Bajaj Hindusthan- Worsening outlook; „Maintain Underperform ::BofA Merrill Lynch

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Bajaj Hindusthan Ltd.
   
Worsening outlook
„Maintain Underperform with reduced earnings and PO
We reiterate our Underperform rating on Bajaj Hindusthan, owing to weak sugar
prices in India. We have cut PO from Rs74 to Rs60, based on a 25% discount to
replacement cost. We expect the stock to be adversely impacted by an earnings
decline driven by weaker margins due to adverse govt regulations. We have cut
our EPS for FY11e from Rs2.75/sh to a loss of Rs0.77/sh and for FY12e to a loss
of Rs10.2 per share from loss of Rs0.9, driven by lower margins and raw sugar
exports.  
Govt regulations restraining domestic sugar prices
Sugar prices in India continue to be 20% below global sugar prices owing to
quantitative restrictions on exports. A likely rise in the production surplus, from
3.5mt in FY11 (Year ending Sep) to 4.5mt in FY12, and sustained govt control on
exports in order to tame inflation could keep sugar prices in check in India.  
Higher cost of sugarcane & lesser export to hurt
Bajaj Hindusthan is likely to see a decline in the PBT margin from -0.5% in FY11e
to -4.5% FY12e, owing to (1) a 6% rise in sugar cane prices despite the lack of an
increase in sugar prices owing to govt policy, and (2) lesser profit from the export
of raw sugar following depletion of stock in FY11.
Upside from sugar decontrol unexciting
Bajaj Hindusthan’s EPS could rise by Rs3/sh due to the removal of the levy on
sugar by the govt, as per thet sugar decontrol policy now being considered by the
govt. However, the benefit may not come through if the price of the remaining
sugar declines by 4% owing to the  increase in supply.