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

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.

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