Company May Not Meet Sugar Production Target Due to Weak, Dispersed Monsoon
THE stock price of the country's largest domestic sugar firm by production capacity, Bajaj Hindusthan, ended flat after touching a 52-week low on Monday, even as the company managed to buck the trend of sequential losses during the December 2010 quarter.
Most sugar companies have witnessed lower profitability beginning with the last sugar season (October '09 to September '10) as higher sugarcane production has eased sugar supply, resulting in lower sugar prices compared with the year-ago period.
A merger with its previously listed subsidiary Bajaj Hindustan Sugar and Industries boosted Bajaj Hindusthan's performance in the December quarter. The merger, effective last quarter, buoyed the company's standalone revenue, which grew two-fold over the year-ago period backed by higher aggregate volume.
But the firm's operating margin contracted 1,500 basis points (bps) to 20% over the year-ago period as it was hit by higher cost of key raw material, sugarcane, besides lower sugar prices.
Also, higher depreciation and interest cost partly put pressure on net profit, which shrink to 57 crore compared with 85 crore a year ago. The company had posted a loss of 50 crore in the previous quarter on account of a sequential rise in sugar prices following concerns of lower-thanprojected sugarcane production in India and abroad.
The country's sugar production for the current season ending September 2011 is expected to be marginally lower at 23 million tonnes compared with the previous projections of 26 million tonnes. This is due to weak and dispersed monsoon, which has resulted in lower sugar production despite increased plantation in two of the leading sugar producing states, Maharashtra and Uttar Pradesh. This has also resulted in 9% increase in sugar prices to . 29/kg compared with the September 2010 quarter. This has supported realisations.
With expectations that sugar prices will remain in the range of 28-30/kg in the coming quarters, the company's bottomline compared with the year-ago period will continue to remain under pressure. Any rise in sequential realisation may not be able to cushion a fall in profitability in the coming quarters that may see the firm posting lower net profits, impacting valuations in the near term.
Bajaj Hindusthan's scrip has lost almost a third of its value in the last three months, underperforming the 32-stock ET Sugar Index, which declined 9% in the same period. This is due to poor financial performance of the company compared with its peers in the past one year.
Despite sliding valuations, the upside in the stock looks restricted in the near term given the expectation of flat realisations owing to and range-bound sugar prices.
