extending, a large number of farmers switched over to cane cultivation resulting in
the area under cane cultivation touching 4.9-5mn ha in SY2011. On the back of
crop economies, we do not see any significant shift towards any other crop and
expect farmers to continue with sugarcane planting in SY2012 as well.
In SY2012, we expect the area under cane cultivation to remain steady at 5mn
hectares, and with a yield of 68 tonnes/ha and drawal rate of 75%, we expect the
country to have sugar production of 25.8mn tonnes. With opening inventory in
excess of 6mn tonnes and consumption at 24mn tonnes, closing inventory would
stand at 8mn tonnes or equivalent to four months of production.
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.
SY2011 to be better than SY2010
In SY2010, the sugar industry witnessed volatile sugar prices, both at the higher
and lower end. Thus, we believe SY2011 would be a recovery phase for the
industry. The mill operators are likely to be more rational while deciding the cane
prices. The cane prices are likely to be in the current SAP range of
`2,050–2,150/tonne, while the sugar prices are likely to remain at `28-30/kg.
Going forward, we expect integrated players such as BJH to benefit as higher cane
availability and lower cane prices would lead to higher utilisation levels (67%).
Overall, we expect BJH’s to turn-around in SY2011 after having posted losses in
SY2010.
Outlook and valuation
Going ahead, sugar prices are likely to be under pressure because of the
higher-than-estimated sugar production in India and Brazil. Hence, we expect
sugar demand-supply to achieve balance in SY2011, resulting in further softening
of the prices. The domestic ex-mill prices have corrected from the highs of `42/kg
to `28-29/kg, while inventory is at ~`28/kg.
We are rolling forward to SY2012 estimates. At current levels of `79 the stock is
trading at fair valuations of 0.7x P/BV and 0.8x EV/IC on SY2012 estimates.
Hence, we maintain our Neutral view on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bajaj Hindusthan – 1QSY2011 Result Update
Angel Broking maintains a Neutral on Bajaj Hindusthan.
Bajaj Hindusthan (BJH) reported poor performance for 1QSY2011 (consolidated)
on the back of higher cane costs and lower sugar realisation. BJH reported 141%
surge in total revenues to `1,483cr for the quarter, while PAT declined by 32% to
`58cr. We are rolling over to SY2012 estimates. At current levels, with BJH
trading at fair valuations, we remain Neutral on the stock.
High raw material cost, low sugar realisation impact margin: Gross margin
plunged by 2,035bp to 27% in 1QSY2011 from 47% in 1QSY2011 owing to the
rise in cane cost and lower realisation. During the quarter, BJH incurred
`2,090/tonne of cane, and realisation stood at `27.5/kg (`31.6/kg).
Outlook and valuation: Going ahead, we expect the sugar prices to remain at
`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 would be
under pressure. At current levels, the stock is trading at fair valuations of 0.7x
P/BV and 0.8x EV/invested capital on SY2012 estimates. Hence, we maintain our
Neutral view on the stock.
Growth across segments
BJH posted net sales of `1,476cr (`615cr) in 1QSY2011 on the back of higher
volumes reported by the distillery and power divisions. Sugar volumes for the
quarter increased by 95.5% to 0.36mn tonnes, the distillery division posted sales of
31.1mn litres (5.8mn litres), and the power (cogen) division witnessed a 73%
increase in sales to 50mn units.
High raw material costs, contribution of levy sales impact margins: BJH’s gross
margin fell by a substantial 2,035bp to 27% in 1QSY2010 from 47% in
1QSY2010. Margins were hit by increased cost of cane, higher contribution of levy
sales and lower sugar realisation. The company incurred `2,090/tonne of cane in
1QSY2010. During the quarter, levy sugar was sold at a fixed price of `18/kg
(revised price), which led to a loss of ~`5/kg for the company. Lower sugar
realisation of `28 during the quarter also contributed to the decline in gross
margins.
Domestic sugar supply easing
India's sugar production is estimated to increase by 40% to 26mn tonnes in
SY2011 as against 18.5mn tonnes in SY2010 on account of higher drawal rate of
78% (65%), as mills offer higher compensation to farmers compared to the
unorganised sector. Cane realisations for farmers in the current rally increased by
73% to `2,600/tonne in SY2010; in the previous rally, they moved up by 18% in
SY2004, 7% in SY2005 and 10% in SY2006. In anticipation of this positive trend
extending, a large number of farmers switched over to cane cultivation resulting in
the area under cane cultivation touching 4.9-5mn ha in SY2011. On the back of
crop economies, we do not see any significant shift towards any other crop and
expect farmers to continue with sugarcane planting in SY2012 as well.
In SY2012, we expect the area under cane cultivation to remain steady at 5mn
hectares, and with a yield of 68 tonnes/ha and drawal rate of 75%, we expect the
country to have sugar production of 25.8mn tonnes. With opening inventory in
excess of 6mn tonnes and consumption at 24mn tonnes, closing inventory would
stand at 8mn tonnes or equivalent to four months of production.
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.
SY2011 to be better than SY2010
In SY2010, the sugar industry witnessed volatile sugar prices, both at the higher
and lower end. Thus, we believe SY2011 would be a recovery phase for the
industry. The mill operators are likely to be more rational while deciding the cane
prices. The cane prices are likely to be in the current SAP range of
`2,050–2,150/tonne, while the sugar prices are likely to remain at `28-30/kg.
Going forward, we expect integrated players such as BJH to benefit as higher cane
availability and lower cane prices would lead to higher utilisation levels (67%).
Overall, we expect BJH’s to turn-around in SY2011 after having posted losses in
SY2010.
Outlook and valuation
Going ahead, sugar prices are likely to be under pressure because of the
higher-than-estimated sugar production in India and Brazil. Hence, we expect
sugar demand-supply to achieve balance in SY2011, resulting in further softening
of the prices. The domestic ex-mill prices have corrected from the highs of `42/kg
to `28-29/kg, while inventory is at ~`28/kg.
We are rolling forward to SY2012 estimates. At current levels of `79 the stock is
trading at fair valuations of 0.7x P/BV and 0.8x EV/IC on SY2012 estimates.
Hence, we maintain our Neutral view on the stock.
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