Bajaj Hindusthan (BHL) has booked 0.7mt of imported raw sugar to be processed in SY10. These imports would account for 89% of the company’s sugar output for SY10 (estimated at 0.74mt), and would partly offset the adverse impact of lower residual inventories. As a result, we expect BHL to record a spike in sale volumes to 1.4mt in SY10 as against 0.94mt in SY09.
As volumes increase by close to 49% and realisations move up, we expect BHL to almost double its revenues to Rs43.5 billion in SY10. This will aid a surge in the company’s bottomline to Rs4.5 billion, as against an expected marginal profit in SY09.
On account of its high leverage, BHL makes an excellent play on rising sugar prices as every Re1 rise in free sugar realization adds Rs1.2 billion (24%) to the company’s pre-tax profit.
Since we are currently in the second year of the sugar upcycle, we have based our target P/E multiple for the stock on valuations seen in SY05 – the second year of the last upcycle which stretched from SY04 to SY06.
At our target P/E multiple of 10x on FY10E, we have a target price of Rs234 for the stock – this offers a 25% upside from current price levels. In a rising sugar price scenario, we are positive on the growth prospects of BHL and initiate coverage on the stock with a BUY recommendation.