Morgan Stanley underweight on Bajaj Hindustan

Morgan Stanley has recommended underweight rating on Bajaj Hindustan.

Morgan Stanley report on Bajaj Hindustan:

Conclusion:

As India’s largest domestic sugar producer, BJH has been hit hardest by the sharp decline in sugar prices in 3Q F07. BJH reported a net loss of  Rs 605 mn for the quarter, due mainly to: 1) the sharp  decline in sugar prices; 2) high cane costs in the  northern mills (vs. the south); 3) the valuation of closing  inventory at market realization (i.e. below the cost of  production). Moreover, as the greatest beneficiary of the UP Sugar Incentive Policy, BJH will be hurt most by its withdrawal. With stock-to-consumption in India set to increase to over 60% in F08E, domestic sugar prices are likely to remain depressed. We expect continued pressure on BJH’s profits over the next 12 months and maintain our Underweight rating on the stock. 

What’s New:

We have lowered our FY07-09 estimates to reflect the 3QF07 results, weaker current and forecast sugar prices and the valuation of F07 closing inventory at market realization. We now forecast an EPS loss of Rs 7.2 for F07 and EPS of Rs1.1 for F08. 

Implication:

Given the weak medium-term outlook and lack of visible catalysts, we expect the stock to trade between our base case and bear case valuations. As we think investors in the near term will likely extrapolate the weak medium-term outlook into lower long-term sugar prices than we have modeled in our base case, we have set our 12-month price target at Rs 135, the midpoint between our 12-month forward base and bear case valuations. Changes in government policy, including that relating to cane pricing, represent a key source of upside risk to our view.