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Bajaj Hindustan (BJH)
Sugar
Maintain REDUCE. BJH has had a meaningful correction but according to us, it is still
too early to take a positive view on account of: (1) Sugar production estimates for the
next sugar year (October 2011 to September 2012) point to a surplus of ~3 mn tons
which would lead to subdued prices even in the next year. In our view, government will
continue with its policy of allowing exports in small tranches which has been insufficient
to shore up domestic prices, and (2) high debt on the balance sheet is a worry keeping
in mind that the down-cycle in the commodity may persist. We maintain REDUCE rating
with a revised target price of Rs60 at 5.2X March 2013E EBITDA (5.5X earlier).
Stock has corrected – still too early to change our negative stance
In our view, it is still too early to change our negative stance on BJH despite the stock having
corrected by ~50% YTD on account of the following reasons: Sugar production estimates for the
next sugar year (October 2011 to September 2012) point to a surplus of ~3 mn tons which would
lead to subdued prices even in the next year. Also, the fact that monsoons have been normal (all
India area weighted rainfall at 716 mm versus normal rainfall level of 713 mm) means the
probability of actual production numbers being very high. A surplus production of ~3 mn tons of
sugar will mean subdued prices in the next year (October 2011 to September 2012) which would
be a repeat of the current year.
Government policy on exports – more focused on reducing inflation
The government policy of allowing exports in small tranches (0.5 mn tons each) has failed to shore
up the domestic price of sugar to remunerative levels. In our view, the aim of the policy is to
provide just enough slack to the sugar companies so that the cane arrears (due to the farmers) are
minimized and the price of sugar also remains in check. In our view, the government policy would
remain the same even in the next year as the focus won’t shift from controlling inflation in basic
commodities.
We maintain our REDUCE rating
We are maintaining our REDUCE rating on the company as in our opinion it is not advisable to play
the upturn in the cycle by taking exposure to a highly leveraged company in the sector when the
turnaround itself could take a long time. We have revised our target price to Rs60 (Rs65 earlier)
based on 5.2X March 2013E EBITDA (5.5X earlier).
Valuation
We value BJH at Rs60 per share
Valuation table for BJH, March 2013E basis (Rs mn)
March-2013E
EBITDA 7,980
EV/EBITDA (X) 5.2
EV 41,498
Net Debt 32,059
Equity value 9,439
Fully diluted shares (mn) 228
Treasury shares (mn) 31
Effective no. of shares 197
Value per share (sugar business) (Rs) (a) 48
Power business valued at book value (b) 1500
Valueper share (power business) (Rs) (c) 7.6
Total value per share (a)+(c) 56
Notes:
(b) We have assumed 26% stake of BJH in the power business.
Source: Kotak Institutional Equities
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bajaj Hindustan (BJH)
Sugar
Maintain REDUCE. BJH has had a meaningful correction but according to us, it is still
too early to take a positive view on account of: (1) Sugar production estimates for the
next sugar year (October 2011 to September 2012) point to a surplus of ~3 mn tons
which would lead to subdued prices even in the next year. In our view, government will
continue with its policy of allowing exports in small tranches which has been insufficient
to shore up domestic prices, and (2) high debt on the balance sheet is a worry keeping
in mind that the down-cycle in the commodity may persist. We maintain REDUCE rating
with a revised target price of Rs60 at 5.2X March 2013E EBITDA (5.5X earlier).
Stock has corrected – still too early to change our negative stance
In our view, it is still too early to change our negative stance on BJH despite the stock having
corrected by ~50% YTD on account of the following reasons: Sugar production estimates for the
next sugar year (October 2011 to September 2012) point to a surplus of ~3 mn tons which would
lead to subdued prices even in the next year. Also, the fact that monsoons have been normal (all
India area weighted rainfall at 716 mm versus normal rainfall level of 713 mm) means the
probability of actual production numbers being very high. A surplus production of ~3 mn tons of
sugar will mean subdued prices in the next year (October 2011 to September 2012) which would
be a repeat of the current year.
Government policy on exports – more focused on reducing inflation
The government policy of allowing exports in small tranches (0.5 mn tons each) has failed to shore
up the domestic price of sugar to remunerative levels. In our view, the aim of the policy is to
provide just enough slack to the sugar companies so that the cane arrears (due to the farmers) are
minimized and the price of sugar also remains in check. In our view, the government policy would
remain the same even in the next year as the focus won’t shift from controlling inflation in basic
commodities.
We maintain our REDUCE rating
We are maintaining our REDUCE rating on the company as in our opinion it is not advisable to play
the upturn in the cycle by taking exposure to a highly leveraged company in the sector when the
turnaround itself could take a long time. We have revised our target price to Rs60 (Rs65 earlier)
based on 5.2X March 2013E EBITDA (5.5X earlier).
Valuation
We value BJH at Rs60 per share
Valuation table for BJH, March 2013E basis (Rs mn)
March-2013E
EBITDA 7,980
EV/EBITDA (X) 5.2
EV 41,498
Net Debt 32,059
Equity value 9,439
Fully diluted shares (mn) 228
Treasury shares (mn) 31
Effective no. of shares 197
Value per share (sugar business) (Rs) (a) 48
Power business valued at book value (b) 1500
Valueper share (power business) (Rs) (c) 7.6
Total value per share (a)+(c) 56
Notes:
(b) We have assumed 26% stake of BJH in the power business.
Source: Kotak Institutional Equities
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