Ambitious power plans, but amid concerns

While Bajaj Hindusthan’s power foray could help diversify its sugar-heavy business model, its leveraged balance sheet and recent dilution remain major concerns.

Sugar major Bajaj Hindusthan has chalked out major plans in the power space and wants to restructure its sugar business by way of merging one of its listed subsidiaries, Bajaj Hindusthan Sugar (BHSL), with the company. While these moves could have a positive impact in the future (power projects are likely to come on stream four to five years hence in 2015), analysts believe it is too early to attach any value to these power projects. Besides, its expensive current valuations, high debt in the books and low return ratios remain key concerns.

Powering ahead
The company, earlier last year, said it would set up power plants of 1,980 Mw and 450 Mw capacity in Uttar Pradesh. In addition to these, it announced in December 2010 that it would set up another 1,980 Mw power project in Uttar Pradesh. This takes the total capacity of the power to about 4,410 Mw of power as against the current operating capacity of 428 Mw (only 105 Mw for external sales). These are large projects and the company will have to show that it has the execution capability to implement the same. The issues investors would like the company to address are fuel supply, financial closure and the clarity about the company’s interest (stake) in these projects. The company has invested Rs 93.4 crore in its subsidiary Bajaj Hindusthan (Singapore), which will look for coal mines abroad. Analysts say a majority of these projects are at a planning stage, which even if completed on time could easily take another three-four years. Besides, even at 26 per cent (minimum that the company wants to have) of the total equity required (at a debt to equity of 75:25), it will require about Rs 1,200-1,400 crore of funds. The current balance sheet size and the large debt in the books, analysts say, could pose difficulties.
 

MOVING INTO POSITIVE ZONE
In Rs crore	SY2009	SY2010	SY2011E
Net sales	2,026	3,201	7,400
Net profit	-33	-130	68
Ebitda margin (%)	20.8	12.8	7.9
RoCE (%)	1.3	1.1	3.8
P/E (x)	NA	NA	37
P/BV (x)	1	1.1	1.1
Note: SY sugar year ending September,                          Source: Angel Research

Restructuring
The company will need more funds to finance its power projects. However, the analysts see very less possibility for further dilution considering that the earnings remain depressed. Also, the company is merging one of its listed subsidiaries (75 per cent stake) Bajaj Hindusthan Sugar. Though the merger will lead to efficiencies, yet based on the number of shares to be issued the dilution will be to the extent of 16 per cent, which will further lower the estimated earnings in the current and next year.

Low realisations from sugar
The company’s existing business of sugar and others like power and distillery have seen improvements in the last one year as a result of higher volumes and better realisations led by higher sugar prices. Though sugar prices recovered — as the government allowed higher exports and imposed a duty on the import of sugar — from Rs 29.5 kg a month back to Rs 30-30.5 a kg currently, the margins remain a key worry. At current realisations of Rs 30.5-31 a kg, the margins still remain low as the production cost stands at Rs 28 a kg. (Rs 22 a kg cost of cane, conversion cost Rs 4 a kg and Rs 2 a kg for depreciation and interest). Considering these factors and the contribution from power and distilleries, analysts expect a net profit of nearly Rs 70 crore in the current year (last year saw an adjusted net loss of Rs 153.74 crore), which could increase if sugar prices go up from the current levels.

Reasonably valued
At Rs 118, the stock is reasonably valued at about 1.1 times its book value and just one time the enterprise value to invested capital (equity and debt). However, it looks expensive at about 36 times its estimated net profit for the current year ending September 2011 and 9.5 times the enterprise value to the operating profits. Investors should also keep in mind that the company is sitting on a huge debt of Rs 3,400 crore and the estimated return ratios on equity as well as capital employed at about 3-4 per cent is very low. Additionally, there is the risk that sugar prices could hammer down the earnings as a result of a high interest cost, and lower operating margins. It paid Rs 368 crore as interest out of the earnings before tax and interest of just Rs 66 crore, indicating a very low interest cover in the year ending September 2010.