2QSY2010 Result Update I Sugar May 21, 2010 Bajaj Hindusthan Performance Highlights Bajaj Hindusthan (BJH) s 2QSY2010 results were below our expectations, primarily due to an increase in cane cost and a higher contribution from levy sales. Total Sales for the quarter grew 34% to Rs567cr, on the back of strong sugar prices. The Total Reported PAT declined by 61% to Rs32cr; however, after adjusting for a one-time exceptional item included in other operating income (pertaining to AS-11 and Forex), the company posted a loss of Rs15cr in the quarter (against a profit of Rs73cr in 2QSY2009). We have pruned our SY2011E estimates due to the poor 2QSY2010 performance. At the current levels, the stock is trading at fair valuations. Hence, we maintain our Neutral view on the stock. Higher Raw Material costs, Levy sales impact Margins: The Gross Margin for the quarter declined by 900bp to 37% in 2QSY2010 from 46% 2QSY2009, on the back of an increase in cane cost and higher contribution from levy sales. BJH incurred a cost of Rs2,470/tonnes on cane in SY2010, as against Rs1,494/tonnes spent in SY2009, an increase of 65% yoy. Cane prices increased primarily due to higher demand from mill operators, as the area under cane cultivation did not increase in tandem during the season. Hence, due to the shortage of sugar, the government increased the levy quota sales to 20% (of production) for SY2010 from 10% in SY2009. Levy sugar is being sold at a fixed price of Rs13.8/kg, which led to an approximate loss of Rs15/kg for the company during the quarter. Outlook and Valuation: Going ahead, sugar prices are likely to be under pressure due to the higher-than-expected sugar production in India and Brazil. As a result, we expect that the demand-supply of sugar would achieve balance in SY2011E, and that prices would further soften from the current levels. The Domestic ex-mill prices have corrected from a high of Rs42/kg to Rs28-29/kg over the past 4 months, while the cost of inventory is in the region of Rs28/kg. Thus, we expect most sugar companies to break-even or record losses at the Net level over the next six months. Give the fact that BJH has the highest raw sugar inventory (700,000 tonnes) in the industry at a cost of Rs28/kg, any further fall in sugar prices would put it at high risk. At the current levels, the stock is trading at fair valuations of 5.6x EV/EBITDA, 1x P/BV and 1x Enterprise Value/Invested Capital, on SY2011E Estimates. Hence, we maintain our Neutral view on the stock. NEUTRAL CMP Rs102 Target Price - Investment Period - Stock Info Sector Sugar Market Cap (Rs cr) 1,950 Beta 1.2 52 WK High / Low 243/100 Avg. Daily Volume 1462586 Face Value (Rs) 1 BSE Sensex 16,446 Nifty 4,931 Reuters Code BJHN.BO Bloomberg Code BJH@IN Shareholding Pattern (%) Promoters 41.8 MF/Banks/Indian FLs 25.6 FII/NRIs/OCBs 17.1 Indian Public 15.5 Abs. (%) 3m 1yr 3yr Sensex 1.6 19.7 14.1 BHL (37.5) (23.8) (44.1) Key Financials Y/E Sept (Rs cr) SY2008 SY2009 SY2010E SY2011E Net Sales 2,070 2,026 5,485 5,133 % chg 16.3 (2.1) 170.7 (6.4) Adj Profit (90) (33) (250) 183 % chg 167.4 (63.2) 655.6 - EPS (Rs) - - - 9.5 EBITDA Margin (%) 14.2 20.8 3.7 15.2 P/E (x) - - - 10.7 RoE (%) - - - 9.3 RoCE (%) 0.3 1.3-7.9 P/BV (x) 1.2 0.9 1.0 1.0 EV/Sales (x) 2.7 2.8 0.9 0.9 EV/EBITDA (x) 19.0 13.6 24.6 5.6 EV / IC (x) 1.1 1.0 1.0 1.0. Sageraj Bariya Tel: 022 4040 3800 Ext: 346 E-mail: sageraj.bariya@angeltrade.com Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539 1
