Not so sweet for UP sugar industry as giant Bajaj Hindusthan gets NPA tag

Bajaj Hindusthan badly needs money to shore up its operations but its NPA tag to make raising funds difficult

With lenders declaring Bajaj Hindusthan Sugar, one of the biggest sugar producers in Uttar Pradesh, a non-performing asset (NPA), the entire sugar sector in the state — apart from the company’s future itself — has been pushed into uncertainty largely because of the sheer size of the company and the number of farmers directly associated with it for their income.

Bajaj Hindusthan has an over 12 per cent share in the total sugar produced in Uttar Pradesh in the 2021-22 season that will end in September and an over 13 per cent share in the number of farmers directly associated with the sugar sector. It operates 14 sugar mills across UP, making it one of the largest companies in the sector.

“With such big numbers, Bajaj’s NPA declaration will reflect badly on the overall health of UP’s sugar sector, both in terms of cane dues to be cleared of farmers, investor perception, government perception and also the general view of the sugar sector,” a senior industry official said.

He added, though, that 60-65 per cent of the sugar companies in UP have cleared their sugarcane dues to the farmers; the remaining ones that delay payments due to their internal troubles give the entire industry a bad name. “This includes companies like Bajaj Hindusthan,” he pointed out.

Industry officials said Bajaj won’t stop crushing sugar but after the NPA label, it will find it difficult to get bank support since two previous debt restructuring exercises have failed. “A sense of uncertainty will hang over its ability to make timely payments for sugarcane bought from farmers, which could have a significant fallout since it impacts almost 0.6 million farmers,” another official said.

Overall, industry players said apart from a few standouts such as Bajaj, the health of UP’s sugar industry has improved in the last few years. The strong focus on ethanol, a slight improvement in sugar prices, steady exports and so on have improved cash flows of UP-based sugar companies and boosted their ability to clear sugarcane dues accruing to farmers.

This is reflected in the fact that around 82 per cent of sugarcane dues accruing to farmers in the 2021-22 season had been paid till early July.

“Even if sugar mills that don’t have an attached distillery are making good money it is because molasses rates have risen to almost Rs 800 per quintal this year compared to Rs 500-550 per quintal a few years back,” the official said.

Sugar companies are also setting up grain-based distilleries to compensate for the seasonality of sugarcane availability. “Net net, the health of UP’s sugar sector is not looking as bad as it was a few years back,” the official explained.

So why is Bajaj Hindusthan Sugar, once a storied company in the domestic sugar industry, in such bad shape? The company has been facing financial problems for nearly a decade now due to a combination of high debt and poor profitability. Its financial metric deteriorated after the company split from the patriarch Rahul Bajaj’s family in 2008 following a bitter public fracas and came under the control of his brother Shishir Bajaj. Shishir’s son, Kushagra, is currently chairman and has been at the helm since October 2014.

The company last reported a net profit in FY12. Since then, it has been reporting losses year after year (<see chart: Bitter truths>). For example, the sugar maker reported a net loss of Rs 267.54 crore in FY22, though that was an improvement on a net loss of Rs 290.8 crore the year before. The company’s net sales were, however, down 13.7 per cent year-on-year to Rs 5,607.6 crore last fiscal, the lowest in the last five years.

Including FY22, the company has now cumulatively lost Rs 4,729 crore in its operations in the last 10 years. These losses have resulted in a steady erosion in its net worth despite an infusion of fresh equity capital in recent years.

Bajaj Hindusthan Sugar is now one of the most indebted top tier sugar makers with debt-to-equity ratio of 2.11x in FY22. Worse, the company’s total debt at the end of FY22 was nearly 24 times its operating profits or EBITDA in FY22.

These losses are largely due to the interest burden that eats away the lion’s share of the operating profits that the company generates from its business. The company has tried to mitigate this by reducing its overall indebtedness through debt repayment. Bajaj Hindusthan has reduced its gross debt (on a consolidated basis) by 45 per cent in the last 10 years, from an all-time high of Rs 8,759 crore at the end of September 2011 to Rs 4,814 crore at the end of March this year.

This led to a sharp decline in its interest burden but this reduction was not enough because operating profit declined even faster during the period. The company’s annual interest burden is down 71 per cent from a record high of Rs 889 crore in FY15 to Rs 254 crore last fiscal. The decline in its operating profit has been faster. The company’s operating profit is down 80 per cent from a high of Rs 1,010 crore in FY12 to Rs 197 crore last fiscal.

The latest crisis for the company arises from the fact that for the second year in a row in FY22, it can’t service its debt due to inadequate operating profits. The company’s interest burden exceeded its operating profits in both FY21 and FY22. For example, the company reported operating profit of Rs 197 crore in FY22 against interest costs of Rs 254 crore in the same period.

This has forced rating agencies to downgrade the sugar company’s credit rating to D or default. “The revision in the ratings assigned to the bank facilities of Bajaj Hindusthan Sugar Limited (BHSL) takes into account the ongoing delays in the debt servicing which are on account of BHSL’s poor liquidity position resulting from cash flow mismatches,” writes CARE Ratings in its rating report on the company.

Group officials declined to comment but an external advisor to the group said it has given banks a new debt restructuring proposal, which is under consideration. The plan involves selling their group’s profit-making arms and repaying banks. The banks want promoters to bring in Rs 1,500 crore to the table as their contribution to the debt recast plan. The company also owns a minority stake in an electricity generation company, which could be sold to repay lenders.

But it will be now up to the lenders whether to give promoters, who now own 25 per cent of the company, another opportunity or look for other options.