Bajaj Hindusthan: Sweet timing

Direction of sugar prices is key to Bajaj Hindusthan profit growth

The key takeaway from Bajaj Hindusthan's March 2006 quarter results is the continued buoyancy in the sugar industry, though margins have been hit by higher sugarcane prices.

Operating profit (excluding other income) has expanded 125.9 per cent y-o-y to Rs 102.52 crore, helped by net sales growing a staggering 295 per cent to Rs 403.51 crore.

The stock has gained about 46.2 per cent over the past three months compared with 25.3 per cent gain in the Sensex.

According to stockbroking firm Prabhudas Lilladher, Bajaj Hindusthan's sales growth has been powered by its capacity expansion as its crushing capacity increased to 56,200 tonne a day compared with 31,500 tonne a day last year.

Sugar realisations are also estimated to have grown 10 per cent y-o-y to Rs 1870 per quintal in the last quarter. However, adjusted raw material costs amounted to Rs 175.23 crore in the last quarter compared with negative Rs 13.05 crore in the corresponding period of the previous year.

Input costs went up owing to enhanced supplies of sugarcane for meeting higher capacities, coupled with sugarcane prices rising over 20 per cent y-o-y in the last quarter, say analysts. As a result, the company's operating profit margin shrank 1893 basis points y-o-y to 25.4 per cent in the March 2006 quarter.

The direction of sugar prices will continue to remain a key determinant for the company's profit growth. In addition, the company's crushing capacity is expected to grow aggressively over the next few quarters.

As a result, the stock gets a discounting of about 30.5 times estimated September 2006 earnings.

Exide: Top line push

Higher demand for automobiles has resulted in Exide Industries top line rising by almost 25 per cent y-o-y during the March 2006 quarter.

Operating profit also went up 39 per cent as the company managed to control costs better. The major cost for Exide is that of lead metal, which had shot up by 30 per cent between December and February.

As a percentage of sales, raw material cost fell 120 basis points to 58.31 per cent. The company would have also benefited from inventory carried forward from the previous quarter.

Exide's operating profit margin went up by 152 basis points y-o-y to 14.61 per cent. Though operating profit margin has improved over the previous year, it has fallen from 18.19 per cent in Q2 FY06 and 15.27 per cent in Q3.

The stock appears reasonably priced at about 20.7 times FY06 earnings. Going forward, lead prices, which are stable at present, are likely to drive Exide's operating margins.

Sun TV: Powerful signals

The sparkling debut of Sun TV on Monday seems to be a manifestation of three market realities "" the enormous latent demand for good quality primary offers, lack of liquidity and higher Day One listing price.

At the current price of Rs 1,466, the company commands a market cap of over Rs 10,000 crore, just a bit short of the other big listed broadcaster Zee Telefilms, while in terms of revenues, Sun is just a little over one-fifth Zee's size.

Part of the reason is the superior profitability numbers "" Sun should end FY06 with a net profit of around Rs 136 crore compared to Rs 196 crore for Zee.

Profitability is again a function of pricing power which Zee seems to have lost in recent years owing to fierce competition and its failure to set right its programming.

Ironically, even Sun with its undisputed leadership in the south has hardly demonstrated superior pricing power. In the past couple of years, despite buoyant business climate, its revenues grew in single digits. Last fiscal's earnings growth was a result of substantially lower salary costs.

Based on estimated FY06 earnings, the stock trades at a P/E multiple of over 60. The stock trades at 35 times estimated FY07 earnings, predicated on a 70 per cent growth over the previous year.

Given that one is betting on huge growth at a time when the business cycle is already strong, it should be obvious that there could be substantial risk to earnings.

Sticky viewers, along with the strong distribution platform, does provides adequate scope for Sun to raise subscription revenues eventually.

Plus, the future of radio business, which is to be funded by the public offer proceeds, could change the complexion of the company in the long run.

Betting on the stock essentially means largely disregarding valuations on grounds that a strong business franchise in a fast growing industry would eventually translate into better profits and shareholder wealth.

With contributions from Amriteshwar Mathur and N Mahalakshmi