Exhibit 1: 2QSY2010 Performance Y/E Sept (Rs cr) 2QSY10 2QSY09 % chg 1HSY10 1HSY09 % chg Sales 567 425 34 1,183 785 51 Other Op Income 18 113 (84) 18 93 (80) Total Revenues 585 538 9 1201 878 37 Consumption of RM 360 231 56 684 474 44 (% of Sales) 62 43 57 54 Gross Profit 207 194 7 498 311 60 Gross margin (%) 37 46 (20) 42 40 6 Staff Costs 44 35 26 75 65 16 (% of Sales) 7 6 6 7 Other Expenses 85 45 92 144 98 47 (% of Sales) 15 8 12 11 Total Expenditure 489 310 58 903 636 42 as % of sales 84 58 75 72 EBITDA 96 228 (58) 298 242 23 EBITDA Margin (%) 17 54 25 31 Depreciation 46 55 (16) 97 103 (6) EBIT 50 173 (71) 201 139 45 EBIT Margin (%) 9 32 17 16 Other Income 1 0 3 0 Interest 65 63 4 111 111 (0) PBT (excl. Extr. Items) (14) 110-93 28 238 Extr. (Income)/Expense (46) (8) - (60) (3) - PBT (incl. Extr. Items) 32 119 (73) 153 31 398 Provision for Taxation 1 37 (98) 36 5 584 (% of PBT) (5) 34 39 19 Reported PAT 32 81-117 25 360 PM (%) 5 15 10 3 Minority & Others - - - - Adj PAT (15) 73-57 22 156 Adj NPM (%) (3) 14 5 3 Equity capital (cr) 19 18 19 18 EPS (Rs) 1.6 4.6 (64) 6.1 1.4 325 Adj EPS (Rs) (0.8) 4.1-3.0 1.3 - May 21, 2010 2
Key highlights Strong realisations support Sales growth: Net Sales for 2QSY2010 grew 34% yoy to Rs567cr (Rs425cr). Sugar Division Sales grew 38% yoy, while Sales of the Power Division increased by 110% yoy. Such strong growth was witnessed inspite of the sugar sales volume falling by 18% during the quarter. Thus, the Top-line was supported by a 48% surge in Sugar realisation, which grew on account of a demand-supply mismatch. Increase in Raw Material costs, high contribution of levy sales impact Margins: The company s Gross Margin fell by a substantial 900bp to 37% in 2QSY2010 (from 46% in 2QSY2009). Margins were hit due to the increase in cane costs and a higher contribution of levy sales. BJH incurred a cost of Rs2,470/tonne of cane in SY2010, as against Rs1,494/tonne in SY2009, an increase of 65% yoy. Cane prices were driven by high demand from the mill operators, as sugar prices kept increasing, while the area under cane cultivation remained flat during the season. The levy quota (sales to PDS) increased to 20% in SY2010, from 10% in SY2009, due to the shortage in sugar production. Levy sugar is being sold at a fixed price of Rs13.8/kg, which led to a loss of Rs15/kg for the company during 2QSY2010. Exhibit 2: Segmental Performance Y/E Sept (Rs cr) 2QSY10 2QSY09 % chg 1HSY10 1HSY09 % chg REVENUES Sugar 564 408 38 1166 764 53 Cogeneration 35 39 (9) 188 51 269 Distillery 105 50 110 147 81 83 Total revenues 704 496 42 1502 895 68 PBIT Sugar 27 31 (11) 163 5 3088 Cogeneration 10 (1) (962) 7 (8) (184) Distillery 90 38 139 122 58 113 Total PBIT 128 67 90 292 55 