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Bajaj Hind: Sugar is not necessarily sweet - Outside View
Bajaj Hind: Sugar is not necessarily sweet

In the sugar industry being big or small is not necessary beautiful. At least this is the only inference that can be surmised after perusing the working of Bajaj Hindustan (BH) for the 12 month period ended Sep 2009. BH is arguably the country's largest sugar manufacturer operating in the joint stock sector. It is indeed the largest manufacturer (mfg) cum seller of ethanol in the country. For the uninitiated, ethanol --both denatured and potable--- is obtained from the sugar cane juice byproduct --molasses --and has multiple uses including in souping up motor fuel.

The power play in the sugar sector in the Indian scenario is both complex and bizarre and is not the playground for the uninitiated. There is however no dearth of sugar mfgs---over 500 of them -----or in terms of area under cultivation--close to 5 m hectares that is. The big players all thrive but not the minority shareholders though.

What determines a sugar mfgs. place under the sun are myriad factors--price paid for cane under SAP, SMP, FRP and god knows what else, the sugar recovery factor from cane crushing, the quantum of levy sugar to be supplied to the public distribution system and the price that the govt fixes for it, the intricate politics that dogs the distribution of ethanol and finally, the open market price for the sugar which is again a variable of the political economy. It is the last factor which is apparently the principal determinant. This is of course assuming that the cash generated from operations is also judiciously used for the betterment of the company's wellbeing--- and that is not always so.

Thanks to the non ending conundrum on the 'right' price payable to farmers the company has contingent liabilities in excess of Rs 6 bn at year end on this count.

Given this unfathomable web, the wonder is that minority interests still see value in becoming shareholders. Some 30% of the cos equity is actually held by the 'learned' Institutional segment --both of the desi and the videsi variety!!!!

Sugar is also the second largest agro processing based industry in India and sugar cane being a cyclical agri produce, the sugar industry has to willy nilly follow an accounting year cycle which is at odds with the cycle prescribed for direct and indirect taxes mandated by the GoI.

BH has in the latest full accounting year crushed infinitely less sugar cane, produced and sold far less ethanol and sugar but has turned a bottomline profit--inspite of other misadventures by seeking to diversify laterally out of its mainline business by getting into the mfg of medium density fibre. It is still early days in this diversification though. It has big capex lined up elsewhere. Thermal power generation is its latest mantra.

The positive bottomline also appears to be as a consequence of some deft accounting. Other income has risen very sharply and the company admits that the bulk of this 'other income' recorded in the latest accounting year is not of a' recurring' nature. Nice of them to have admitted so.!!!!

That BH is hard pressed is visible elsewhere too. The funds generated from operating activities is largely eaten up by demands on receivables and inventories and the company made good only by issuing shares to foreign entities at a substantial premium. It also thought nothing about fattening the management at the same time by issuing shares to itself at a substantially lower premium--apparently to increase its hold on the company. The management issued shares to itself at a premium of Rs 51 per share while the Institutional placement was at a premium of Rs 203 per share!!!! Nice going or what?.

What's more, a part of the proceeds of this new issue was used to neutralise a part of the liability that would have materialised if it had to convert its earlier FCCB bond issue into equity---and which would have increased the 'firang' hold. There are other factors too which add to its misery. It had equity investments in group cos aggregating Rs 5.5 bn which does not appear to bring in a dime .Add to that the fact that it has loaned close to Rs 10 bn to group entities including Bajaj Hindustan Sugars --which again do not appear to net it any returns---and the big picture is about complete. There is an interest recd income of Rs 970 m but there is no clue to what this receipt pertains.

This money lending spree has to be seen in the light of the co's borrowings which stand in excess of Rs 30 bn at financial year end. In the same breath it claims that good corporate governance policies are being implemented in full spirit!!!!

Disclosure: Please note that I am a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
Equitymaster Agora Research Private Limited


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