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Bajaj Hindusthan: Bitter start! - Views on News from Equitymaster

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Bajaj Hindusthan: Bitter start!
Mar 30, 2007

Performance summary
Sugar major, Bajaj Hindusthan (BHL) announced its results for the first quarter ended December 2006 recently. While the topline grew marginally by 4% YoY, the bottomline for the quarter dropped by 29% YoY due to the detrimental circumstances prevailing in the sugar sector. The impact of surplus stocks, weak pricing power and ban on exports have evidently impacted the companyís margins.

Financial performance
Rs(m) 1QFY06 1QFY07 Change
Gross sales 2,913 3,041 4%
Less: Excise duty 160 175 9%
Net sales 2,753 2,866 4%
Expenditure 2,254 2,570 14%
Operating profit (EBDITA) 499 297 -41%
EBDITA margin (%) 18.1% 10.4%
Other income 26 78 200%
Interest 19 (51)
Depreciation 137 215 57%
Profit before tax 369 211 -43%
Tax 126 39 -69%
Profit after tax/(loss) 243 173 -29%
Net profit margin (%) 8.8% 6.0%
No. of shares (m) 120 141.4
Diluted earnings per share (Rs) 13.0
Price to earnings ratio (x) 14.1

What is the companyís business?
Bajaj Hindusthan (BHL) is Indiaís 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 1QFY07?
Sugar disappoints: BHL reported a 4% YoY increase in the topline during 1QFY07. The distillery segment was the star performer this quarter with revenues rising by 83% YoY, albeit on a lower base. Its contribution to the total revenues went up from 5% to 9% in this quarter. The sugar divisionís performance was not exciting due to lower realisations. The revenues of the division grew by 3.6% YoY. With the government having recently lifted the export ban, the domestic prices may firm up in the near future. This would give some relief to the sugar companies. BHL also commenced operations in the new plants during the quarter with its capacity totaling to 16,000 TCD. Going forward, the volumes are expected to be strong.

Segment wise performance
(Rs m) 1QFY06 1QFY07 Change
Sugar 2,675 2,771 3.6%
% of total revenues 95% 91%
Distillery 151 276 82.7%
% of total revenues 5% 9%

Margin woes continue: The company, yet again, witnessed pressure on the margin front. Higher overhead costs led to the operating profits decline by 41%YoY. The margins were dented by 7.7% for the quarter. On the PBIT front, the distillery segment though on a smaller base, outperformed the sugar division. The margins of the distillery division touched 20% for the quarter. The sugar divisionís reported a 80% YoY decline at the PBIT level.

(Rs m) 1QFY06 1QFY07 Change
Raw Material 1,783 1,953 9.5%
% of net sales 64.8% 68.1%
Staff cost 130 188 44.7%
% of net sales 4.7% 6.5%
Other expenditure 341 429 25.7%
% of net sales 12.4% 15.0%

Declining profits: The bottomline of the company fell by 29% YoY in 1QFY07. Lower operating income and higher depreciation were the main culprits for the decline in the profits. Other income rose by 200% YoY leading partly cushioning the fall in bottomline.

PBIT
(Rs m) 1QFY06 1QFY07 Change
Sugar 359 73 -79.7%
% of sales 13.4% 2.6%
Distillery 12 56 370.3%
% of sales 7.8% 20.1%

What to expect?
At the current market price of Rs 183, BHL is trading at a price to earnings multiple of 14.1 times its trailing 12 months earnings. The company would continue facing pressure on the revenue and the margin fronts in the medium term due to the impeding scenario in the sector. However, the government is taking steps to improve the situation by allowing exports and giving subsidies. Though the export realisations would be lower as compared to FY06, it would help the company to marginally offset the prices in the domestic markets. Also, with ethanol division performing well, the company is bullish on the segment. However, sugar being a highly regulated industry, we reserve our conservative view on the stock.

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