Wednesday, February 15, 2012

>BAJAJ HINDUSTHAN: Increase in cane crushing and sugar production during the Q1SY12

Bajaj Hindusthan’s Q1SY12 result was significantly below our estimates with Revenue at Rs5.6bn (49.6% below our estimates of Rs11bn), EBITDA at Rs633mn (71.5% below our estimates of Rs2.2bn) and adjusted loss at Rs444mn (vs. estimated profit of Rs117mn). The primary reason for lower than- estimated revenue and profit was a steep decline in sugar sales volume. Sugar sales volume declined 54.3% YoY (and 35.7% QoQ) to 16.5 lac quintals (est. 33 lac quintal). Led by a significant decline in sales volume, Sugar segment reported EBIT level loss of Rs846mn against a profit of Rs1,189mn in Q1SY11. Revenue from distillery segment too declined 61.5% YoY (and 46.1% QoQ) to Rs5.4bn primarily due to 54.3% YoY (and 53.7% QoQ) decline in sales volume to 68.5 lac litres. We believe that the profitability of the company
would be under pressure given the higher State Advised Price (SAP) (Rs240/quintal vs. Rs205/quintal in SY11) fixed by the Uttar Pradesh State government and pressure on sugar prices as higher production is expected in SY12E. The stock has appreciated by 21% since our last update post Q4SY11 results driven by positive news flows like a) allowance of further export of 1mt by the Central government (approval of poll committee is needed due to ongoing state elections in Uttar Pradesh) and b) A committee formed by the Prime Minister to look into the sugar de-control issue. However, we expect that in the near-term the stock could be under pressure as we expect the company to report losses in SY12E and SY13E due to higher sugarcane prices and lower realization as the sugar inventory in India is expected to increase in SY12E We downgrade our rating on the stock to Sell from Hold with a target price of Rs30 (earlier: Rs31), downside of 12.7% from CMP.

■ Disappointing performance of the sugar segment: Revenue from the sugar segment declined 61.5% YoY (and 46.1% QoQ) to Rs5.4bn primarily due to significant 54.3% YoY (and 53.7% QoQ) decline in sales volume to 16.5lac quintals. Realization of open market sugar increased 5.8% YoY (and 6.5% QoQ) to Rs30.1/kg. Led by lower sales volume and rise in sugarcane price, the segment reported EBIT level loss of Rs846mn against a profit of Rs1,189mn in Q1SY11. Recovery rate of sugar was at 8.1% against 8.5% in Q1SY11.

 Lower sales impacts distillery business’ performance: Led by 78% YoY (and 75.8% QoQ) fall in distillery sales volume, revenue from the distillery segment declined 72.8% YoY (and 72.1% QoQ) to Rs220mn. Realization of Alcohol increased 24.3% YoY (and 8.8% QoQ) to Rs31.4/litre. EBIT of the distillery segment declined 80.7% YoY (and 64.3% QoQ) to Rs65mn and EBIT margin declined 12pp YoY (and 6.4pp QoQ) to 29.5%.

■ Increase in cane crushing and sugar production during the quarter: Sugarcane cane crushing by the company increased 30.9% YoY to 3.1mn tonnes during the quarter and sugar production increased 24.5% YoY to 0.39mt. Recovery rate was 42bps lower at 8.1% during the quarter, however, recovery rate is expected to improve going forward as the crushing of new crop starts in February.

 Downgrade to Sell: The stock is trading at 0.58x SY12E P/BV and 0.71x SY13E P/BV. We downgrade our rating on the stock to Sell from Hold due to 21% appreciation post our last recommendation with target price of Rs30 (earlier: Rs31), downside of 12.7% from CMP.