EID Parry - A Sweet deal! - KR Choksey

Better realization & higher no. of operating days to drive top-line growth

EID parry on consolidated basis increased cane crushing at 65% CAGR over the period FY10-FY12 from 25lac MT to 69lac MT. Higher crushing was on account of addition of cane acreage for cultivation & higher number of operating days (220-300 days). During FY13, the company plans to crush 70-75lac MT and expect rise in crushing at 5% per annum. However, we expect increase in cane crushing by 1% CAGR over FY12-FY14E, due to constraint regarding water issues, resulting into lower recovery rate & decline in cane areas in Maharashtra and Karnataka. On the back, sugar production is likely to decline by 1.6% CAGR while sugar price to remain healthy between Rs29,500-33,000/tonne, resulting into increase in sugar revenues by 7% CAGR over FY12-FY14E.

Past acquisitions in different location de-risking business model

EID Parry acquired two major companies Sadashiva Sugars and Parrys Sugar Industries during FY10 and FY11 respectively at an investment of Rs148crs. Post acquisition and removal of bottlenecks, EID Parry increased its sugarcane capacity to 38,000TCD, co-generation capacity to 153MW and distillery capacity to 230 KLPD. We believe the company has smartly diversified its business risk by expanding the sugar operation in different states giving competitive edge over other players.

Operational efficiency, better relation with farmers

With the diversified business operation in 3 different states where the yield/hectares, number of operating days are very high, due to more favorable climate, we believe EID is well positioned to grab the opportunity in upcoming years. It is constantly assisting farmers for better fertility and production related advices and making cane payment within 14 days, helping it to gain confidence in farmers' community. Furthermore, it concentrates in those areas, having lower sugarcane prices and less competitive market, helping to generate better margins and bring more efficiency at operating level.

Integrated plants provide financial stability

EID parry has fully integrated sugar plants with cogeneration and distillery facility. The company has leveraged co-products which have given stability and predictability to the financial performance. The revenue from sale of alcohol and power has grown at 73% and 32% CAGR over the period FY10-FY12. As the availability of by-products - bagasse and molasses directly linked with the cane crushing, we expect revenue from alcohol and power to rise at 9% and 2% CAGR respectively over the period FY12-FY14E.

Coromandel International - an ace up the sleeve

Murugappa Group company EID Parry (India) holds 62.69% of Coromandel's equity. The company is the second largest manufacturer of Phosphatic Fertilizers after IFFCO. Coromandel International, being the largest private phosphatic fertilizer manufacturer in India is a key beneficiary of govt's Nutrient Based Subsidy (NBS) scheme for non urea fertilizers. Recently, the company witnessed decline in volumes & margin contraction, mainly due to deficiency in monsoon, higher RM costs & selling prices, which restrained the farmers from buying it. However, we believe capacity expansion and resolution of raw material availability is expected to benefit the company in upcoming years.

Attractive Valuation & Outlook: Bright future ahead...

The stock is currently trading at a P/E and EV/EBITDA multiple of 9.1x and 5.9x to FY14 earnings, respectively. We re-initiate the company with a "BUY" recommendation on a SOTP based target price of Rs244, giving an upside potential of 54%.

Source : Equity Bulls

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