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Bajaj Hindusthan: Research meet extracts - Views on News from Equitymaster
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Bajaj Hindusthan: Research meet extracts
Oct 10, 2006

We recently met the management of Bajaj Hindusthan to get its view on the domestic sugar sector, the global perspective and the company’s growth prospects. Here are the key takeaways. Company background
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.

Domestic Scenario


Source : ISMA
After 3 years of deficit, the Indian sugar sector is all set for a buoyant sugar season (SS07). Sugar production has already risen from 12.7 MT in SS05 to nearly 19 MT in SS06. As per the industry, the expected output will be around 23 MT in SS07. The increased production implies that supply is likely to catch-up with demand comfortably after three consecutive years of shortfall. The closing inventory, which had come off its high levels of 12.5 MT in SS03 to 3.8 MT in SS06, is expected to be more than 4.5 MT this season.

Improving cane acreage, higher drawal rate and better recoveries is expected to reflect in impressive production numbers for various states in India. Along with UP, significant improvement in production is expected from Maharashtra, where production is expected to be approximately 6.0 MT for SS07, which is the highest in the past five years. Even in Tamil Nadu, the production is expected to touch 2 MT from 1.7 MT last season. Also there would be ‘problem of plenty’ in terms of cane, as a result of which the companies may not pay high prices like last year.

Demand side
The consumption growth remained strong due to the increasing population in the country. Over the past four years, India’s sugar consumption has grown at a CAGR of 3%, and we expect the growth to continue at a similar pace. India has the lowest per capita consumption of sugar of about 17 kgs, which is below the global average of 22 kgs. However, going forward, we expect India’s per capita consumption to increase, as the emerging working population shifts to food with higher sugar content.

Global markets
World sugar market has witnessed structural changes due to the reforms in EU and ethanol dynamics in Brazil. These two factors will dominate the direction of the world sugar market going forward. World sugar production is expected to be 150.6 MT (SS06). Brazil, which is the largest sugar exporter, is expected to keep on diverting about 55 % of its sugarcane into manufacturing of ethanol. Also due to the WTO ruling, the subsidies have been cut in EU. This has led to phasing out of 5 MT of EU sugar from the markets. With further cut in the subsidies, the chances of EU importing sugar have become high. This will provide a good opportunity for the Indian sugar mills to export provided the ban is lifted.

The FAO forecast of world sugar consumption in SS06 is 149.9 MT, a 1.9 % growth from the 147.2 MT in SS05. Developing countries largely account for the continued consumption growth, particularly China and India where the significant expansion in demand has been underpinned by strong economic performances. In developed countries, per capita consumption has been declining over the last decade, reflecting health concerns associated with high sugar consumption. Overall consumption in developing countries in SS06 is expected to grow by 2.6 % compared with a 0.4 % growth rate estimated for developed countries.

Consolidation
The management of Bajaj Hindusthan expects the prices of sugar to be in the range of Rs 17 to Rs 18 per kg. According to it, the prices would not go below Rs 17, as this would not be viable for many sugar companies, which have high interest costs. Both greenfield and brownfield expansions have been underway in order to take advantage of the bull run. The industry may witness acquisitions and consolidation. Small firms, who will find it difficult to grow their bottomline, will be potential targets for larger players. The Pratapur acquisition by Bajaj Hindusthan and Indo – Gulf takeover by Balrampur Chini indicate that the larger firms are looking at inorganic growth.

Company plans
BHL has expanded its sugarcane crushing capacity from 31,000 TCD to 53,000 TCD in season SS06. BHL will further expand its capacity to 95,000 TCD in season SS07 and 100,000 TCD in SS08. This would lead to a huge volume growth. The company also plans to become debt free by FY09. On its Brazil venture, the company is doing a feasibility study. Given the fact that interest rates are high in Brazil (18%), it is better to have own funds to start a business in the region. Hence the company is looking at options to start a plant in Brazil.

Fibre board business
Bajaj Hindusthan is implementing a project to produce medium density fibreboards (MFB) and particle board (PB) from the bagasse generated from its sugar mills. The company is setting up 3 plants, which are expected to be completed by FY08. According to the management, this will offer better margins than producing power from bagasse. The fibre boards are used for furniture and is expected to have strong demand.

What to expect?
At the current market price of Rs 307, BHL is trading at a P/E multiple of 20.9 times its trailing 12 months earnings. BHL is well placed in terms of its expansion plans to capture the volume growth. Also in case of consolidation the company has the resources to acquire other smaller sugar mills.

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