Sugar manufacturers are set for a bumper year, with the first quarter results of Bajaj
Hindusthan Ltd offering a preview. Its sales rose by 71% to Rs615 crore and its operating profit margin shot up from 10% to 34.2%. Bajaj Hindusthan’s sugar realizations during the quarter rose by 78% to Rs32 per kg. That explains the sharp rise in its operating profit margins as its raw material costs grew by just 33%. It earned a net profit of Rs85 crore during the quarter, against a loss of Rs56 crore a year ago.
Anticipating a lower sugar cane crop, sugar companies have imported sizeable quantities of raw sugar. Apart from crushing cane, raw sugar will be processed to meet the shortfall. During the December quarter, Bajaj Hindusthan sold around 176,000 tonnes of sugar in the market and has an inventory of 250,000 tonnes for sale in the current quarter.
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The management said that it expects to produce around 1.35 million tonnes of sugar during the year, of which 1 million tonnes will come from processing raw sugar and the rest from sugar cane. Bajaj Hindusthan had an inventory of 700,000 tonnes of raw sugar as of December; it plans to process one-third of this by March and the rest when the crushing season ends. Sugar realizations are at around Rs43 per kg levels at present for some of Bajaj Hindusthan’s Uttar Pradesh factories and the company expects realizations to reach Rs50 per kg in the March quarter.
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Sugar cane prices are rising too, but a substantial inventory of raw sugar will protect its average raw material costs. Average cost for raw sugar, at the profit-before-tax level, was around Rs27 per kg during the quarter and Rs29 per kg for cane sugar. Sugar cane is being sourced on average at Rs220 per quintal, which may rise to as much as Rs275 per quintal.
The next three quarters will see sales and profits continue rising due to higher output and prices. Margins may moderate, however, during quarters when the proportion of cane sugar increases. Consensus estimates for the fiscal year ending September put its earnings per share at Rs18.6, which translates to a price-earnings multiple of around 12 times. Its share price has risen by 10% in a month.
It has no capital expenditure plans in sugar, but is investing Rs1,600 crore to set up power plants on land adjoining its units. It has a net debt of around Rs2,041 crore, which it plans to lower using the current fiscal’s higher cash flows. It recently got shareholder approval to issue up to Rs2,000 crore of equity or convertible securities. The prospects of a sizeable equity issuance (it has a market capitalization of Rs4,100 crore), though this may happen through separate issues, may act as a counter-weight to the enthusiasm generated by rising sugar prices.
Graphics by Yogesh Kumar / Mint