Bajaj Hindusthan Sugar: Sale of power assets to drive earnings

Since the entire proceeds are to be used towards advance repayment of term debt, it could boost the company's earnings

Bajaj Hindusthan Sugar's board, on Tuesday, proposed the sale of 449 Mw of power co-generation capacities located at 14 locations to Lalitpur Power Generation Company Limited (LPGCL), a group company for a lump sum cash payment of Rs 1,800 crore, subject to necessary approvals from shareholders and regulator.

With this move, the company seems to be consolidating the power generation business in one group company. But for Bajaj Hindusthan, since the entire proceeds are proposed to be utilised towards advance repayment of its existing term debt, it can boost earnings of the company. This will further boost the company's already improving financials.

During the past year, as the sugar cycle became favourable and as realisations improved, Bajaj Hindusthan's sugar business too has seen a turnaround in profitability. However, given the high debt in the books, operating profits have still not been adequate to cover interest costs.

During the September 2016 quarter, while the company saw its revenues rise 13 per cent to Rs 860 crore, it reported a major turnaround with an operating profit of Rs 78.22 crore as against a Rs 40.67 crore operating loss in the year-ago quarter. After including other income, profit before interest, tax and depreciation at Rs 118.20 crore fell well short of finance costs of Rs 202 crore. Hence, the planned reduction in debt is vital for the company to return to profitability. The company had total debt of Rs 7,313 crore at the end of FY16 and a repayment of Rs 1,800 crore can reduce debt by a fourth. This should lead to a proportionate cut in finance costs, which coupled with further improvement in operating performance can lead to positive cash flows as well.

Following the announcement, the stock saw intraday gains of 10 per cent before closing 2.2 per cent up at Rs 13.64. One reason for the stock not sustaining the gains could be lack of clarity on the price of power that Bajaj Hindusthan would source from these plants once they are sold to the group company.

Moving forward, the outlook for the sugar manufacturers remains favourable. Domestic sugar production is estimated to decline to 23.4 million tonnes in sugar year (SY) 2016-17 compared to 26 MT in SY15-16, and sugar consumption is expected to remain in excess of 25 million tonnes. Thus, sugar prices are likely to remain firm helping sugar players as Bajaj Hindusthan. A faster approval and completion of the sale of cogeneration assets can provide impetus to the stock.