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Bajaj Hindusthan: Sweetness continues - Views on News from Equitymaster

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Bajaj Hindusthan: Sweetness continues
Aug 2, 2006

Performance summary
Bajaj Hindusthan (BHL) recently announced its results for the third quarter and nine months ended June 2006 (fiscal year ending September). The company reported a 93% YoY increase in topline in 9mFY06. The operating margins have declined during the nine-month period due to higher raw material costs. Aided by higher other income, net profits for 9mFY06 have surged by a strong 80% YoY.

Rs (m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Gross sales 3,640 4,480 23.1% 5,946 11,382 91.4%
Less: Excise duty 38 34 -9.1% 449 768 71.0%
Net sales 3,602 4,446 23.4% 5,497 10,614 93.1%
Expenditure 2789 3,351 20.2% 3,946 8,041 103.8%
Operating profit (EBDITA) 814 1,095 34.6% 1,551 2,573 65.9%
EBDITA margin (%) 22.6% 24.6%   28.2% 24.2%  
Other income 30 12 -61.1% 45 266 493.3%
Interest 51 (57) -210.7% 154 (37) -124.0%
Depreciation 108 198 83.0% 259 566 118.5%
Profit before tax 684 966 41.2% 1,183 2,310 95.3%
Tax 154 327 113.0% 336 783 133.1%
Profit after tax/(loss) 531 639 20.5% 847 1,527 80.3%
Net profit margin (%) 14.7% 14.4%   15.4% 14.4%  
No. of shares (m) 108.2 141.4   108.2 141.4  
Diluted earnings per share (Rs)*         14.7  
Price to earnings ratio (x)*         22.6  
* 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 3QFY06?
Topline buoyant: BHL reported a 23% YoY rise in net sales for 3QFY06. The company’s sugar segment revenues were up by 10% YoY. Even though production doubled (7.5 m bags in 3QFY06) volumes, were muted, with the company selling nearly 192,000 tonnes of sugar compared with 197,000 tonnes in 3QFY05. The average realisation was around Rs 18.5 per kg. The price of sugar was weak in June due to weaker demand and news flow around the government’s reduction in the import duty. This affected the company’s sugar sales.

The distillery segment, on the other hand, recorded robust volume growth in 3QFY06. Distillery revenues of were up by nearly 320% YoY, albeit on a lower base. However, distillery revenues now account for around 12% of BHL’s revenues. This is undoubtedly a positive, as it results in greater revenue diversification, plus the fact that margins are higher in the distillery segment. BHL sold around 24 m litres of alcohol/ethanol in the quarter at an average price of Rs 21 per litre. According to the management, BHL is seeing robust demand for alcohol, which includes exports.

Segment wise performance
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Sugar 3,541 3,899 10.1% 5,612 10,536 87.8%
% of total revenues 97% 88%   94% 91%  
Distillery 124 520 319.4% 375 988 163.8%
% of total revenues 3% 12%   6% 9%  
Total revenues 3,665 4,419   5,986 11,524  

‘Distilled’ margins: Operating margins expanded by a strong 200 basis points during the quarter on the back of reduced raw material costs. While staff costs and other expenses have increased, the 510 basis points decline in input costs (as a percentage of sales) powered the operating margins higher. Currently, the company is paying Rs 122 per quintal of cane. However, we expect cane costs to rise in FY07 in view of the increasing competition for cane in Western Uttar Pradesh.

Cost break-up
As a % of net sales 3QFY05 3QFY06 9mFY05 9mFY06
Total Cost of goods 73.2% 68.1% 56.8% 61.0%
Staff Cost 2.0% 3.3% 4.4% 4.3%
Other Expenditure 2.3% 4.0% 10.6% 10.5%

Bottomline picture: Net profits for 3QFY06 rose by a decent 21% YoY. While the profits from sugar sales were up by just 3% YoY, the distillery profits rose by a whopping 116% YoY. BHL raised US$ 110 m through GDR’s and FCCBs last year, which 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 charges. Depreciation was higher due to addition in capacities in sugar and distillery segments.

Expansions: BHL has confirmed that the green field projects at Saharanpur, Pilibhit and Lakhimpur regions of UP have progressed as per schedule, and will commence operations by October 2006. This will take the total capacity of the group to 95,000 TCD. Distillery capacities will double to 640 KLPD after the expansion. Also year ago, BHL acquired `The Pratappur Sugar and Industries Ltd.’ (PSIL) as its subsidiary, with a capacity of 3,200 TCD. PSIL has undertaken significant brownfield and greenfield expansions. The capacity of its existing sugar plant is being enhanced from 3,200 TCD to 6,000 TCD. In addition, three new sugar units are being set up in virgin, cane-rich areas of Eastern UP to enhance its crushing capacity to 40,000 TCD over the next fifteen months. PSIL is also setting up a distillery with the capacity to manufacture 160 KLD of industrial alcohol/ ethanol. This strategic acquisition will help BHL extend its presence in the sugar markets.

Our View
At the current market price of Rs 333, BHL is trading at a P/E multiple of 22.6 times its trailing 12 months earnings. BHL’s expansion plans are expected to result in growth in its business, with distillery capacities being one of the key drivers of the growth. With its rapidly expanding capacities, diversification of revenues, efficient operations and good management, the company appears well-positioned to benefit from the upturn in the sugar cycle.

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