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Bajaj Hindusthan: No sweetness! - Views on News from Equitymaster

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Bajaj Hindusthan: No sweetness!

Jul 6, 2007

Performance summary
Sugar major, Bajaj Hindusthan (BHL) had announced its results for the second quarter and half year ended March 2007. The company reported disappointing 2QFY07 earnings, with the bottomline falling by 94% YoY. As capacity expansion played out, revenues grew by 30% YoY during the quarter. With further dip in sugar realisations, EBITDA margins were under pressure shrinking from 29.3% in 2QFY06 to 7.3% in 2QFY07.

Financial performance
Rs(m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Gross sales 4,169 5,470 31% 7,081 8,511 20%
Less: Excise duty 219 331 51% 379 506 33%
Net sales 3,949 5,139 30% 6,702 8,006 19%
Expenditure 2,791 4,762 71% 5,045 7,332 45%
Operating profit (EBDITA) 1,159 377 -67% 1,658 674 -59%
EBDITA margin (%) 29.3% 7.3%   24.7% 8.4%  
Other income 49 138 184% 75 217 189%
Interest 0.4 150 37325% 20 99  
Depreciation 232 353 52% 368 568 54%
Profit before tax 975 13 -99% 1,344 224 -83%
Tax 330 (24) -107% 456 15 -97%
Profit after tax/(loss) 645 37 -94% 888 209 -76%
Net profit margin (%) 16.3% 0.7%   13.2% 2.6%  
No. of shares (m) 140.6 141.4   140.6 141.4  
Diluted earnings per share (Rs)         8.7  
Price to earnings ratio (x)         18.7  

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 manufacturing facilities spread across UP and currently it has a sugar capacity of 100,000 TCD. In addition it also has a 320 KLPD distillery capacity scalable to 800 KLPD by SS08 and 90 MW of saleable power, which will come by SS07.

What has driven performance in 2QFY07?
Volumes drive revenue growth: BHL reported a 30% YoY revenue growth for 2QFY07, driven by a 32% YoY growth in sugar segment revenues. The distillery segment grew by 16% YoY for the quarter. Although sugar realisations have dipped to Rs 13,000 per tonne, which is significantly lower than that in 2QFY06, delay in commissioning of the distillery capacity (320 KLPD) and higher capacity utilisation of sugar operations have resulted in the sugar segment contributing 94% to overall revenues in the current quarter. The industry scenario continues to remain bleak. With over production and low sugar realisations, companies are finding it difficult to break even. As a result, the sugar division is expected to be hit hard in the coming period.

Segment wise performance
(Rs m) 1QFY06 1QFY07 Change 1HFY06 1HFY07 Change
Sugar 3,809 5,039 32.3% 6,484 7,810 20.5%
% of total revenues 93% 94%   94% 93%  
Distillery 279 322 15.5% 430 598 39.1%
% of total revenues 7% 6%   6% 7%  

Higher costs take toll: The company continues to witness pressure on the operating margin front. Faster growth in expenses led to a 22% YoY decline in the operating margins. All the expenditure heads have witnessed an increase as percentage of sales. On a segmental basis, the lower profitability in sugar segment is on account of lower realisation from sugar and an increase in sugarcane prices. The distillery margins also fell due to delay in commissioning of the capacity of 2 plants of 160 KLPD each. Excess sugar production on a national basis and the ban on export resulted in a fall in sugar realisations. Lower realisations coupled with relatively lower sugar recoveries and higher cane prices have severely impacted margins from the sugar business.

(Rs m) 1QFY06 1QFY07 Change 1HFY06 1HFY07 Change
Raw Material 2,018 3,581 77.4% 3,802 5,534 45.6%
% of net sales 51.1% 69.7%   56.7% 69.1%  
Staff cost 179 357 99.7% 309 545 76.6%
% of net sales 4.5% 7.0%   4.6% 6.8%  
Other expenditure 594 824 38.8% 935 1,253 34.0%
% of net sales 15.0% 16.0%   13.9% 15.6%  

Bottomline tumbles: For the quarter the company witnessed a 94% YoY decline in net profits. Lower operating margins combined with higher interest costs led to lower net margins. As incremental capacities have come on-stream in the current season, fixed costs (interest and depreciation) have risen further squeezing net margins to 0.7% in 2QFY07.

PBIT
(Rs m) 1QFY06 1QFY07 Change 1HFY06 1HFY07 Change
Sugar 841 (29) -103.4% 1,200 44 -96.3%
% of sales 22.1% -0.6%   18.5% 0.6%  
Distillery 100 62 -38.2% 112 117 4.9%
% of sales 35.8% 19.1%   26.0% 19.6%  

What to expect?
At the current market price of Rs 163, BHL is trading at a price to earnings multiple of 18.7 times its trailing 12 months earnings. The sugar production in the country is up by 30% from the previous year. The higher output has put more pressure on prices; as a result sugar prices have declined and at present are close to the cost of production of sugar producers. Delays in commissioning of two distilleries, which is a high margin segment, severely impacted BHL’s profitability in the quarter. Though we expect only a part of the losses of the sugar segment to be offset by distillery segment profits and the cogen of 90 MW which would come in by SS08, the prospects for the sector continues to be bleak.

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