432 PBIT margin (%) Sugar 5 7 14 1 Cogeneration 29 (3) 4 (15) Distillery 86 76 83 72 Exhibit 3: 2QSY2010 Quantitative data Y/E Sept (Rs cr) 2QSY10 2QSY09 % chg 1HSY10 1HSY09 % chg Cane crushed (mn tones) Production Sugar 5.7 2.9 95.2 8.3 5.4 52.2 -cane based (mn tones) 0.5 0.3 100.7 0.8 0.5 53.0 -raw (mn tones) 0.1 0.0-0.1 0.0 - Distillery ( mn litres) 35.6 20.2 75.7 43.1 22.9 88.1 Sales Sugar (mn tonnes) 0.1 0.2 (17.7) 0.3 0.4 (11.1) Distillery ( mn litres) 13.0 16.5 (21.5) 18.8 20.6 (8.9) Power ( mn units) 76.6 46.9 63.4 105.6 72.9 44.9 Realisation Sugar ( Rs / kg) 32.9 22.2 48.0 32.2 18.6 73.4 Distillery ( Rs / ltr) 26.8 26.1 2.9 27.3 28.5 (4.3) Power (Rs/ unit) 4.0 3.0 31.7 4.0 3.0 31.7 May 21, 2010 3
Exhibit 4: Sugar Realisation Trend 35 30 32 33 25 22 Rs / Kg 20 15 10 17 5 0 1QSY2009 2QSY2009 1QSY2010 2QSY2010 Other developments BJH has decided to hive-off its power venture into an SPV, where it plans to hold a minimum 26% stake. We believe that the sharp correction in sugar prices has led the management to reconsider its power venture plan, one which would entail a huge investment. As per disclosed plans, BJH was planning to set up a 450MW thermal power plant on land adjacent to its sugar mill. This would have entailed investment of roughly Rs1,800cr (Rs4cr/MW). Considering that BJH is likely to have net debt:equity of 1.2x at the end of SY2011E, the power venture would have put additional pressure on the company s balance sheet and cash flow. Outlook and Valuation BJH s 2QSY2010 performance was below our expectations. Going ahead, sugar prices are likely to be under pressure due to the higher-than-expected sugar production in India and Brazil. As a result, we expect that the demand-supply of sugar would achieve balance in SY2011E, and that prices would further soften from the current levels. The Domestic ex-mill prices have corrected from a high of Rs42/kg to Rs28-29/kg over the past 4 months. The correction in prices has been severe and sharp, owing to which we expect a small bounce back in the near term. However, the rise would not take realisations to the earlier highs of Rs42/kg. We have revised our SY2011E and SY2012E estimates for BJH, due to the lackluster 2QSY2010 performance. We have lowered our SY2011E sugar realisation from the earlier Rs33.5/kg to Rs30.5/kg, and for SY2012E from Rs25/kg to Rs24/kg. We estimate the inventory cost of BJH to be in the region of Rs28/kg, slightly above its peers, due to a higher cane cost borne by the company BJH paid Rs2,470/ tonne of cane against Rs2,260/tonne paid by Balrampur Chini. Thus, we estimate BJH to a post loss in SY2010E. At the current levels of Rs102, the stock is trading at fair valuations of 5.6x EV/EBITDA, 1x P/BV and 1x Enterprise Value/Invested Capital on SY2011E Estimates. Hence, we maintain our Neutral view on the stock. May 21, 2010 4
Exhibit 5: Revised Estimates Rs crore Old New % change SY2010 SY2011 SY2010 SY2011 SY2010 SY2011 Sales 5,471 5,301 5,485 5,133 0 (3) EBITDA 843 818 202 781 (76) (5) EBITDA % 15 15 4 15 PAT 237 201 (250) 183 - (9) EPS 12 11-10 - (9) Exhibit 6: One-year Forward EV/IC Chart 12,000 10,000 8,000 6,000 4,000 2,000 0 Oct-01 Apr-02 Oct-02 EV (Rs cr) Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Source: C-line, Angel Research EV 0.8x 1.1x 1.3x 1.6x 1.8x May 21, 2010 5
