Bajaj Hindusthan Sugar Ltd. : Both Sweet And Sour

The growth of sugar and ethanol producer Bajaj Hindusthan Sugar Limited has been amazing with a significant expansion phase from 2003 to 2007 that led to the creation of eight new plants, elevating the total cane crushing capacity to 96,000 tonnes per day. However, there are certain challenging dynamics that need to be overcome 

Bajaj Hindusthan Sugar Limited (BHSL) was established on November 23, 1931, initially known as Hindusthan Sugar Mills Limited. Founded by Jamnalal Bajaj in collaboration with Mahatma Gandhi, the company’s creation aimed to boost industrial growth in India, given the limited number of sugar mills at the time. The first plant was set up in Gola Gokaran Nath, Uttar Pradesh, with a capacity of 400 tonnes of cane crushed per day. Over the years, this capacity expanded to 13,000 tonnes per day. In 1988, the company’s name was changed to Bajaj Hindusthan Sugar Limited and it merged with Sharda Sugar and Industries Limited in 1990. [EasyDNNnews:PaidContentStart]

A significant expansion phase from 2003 to 2007 led to the creation of eight new plants, elevating the total cane crushing capacity to 96,000 tonnes per day. The acquisition of Pratappur Sugar and Industries Limited (PSIL) and its subsequent doubling of capacity enhanced BHSL’s position and established it as a major ethanol producer. Further expansions included the establishment of additional sugar units and power cogeneration plants, making BHSL a substantial power generator. 

Today, BHSL has 14 sugar plants having an aggregate crushing capacity of 136,000 TCD, six distilleries with aggregate capacity of 800 KL per day and about 151 MW of surplus power. Furthermore, BHSL’s revenue is derived from three main segments: sugar manufacturing (76 per cent), industrial alcohol production (12 per cent) and power generation based on bagasse (11 per cent). As of FY23, BHSL has a market share of about 3.93 per cent in India and 12.29 per cent in Uttar Pradesh. 

Sector Overview

Over the years, India has become an efficient and consistent supplier of sugar to the global market. During the year 2021-22, India surprised the global sugar community by exporting a record 11.1 million MT of sugar as against the last highest export at a level of 7.2 million MT during the previous year. During 2022-23, India is estimated to have exported a quantity of 6.2 million MT and quantities have dwindled this year because of lower production as against last year. 

Ethanol production, which till 5-6 years back was considered a by-product of the sugar industry, is now becoming an important product of the industry and the time is not far when it is going to become a major product for the sector. The diversion of sugar towards ethanol, which was nil till 2017-18, reached a level of 0.5 million MT during 2018-19, 0.8 million MT the next year and 2.0 million MT during 2020-21 with an estimated level of 4.0 million MT during the sugar year 2022-23 and 5.5 million MT during 2023-24. On the one hand, this diversion of sugar towards ethanol is providing the much needed raw material for the government’s blending programme while on the other hand it is helping in regulating excess sugar production in the country. 

Over the last five years, the government’s strategic measures have greatly boosted the sugar sector. By promoting exports, allocating quotas and offering export aid, surplus sugar issues have been tackled. Ethanol blending, a minimum support price and controlled monthly domestic release have further aided cutting sugar stocks, easing cane payments and enhancing industry cash flow. Additionally, ensuring consistent ethanol supply to oil firms has bolstered the sugar industry’s overall progress.

Sugar Production and Consumption Over 13 Years 

From the above graph, it can clearly be observed that sugar production is always in excess and higher than consumption. It is only during 2016-17 that sugar production came down below consumption due to a very poor crop in Maharashtra. 

Major Sugar Producing Countries 

During 2021-22, India became the world’s largest producer of sugar, surpassing Brazil, and the second-largest exporter of sugar after Brazil. Production of more than 30 million MT is the new normal for the Indian sugar industry. In the last six years since 2017-18, five-fold growth has helped the all-India sugar production to cross the level of 30 million MT. 

Financial Overview 

Bajaj Hindusthan Sugar recently announced their Q1FY24 results in which on a consolidated basis the sales of the company declined by 11.1 per cent and stood at ₹ 1,360 crore as compared to ₹ 1,530 crore in Q1FY23, while the operating profit of the company also declined by 33.3 per cent to ₹ 22 crore as against ₹ 33 crore in Q1FY23. Similarly, the net loss of the company declined further to ₹ 75 crore in Q1FY24 as compared to net loss of ₹ 45 crore in Q1FY23. 

