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Bajaj Hindusthan: Not a sweet end! - Views on News from Equitymaster
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Bajaj Hindusthan: Not a sweet end!
Jan 2, 2007

Performance summary
Sugar major, Bajaj Hindusthan (BHL) announced its results for the last quarter and full year ended September 2006. For the full year company recorded a topline growth of 71% YoY. The bottomline for the year was up 36% YoY. The management has recommended a final dividend of Re. 0.6 per equity share (dividend yield of 0.3%).

Rs(m) 4QFY05 4QFY06 Change FY05 FY06 Change
Gross sales 2,969 3,887 30.9% 8,915 15,269 71.3%
Less: Excise duty 148 205 38.6% 453 797 75.7%
Net sales 2,821 3,682 30.5% 8,461 14,472 71.0%
Expenditure 2270 3,146 38.6% 6,360 11,363 78.7%
Operating profit (EBDITA) 551 536 -2.6% 2,101 3,109 48.0%
EBDITA margin (%) 19.5% 14.6%   24.8% 21.5% 80.00
Other income 42 129 207.9% 87 395 355.2%
Interest (22) 16   132 (22)  
Depreciation 92 158 72.0% 351 724 106.2%
Profit before tax 523 492 -5.9% 1,705 2,802 64.3%
Tax (35) 110.1   301 893 196.9%
Profit after tax/(loss) 558 382 -31.6% 1,404 1,908 35.9%
Net profit margin (%) 19.8% 10.4%   16.6% 13.2%  
No. of shares (m) 116.3 141.4   116.3 141.4  
Diluted earnings per share (Rs)*         13.5  
Price to earnings ratio (x)*         16.2  
* 12 month trailing earnings.            

What is the company’s business?
Bajaj Hindusthan (BHL) is India’s largest sugar and ethanol manufacturing company with a strong foothold in Western Uttar Pradesh (UP). It is a premier sugar producer with an installed capacity of 53,000 tonnes crushed per day (TCD). In sugar production terms, it has the capacity to produce close to 2 m tonnes (MT) and is amongst the top 10 global sugar producers. It is also the largest distiller in India.

What has driven performance in 4QFY06?
Topline picture: BHL reported a 31% YoY increase in the topline during 4QFY06 with sugar sales reporting a 30% YoY growth. However, its share to the total revenues fell from 93% in 4QFY05 to 89% in this quarter. Higher cane prices, lower recoveries due to earlier start of the crushing season and the government imposed ban on exports took their toll on domestic sugar realizations. During the year, BHL’s sugar sales volumes increased by 57% YoY to touch 0.7 MT. Its industrial alcohol volumes grew by 160% YoY, while revenues were up 100% YoY for the quarter. The company has planned expansions for the current season, which will lead to higher volumes. Also BHL’s two new distilleries each of 160,000 litres per day are expected to be operational by March 2007. Its MDF and particle board foray under the aegis of its 100% subsidiary Bajaj Eco-tec Products is also progressing well and is expected to commence operations by November 2007.

Segment wise performance
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Sugar 2,645 3,435 29.8% 8,223 13,775 67.5%
% of total revenues 93% 89%   94% 91%  
Distillery 214 430 100.7% 567 1,344 137.0%
% of total revenues 7% 11%   6% 9%  
Total revenues 2,859 3,864   8,790 15,119  

‘Distilled’ margins: Operating margins fell by 490 basis points during the quarter on the back of higher raw material costs. The raw material cost increased from 73% (as a % of sales) in 4QFY05 to 76% in this quarter. Even the staff costs and other expenses have increased leading to a further dent in the margins. Sugar EBIT in FY06 declined by 24% YoY on account of lower realizations.

Cost break-up
As a % of net sales 4QFY05 4QFY06   FY05 FY06
Total Cost of goods 72.6% 75.9%   62.8% 65.3%
Staff Cost 2.0% 3.0%   3.5% 3.9%
Other Expenditure 5.9% 6.6%   8.8% 9.3%

Bottomline tumbles: For the quarter the company witnessed a 32% YoY decline in net profits. Lower operating margins combined with higher interest costs and depreciation charges led to lower net margins. The depreciation cost increased due to the capacity expansions. The fall in the bottomline would have been higher, but for the higher other income.

Segment wise EBIT performance
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Sugar 402 305 -24.2% 1,725 2,140 24.1%
% of sales 15.2% 8.9%   21.0% 15.5%  
Distillery 95 21 -78.3% 104 333 219.3%
% of sales 44.4% 4.8%   18.4% 24.8%  

What to expect?
At the current market price of Rs 218, BHL is trading at a price to earnings multiple of 16.2 times its trailing 12 months earnings. In the current season FY2006-07, BHL will increase its capacity to 89,000 TCD and that of BHSIL to 6,000 TCD. With the re-introduction of the 5% ethanol blending programme aided with long term contracts, ethanol revenues are likely to be more stable and will be able to mitigate to some extent the cyclicality of the sugar business. BHL would also commence supplying power to the grid in the current year. Power revenues along with the attendant carbon credits will form another source of revenue for the company. Currently, while the company is facing pressure on sugar realisations, its diversification into other segments will help reduce the impact.

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