HDFC downgrades Bajaj Hindustan

HDFC Sec has downgraded Bajaj Hindustan to “Market performer” with a negative bias from BUY rating as the company is likely to be adversely impacted by higher debt and sugar cane costs. UP government has declared cane price (SAP) of Rs 1,400 per tonne for 2008-2009 (Oct-Sep) crushing season against Rs 1,100 per tonne paid by the companies for the last season. Sugar Mill owners have challenged the order in the High Court. Meanwhile, Bajaj Hindustan has agreed to pay Rs 1,400 per tonne for 08-09 crushing season to the farmers and not delay their operations till the court issues directives on this matter.

According to revised cane pricing assumptions there is a significant earnings downgrade for the company of 50% and 32% for CY09E and CY10E respectively. For every 5% change in cane prices, EPS changes inversely by 51%. It was also expected that government would give incentives to sugar mills after two years of the downturn faced by them which did not happen.

At the current market price of Rs. 49.4, the stock is trading 14.39X CY09E at an EPS of Rs. 3.43. HDFC Sec expects FY10 EPS of Bajaj Hindustan to be Rs 11.9, a jump of 200%. Can they achieve it ?