On an annual consolidated basis, in FY23 the sales of the company surged by 13.6 per cent and stood at ₹ 6,338 crore as compared to ₹ 5,576 crore in FY22, while the operating profit soared by 46.5 per cent to ₹ 263 crore as compared to ₹ 172 crore in FY22. Similarly, the net loss of the company decreased by 48.7 per cent and stood at ₹ 135 crore as against a net loss of ₹ 268 crore in FY22. Furthermore, the company has been able to grow its sales by 2 per cent (CAGR) for the past five years and the net profit has grown by 12 per cent (CAGR) for the same period. Bajaj Hindusthan Sugar holds a market capitalisation amounting to ₹ 3,040 crore and possesses a book value of ₹ 34.60. 

Evaluating the company’s liquidity and solvency aspects, it displays a current ratio of 0.56, an interest coverage ratio of 0.24 and a debt-to-equity ratio of 0.97, all indicating unfavourable conditions from both liquidity and solvency standpoints. In addition, the company bears a total debt of ₹ 4,292 crore. Turning to the profitability facet, the company reflects a negative return on equity (ROE) of 4.03 per cent and a return on capital employed (ROCE) of 0.91 per cent. Moreover, the company has been consistently incurring losses. Looking at the current valuation metrics, the company has a price-to-book value of 0.71, price-to-sales of 0.5 and EV/EBITDA of 13.9x, which indicates undervaluation when compared with its peer companies. 

Risks and Concerns

While cane prices are fixed by the state government, sugar realisations are totally market-driven and dependent on the demand-supply dynamics. This at times has led to a complete mismatch between the cane price and sugar realisations. To mitigate the said sugar price risk, the government had fixed a minimum selling price (MSP) of sugar, earlier at the level of ₹ 29 per kg and now at the level of ₹ 31 per kg, below which no sugar mill can sell the product in the market. Further, the government has implemented a monthly release mechanism to regulate sugar supply in the market so that the prices remain firm. The government is further taking care of excess sugar in the system which might dampen prices by having policies for diversion towards ethanol or exports. 

Outlook

The Indian sugar industry has come of age and is now no more just a sugar producing industry but has also become a major hub of biofuel. On the lines of Brazil, every year the diversion of cane or sugar towards ethanol is increasing, thus providing bioethanol for Government of India’s ambitious target of 20 per cent ethanol blending by the year 2025. During the sugar year 2022-23 (October-September), the all-India sugar production is slated to take a dip to the level of approximately 32.8 million MT as against record sugar production of 35.8 million MT during the year 2021-22 due to lower yield or sugar production in Maharashtra and Karnataka. 

State-wise Sugar Production on All India basis since the Year 2017-18 

During the sugar year 2022-23, since sugar exports from the country will be restricted to just 6 million MT as against the initial estimate of 8–9 million MT and 11.1 million MT during 2021-22, the international sugar prices skyrocketed to the last 11 years’ high levels. On the export front, during 2021-22, India has shaken the world market by exporting a record 11.1 million MT of sugar. International trade has started recognising India as an efficient and consistent sugar exporter and countries are becoming dependent for their regular sugar import requirements from India. Sugar consumption has continued to grow at a CAGR of 1.8 per cent in the last 10 years and touched a level of 27.3 million MT during 2021-22. It is estimated to reach a level of 27.5 million MT during 2022-23. 

Ethanol supplies and blending percentages are increasing every year in line with the government targets. During the year 2013-14, ethanol blending percentage was just 1.53 per cent with ethanol supply of 38 crore litres which is now estimated at a level of 12 per cent during the sugar year 2022-23 with estimated ethanol supply of 550 crore litres. However, there is unfavourable financial standing encompassing liquidity, solvency and profitability challenges, alongside internal legal considerations and external dynamics impacting the sugar industry. Hence, we recommend AVOID. 

[EasyDNNnews:PaidContentEnd] [EasyDNNnews:UnPaidContentStart]

[EasyDNNnews:UnPaidContentEnd]