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Bajaj Hindusthan: Sweet Performance - Views on News from Equitymaster
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Bajaj Hindusthan: Sweet Performance
May 10, 2006

Performance summary
Bajaj Hindusthan (BHL) announced its results for the second quarter and half-year ended March 2006 (fiscal year ending September 2006). The company reported a more than double YoY increase in topline to Rs 4,035 m in 2QFY06. Robust sugar and distillery revenues drove the topline. Net profit for the quarter surged 200% YoY.

Rs(m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Gross sales 1,024 4,035 294% 2,237 6,902 209%
Less: Excise duty 308 485 57% 412 734  
Net sales 716 3,550 396% 1,825 6,168  
Expenditure 262 2,525 864% 1,158 4,690 305%
Operating profit (EBDITA) 454 1,025 126% 667 1,478 122%
EBDITA margin (%) 63.4% 28.9%   36.5% 24.0%  
Other income 65 182 180% 85 254 199%
Interest 84 0 -100% 103 20 -81%
Depreciation 96 231 141% 151 368 144%
Profit before tax 339 976 188% 498 1,344 170%
Tax 123 330 168% 182 456 151%
Profit after tax/(loss) 216 646 199% 316 888 181%
Net profit margin (%) 30.2% 18.2%   17.3% 14.4%  
No. of shares (m) 87.3 140.6   87.3 140.6  
Diluted earnings per share (Rs)         12.6  
Price to earnings ratio (x)         41.8  

What is company’s business?
Bajaj Hindusthan 2005 2006 2007
Crushing capacity (TCD) 31,000 56,200 100,000
Distillery (KPLD) 160 320 800
Cogen (MW) 0 0 0
Bajaj Hindusthan (BHL) is India’s largest sugar and ethanol manufacturing company with 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 million tonnes (MT) and is amongst the top 10 global sugar producers. It is also the largest distiller in India.

What has driven performance in 2QFY06?
Buoyant revenues: BHL reported a nearly three-fold jump in net sales for 1HFY06 as compared to the corresponding period last year. The surge in sugar revenues was mainly on account of the capacity expansion from 31,000 TCD in the previous season to 53,000 TCD in the current sugar season. The company is also likely to have benefited from the YoY increase in sugar prices. Distillery revenues during the quarter surged by 109% YoY, as the company increased its distillery capacity to 320 KLPD from 160 KLPD last year. The revenues are expected to remain robust as the company has planned more capacity expansions over the next couple of years.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Sugar 939 3,870 312.1% 2,071 6,637 220.5%
% of total revenues 86% 93%   89% 93%  
Distillery 149 312 109.4% 251 468 86.5%
% of total revenues 14% 7%   11% 7%  
Total revenues 1,088 4,182   2,322 7,105  

Cost analysis: Operating costs increased by 864% YoY for 2QFY06. The company in this quarter got the benefit of the higher inventory due to the increase in capacity. Currently, the company is paying Rs 122 per cane, which is expected to increase by Rs 10 per annum per cane. As a result, we expect operating margins to reduce going forward.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Raw Material (130) 1,753 - 487 3,447 607.8%
% of net sales -18.2% 49.4%   26.7% 55.9%  
Staff cost 107 179 67.3% 169 309 82.8%
% of net sales 14.9% 5.0%   9.3% 5.0%  
Other expenditure 286 594 107.7% 501 935 86.6%
% of net sales 39.9% 16.7%   27.5% 15.2%  

Bottomline doubles: Net profit for 2QFY06 surged about 200%, while that for the half year rose by 181% YoY. BHL raised US$ 110 m through GDR’s and FCCB’s last year. The raised funds were utilised by the company towards capacity expansion and reduction in debt (from Rs 5.3 bn to Rs 2.5 bn), which is reflected in lower interest charge. Depreciation surged 140.5% YoY as new capacities came in to operation in sugar and distillery segments. However, once the new capacity improves in capacity utilisation, the depreciation cost (as a % of sales) is expected to reduce. EPS growth is not comparable, as the company issued GDRs and FCCBs, which diluted equity capital.

Over the past years: BHL produced 0.4 MT of sugar in FY05 as compared to 0.3 MT in FY04. This was basically due to the increase in cane crushing capacity to 31,000 TCD. Industrial alcohol production was also strengthened by 24% due to doubling of the capacity. The company earns 90% of its revenues from sugar sales, while remaining is derived from alcohol and molasses. BHL does not have any cogen plant and sells all surplus bagasse. The increased capacity along with upcycle in the sugar industry has helped the company grow its sales and net profit at a CAGR of 42% and 122% in the last three years (FY03 to FY05). Its EBIDTA margin improved to 24.8% and the net margin expanded to 16.6% in FY05 (11.5% and 6.7% respectively in FY03). The company has also managed to reduce its debt equity ratio.

(Rs m) FY03 FY04 FY05 CAGR
Net sales 4,209 4,998 8,463 41.79%
Operating profit 486 952 2,101 107.96%
Operating profit margin (%) 11.54% 19.06% 24.83%  
Net profit 284 624 1404 122.45%
Net profit margin (%) 6.74% 12.48% 16.59%  
D/E ratio 1.48 2.34 0.83  
RONW (%) 23.3% 45.3% 22.9%  
ROA (%) 7.6% 10.9% 11.1%  

Our View
BHCL is trading at a P/E multiple of 30.9 times trailing 12 months earnings Going forward, we believe that the upcycle in the industry will benefit the companies (demand – supply mismatch, lower inventories and rising demand for ethanol). We expect the financial performance of the sugar mill to remain robust. We are in the process of preparing a research report on the company.

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