Profit & Loss Statement (Consolidated) (Rs cr) Y/E Sept SY2006 SY2007 SY2008 SY2009 SY2010E SY2011E Gross sales 1,565 1,914 2,218 2,115 5,721 5,354 Less: Excise duty 82 133 148 89 236 221 Net Sales 1,483 1,780 2,070 2,026 5,485 5,133 Other operating income - - - - - - Total operating income 1,483 1,780 2,070 2,026 5,485 5,133 % chg 77.2 20.1 16.3 (2.1) 170.7 (6.4) Total Expenditure 1,169 1,590 1,776 1,605 5,283 4,352 Net Raw Materials 975 1,205 1,369 1,221 4,364 3,525 Other Mfg costs 10 16 24 29 53 44 Personnel 58 142 148 165 232 261 Other 126 226 234 189 634 522 EBITDA 313 191 294 421 202 781 % chg 56.2 (39.2) 54.2 43.2 (52.0) 286.5 (% of Net Sales) 21.1 10.7 14.2 20.8 3.7 15.2 Depreciation& Amortisation 76 161 280 346 366 373 EBIT 237 30 14 76 (164) 409 % chg 43.5 (87.5) (51.8) 430.1 - - (% of Net Sales) 16.0 1.7 0.7 3.7 (3.0) 8.0 Interest & other Charges 23 139 278 263 281 235 Other Income 87 80 121 141 111 106 (% of PBT) 29 - - - - 38 Recurring PBT 302 (29) (143) (47) (334) 280 % chg 77.1 - - - - - Extraordinary (Expense)/Inc. - - 130 (152) - - PBT (reported) 302 (29) (273) 105 (334) 280 Tax 117 (20) (98) 46 (67) 56 (% of PBT) 38.9 68.1 35.9 43.4 20.0 20.0 PAT (reported) 185 (9) (175) 60 (267) 224 Add: Share of earnings of associate 4 5 6 7 8 9 Less: Minority interest (MI) - (11) 17 2 17 (41) Prior period items - - - - - - PAT after MI (reported) 185 (21) (157) 62 (250) 183 ADJ. PAT 226 (34) (90) (33) (250) 183 % chg 77.1 - - - - - (% of Net Sales) 15.3 - - - - 3.6 Basic EPS (Rs) 16.0 - - - - 9.5 Fully Diluted EPS (Rs) 16.0 - - - - 9.5 % chg 45.7 - - - - - May 21, 2010 6
Balance Sheet (Consolidated) (Rs cr) Y/E Sept SY2006 SY2007 SY2008 SY2009 SY2010E SY2011E SOURCES OF FUNDS Equity Share Capital 14 14 14 18 19 19 Preference Capital - - - - - - Reserves& Surplus 1,347 1,392 1,187 2,096 1,875 2,002 Shareholders Funds 1,361 1,406 1,201 2,114 1,894 2,021 Minority Interest - 23 67 65 82 41 Total Loans 1,541 3,593 4,335 4,056 3,439 2,820 Deferred Tax Liability 126 105 4 49 49 49 Total Liabilities 3,029 5,127 5,608 6,283 5,464 4,931 APPLICATION OF FUNDS Gross Block 1,379 2,922 4,745 5,295 5,315 5,330 Less: Acc. Depreciation 305 467 719 1,060 1,426 1,798 Net Block 1,074 2,455 4,026 4,235 3,889 3,532 Capital Work-in-Progress 1,472 1,630 159 155 155 155 Goodwill - - - - - - Investments 0 0 0 0 0 0 Current Assets 4 5 6 7 8 9 Cash 231 267 174 127 424 370 Loans & Advances 444 1,240 1,571 1,859 1,481 1,540 Other 210 548 847 1,006 1,734 1,552 Current liabilities 402 1,013 1,169 1,100 2,218 2,218 Net Current Assets 483 1,042 1,423 1,893 1,420 1,244 Others - - - - - - Total Assets 3,029 5,127 5,608 6,283 5,464 4,931 Cash Flow (Consolidated) (Rs cr) Y/E Sept SY2006 SY2007 SY2008 SY2009 SY2010E SY2011E Profit before tax 280 (29) (293) 105 (334) 280 Depreciation 72 161 280 346 366 373 Change in Working Capital (357) (25) (128) (263) 1,063 257 Less: Other income Direct taxes paid (73) (20) (25) (14) 59 (49) Cash Flow from Operations (77) 88 (166) 174 1,154 860 (Inc.)