EID Parry - A 'Sugar'coated value story - JM Financial

EID well placed to ride on the ensuing upcycle: India's sugar production is expected to decline from 26.2mnt in SS12 (Oct-Sep) to 24mnt in SS13 and further to 21-22mnt in SS14 (vs consumption of 23-23.5mnt) as significant drought is impacting acreage in key southern states of Maharashtra, Karnataka and Tamil Nadu (c.60% of India production). As a result, we expect sugar prices to firm up at least 10-15% over next 12-18 months. EID Parry (EID) is the only sugar company in India which has a) diversified state presence (TN, Karnataka, AP), b) higher gross spreads (average Rs. 4.4/kg vs. Rs. 2-3/kg peers), and c) longest crushing season (200-250 days vs 120-150 days for peers).

Standalone earnings diversified and estimated to witness 17.3% CAGR: EID derives significant revenues/profits from distillery, cogeneration, Bio Products (90% of FY14 EBIT), and dividend income (mainly Coromandel International), which help mitigate cyclicality caused by sugar segment. We estimate standalone earnings to witness 17.3% CAGR in FY13-15 led by 200-260bps improvement in operating margins and savings in interest cost. Our estimates do not assume merger of PSL's 2 plants, pending clarity of financials.

Substantial holding company discount and medium-long term link of sugar-EID price offer limited downside: EID share price declined 28% YTD and now implies c.37% discount to its value of stake in Coromandel International (CRIN), which in our view, is one of the highest in recent past. Moreover, while CRIN price will influence EID price in near term , we believe, contrary to the perception, EID share price largely tracks sugar price trend in medium-long term.

Initiate coverage with BUY and Mar'14 TP of Rs. 206; current dividend yield of 3.9%: We initiate coverage with BUY on EID and Mar'14 TP of Rs. 206, potential upside of 39%. We value EID on Sum of Parts basis by valuing a) sugar business at 8x FY15 Core EPS (implied EV/Replacement multiple of 0.4x), b) stake in CRIN at 40% discount to our base TP, and c) other subsidiaries at 0-20% discount to book value. At CMP, EID offers dividend yield of 3.9% (we assume 48-49% payout in FY14/15E).

Key risks to our call: Adverse accounting impact of PSL/SilkRoad refinery merger and lower than estimated gross spread/sugarcane crushing volume.

Source : Equity Bulls

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