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Bajaj Hindusthan’s margins hit by falling sugar prices

Bajaj Hindusthan’s margins hit by falling sugar prices
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First Published: Wed, May 12 2010. 09 56 PM IST

Graphic: Yogesh Kumar/Mint
Graphic: Yogesh Kumar/Mint
Updated: Wed, May 12 2010. 09 56 PM IST
Bajaj Hindusthan Ltd (BHL) has taken a sensible decision to transfer its power business to a 100% subsidiary. The earlier logic was to use cash flows from the sugar business to create an alternate revenue stream. BHL would set up these units on land adjoining its sugar units and share some infrastructure.
The sudden downturn that hit the sugar industry has forced a rethink. While BHL will hold at least a 26% stake in the power business, its funding commitment will be lower and it will also stay a focused sugar company.
Graphic: Yogesh Kumar/Mint
BHL’s March quarter numbers show why it changed its mind. Profitability was affected due to lower sugar sales and a fall in realizations. Sugar volumes were affected as demand declined due to government measures and traders waited for the situation to stabilize. In the March quarter, BHL’s sugar sales rose by 38.5% to Rs565 crore, though volumes declined 17.7% to 1.46 million quintals. Sugar prices were volatile during the March quarter, swinging from around Rs40/kg levels to Rs30/kg levels, but they are still higher than over a year ago. Average realizations for BHL were Rs32/kg compared to Rs20/kg the year ago.
The main hit to profitability was from higher cane prices, as procurement prices shot up during the season. BHL’s total material costs rose by nearly 56% during the quarter and as a result, its sugar segment profit declined by 11%. The distillery and co-generated power divisions came to the rescue.
While its distillery business reported a profit of Rs10 crore compared with a loss of Rs1.2 crore in the year-ago period, the power business reported a profit of Rs90 crore, up 136%. Power sales were up 64% in volume terms and realizations improved due to higher tariffs.
Still, BHL’s operating profit declined by 20% and its margin fell to 23% from 40%. The decline in net profit at 73% was much higher, mainly due to forex gains in the year-ago period. Sugar players believe that prices will be stable at current levels for the next few quarters. But then they were wrong on both production and price estimates too. Stable prices are critical for them to sell their stocks at a profit.
BHL is sitting on 7.22 million quintals of white sugar and 4.66 million quintals of raw sugar. Its white sugar inventory cost is around Rs27/kg while its raw sugar cost is around Rs22/kg.
That still gives it enough room to make profits, based on current price levels. The sales will also free up cash stuck in inventory, allowing it to pay down debt.
Write to us at marktomarket@livemint.com
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First Published: Wed, May 12 2010. 09 56 PM IST