/ Dec. in Fixed Assets (1,229.3) (1,696.9) (291.6) (160.4) (20.0) (15.0) (Inc.)/ Dec. in Investments (148.3) (301.5) (1.2) 35.0 - - Inc./ (Dec.) in loans and adv. - - - - - - Other income - - - - - - Cash Flow from Investing (1,378) (1,998) (293) (125) (20) (15) Issue of Equity 734 31 5 742 76 - Inc./(Dec.) in loans 996 2,052 620 (428) (617) (619) Dividend Paid (Incl. Tax) (8) (10) (10) (10) (14) (45) Others (50) (126) (250) (399) (281) (235) Cash Flow from Financing 1,672 1,947 365 (95) (837) (898) Inc./(Dec.) in Cash 217.5 36.2 (93.4) (46.8) 296.4 (53.6) Opening Cash balances 6 231 267 174 127 424 Closing Cash balances 223 267 174 127 424 370 May 21, 2010 7
Key Ratios Y/E Sept SY2006 SY2007 SY2008 SY2009 SY2010E SY2011E Valuation Ratio (x) P/E (on FDEPS) 6.4 - - - - 10.7 P/CEPS 4.8 11.3 7.6 5.8 16.8 3.5 P/BV 1.1 1.0 1.2 0.9 1.0 1.0 Dividend yield (%) 0.6 0.6 0.6 0.7 2.0 2.5 EV/Sales 1.9 2.7 2.7 2.8 0.9 0.9 EV/EBITDA 8.8 25.0 19.0 13.6 24.6 5.6 EV / Total Assets 0.9 0.9 1.0 0.9 0.9 0.9 EV / IC 2.1 1.5 1.1 1.0 1.0 1.0 Per Share Data (Rs) EPS (Basic) 16.0 - - - - 9.5 EPS (fully diluted) 16.0 - - - - 9.5 Cash EPS 21.4 9.0 13.4 17.7 6.1 29.0 DPS 0.6 0.6 0.6 0.7 2.0 2.5 Book Value 96.3 99.4 85.0 119.5 99.0 105.6 Dupont Analysis EBIT margin 16.0 1.7 0.7 3.7-8.0 Tax retention ratio 61.1 31.9 64.1 56.6 80.0 80.0 Asset turnover (x) 1.1 0.6 0.4 0.3 1.1 1.2 ROIC (Post-tax) 11.0 0.3 0.2 0.7-7.4 Cost of Debt (Post Tax) 3.0 1.7 4.1 4.6 6.0 6.0 Leverage (x) 0.9 1.7 2.9 2.4 1.7 1.4 Operating ROE 18.3 - - - - 9.4 Returns (%) ROCE (Pre-tax) 11.3 0.7 0.3 1.3-7.9 Angel ROIC (Pre-tax) 8.5 0.6 0.3 1.2-9.0 ROE 22.9 - - - - 9.3 Turnover ratios (x) Asset Turnover (Gross Block) 1.1 0.8 0.5 0.4 1.0 1.0 Inventory / Sales (days) 24 59 108 158 84 106 Receivables (days) 10 18 15 9 7 10 Payables (days) 40 105 172 212 102 170 WC cycle (ex-cash) (days) 41 105 178 272 92 67 Solvency ratios (x) Net debt to equity 1.0 2.4 3.5 1.9 1.6 1.2 Net debt to EBITDA 4.2 17.4 14.1 9.3 14.9 3.1 Interest Coverage (EBIT / Int.) 10.3 0.2 0.1 0.3-1.7 May 21, 2010 8
Research Team Tel: 022-4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Securities Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, and are for general guidance only. Angel Securities Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Securities Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Securities Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Securities Limited nor its directors, employees and affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Disclosure of Interest Statement Bajaj Hindusthan 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below Rs 1 lakh for Angel and its Group companies. Address: Acme Plaza, A Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059. Tel : (022) 3952 4568 / 4040 3800 Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234-2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946 Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302 May 21, 2010 9