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EID Parry: Pains of restructuring - Views on News from Equitymaster
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EID Parry: Pains of restructuring
Jan 25, 2007

Performance summary
EID Parry has declared its results for 3QFY07 and nine month ended December 2006. While the standalone topline saw a decline of 28% YoY, the bottomline fell by 89% YoY. Operating profits also declined by 86% YoY for the quarter. We would like to bring to investors’ notice that the results are not comparable year-on-year owing the demerger of the sanitaryware division into a separate company.

Standalone picture
Rs(m) 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Gross sales 2,230 1,607 -27.9% 6,241 5,063 -18.9%
Excise duty 129 99 -23.2% 387 271 -30.0%
Net sales 2,102 1,509 -28.2% 5,854 4,792 -18.1%
Expenditure 1,879 1,478 -21.3% 5,129 4,339 -15.4%
Operating profit (EBDITA) 223 30 -86.4% 725 453 -37.5%
EBDITA margin (%) 10.6% 2.0%   12.4% 9.5%  
Other income 257 78 -69.9% 486 334 -31.3%
Interest 23 -10   65 -9 -113.6%
Depreciation 76 80 5.3% 224 241 7.7%
Profit before tax 382 38 -90.1% 923 555 -39.8%
Extraordinary item -     - 1,181  
Tax 58 3 -95.7% 202 357 76.9%
Profit after tax/(loss) 324 35 -89.1% 722 1,380 91.2%
Net profit margin (%) 15.4% 2.3%   12.3% 28.8%  
No. of shares (m) 89.3 89.3   89.3 89.3  
Diluted earnings per share (Rs)*         20.35  
Price to earnings ratio (x)*         5.9  
* 12 month trailing earnings

What is the company’s business?
Established in the year 1788, EID Parry became a member of the Murugappa Group in the year 1981. The company, based in South India, is amongst the largest producers of sugar in the country, with a crushing capacity of 14,500 TCD (tonnes crushed per day) spread across its four plants. The company's plants are located at Nellikuppam in the Cuddalore district, Pugalur in the Karur district, Pudukottai in the Pudukottai district and Pettavaithallai in the Trichy district. It also has a distillery capacity of 120 KLPD and power capacity of 42 MW. Initially along with sugar business the company was also engaged in farm inputs and parryware. It underwent a restructuring to have greater focus on its sugar, sanitaryware and bio-products business.

What drove the performance in 3QFY07?
Restructuring effect: EID Parry reported a 28% YoY decline in the topline for 3QFY07. The company had transferred its Parryware business on a slump sale basis to Parryware Glamourooms Pvt Ltd, a wholly owned subsidiary of the company in March 2006. Then, in April 2006, the company signed an agreement with Roca of Spain for a 50:50 joint venture for the Parryware business. Parryware had contributed 26% to the total sales in 3QFY06 and to that extent the revenues are down in this quarter. Hence the results are not comparable on YoY basis.

Segment-wise performance
(Rs m) 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Sugar 1,522 1,586 4.2% 4,241 5,050 19.1%
PBIT margin (%) 5.3% -0.4%   7.8% 7.4%  
% of revenue 61.1% 93.4%   62.8% 76.1%  
Parryware 645 - -100.0% 1,907 - -100.0%
PBIT margin (%) 12.9%     65.5%    
% of revenue 25.9% 0.0%   28.2% 0.0%  
Bio products 75 77 2.1% 144 154 6.7%
PBIT margin (%) 27% 22.2%   8% -3.5%  
% of revenue 3.0% 4.5%   2.1% 2.3%  
Others 250 36 -85.7% 464 1,435 209.0%
% of revenue 10.0% 2.1%   6.9% 21.6%  
Total revenues 2,493 1,699 -31.8% 6,756 6,639 -1.7%

The sugar division recorded a top line growth of 4% YoY during the 3QFY07. Surplus sugar situation in the country along with the export ban imposed by the government had led to the low sugar realisations across the industry and EID Parry was no exception. The cogeneration power project at Pugalur sugar factory is progressing well. Production has also commenced in the Ariyoor Sugar Factory at Puducherry. This division contributed 93% of the total revenue in 3QFY07, up from 61% in 3QFY06.

The revenues of the bio products division increased by 2% YoY and 7% YoY for the quarter and nine month period respectively. The contribution from this division to the total sales, though small currently, has increased from 3% in 3QFY06 to 4.5% in 3QFY07.

Cost break-up
As a % of net sales 3QFY06 3QFY07 9mFY06 9mFY07
Total Cost of goods 58.9% 81.2% 56.7% 69.6%
Staff Cost 6.5% 5.8% 7.7% 5.5%
Other Expenditure 24.0% 11.0% 23.1% 15.4%

Bitter margins: EID’s raw material costs as a percentage of sales have increased from 59% in 3QFY06 to 81% in this quarter and this is the primary reason why the company’s operating margins have contracted by massive 860 basis points (8.6%). Had it not been for the savings on the wages and other expenses front, the fall in operating margins would have been even higher. Also the restructuring of the business has further caused the decline in the operating profits. The Parryware business contributed nearly 12.9% to the PBIT in 3QFY06 and was a major profit driver. The sugar division reported a loss of Rs 6 m in the quarter due to lower realisations and higher input costs. The PBIT margins of the Bio products division fell to 22%, as compared to 27% in 3QFY06 mainly on account of product launch expenses.

Declined profits: Fall in topline and margins aided by lower other income resulted in a 89% YoY decline in the net profits. The net profit margins were at the low of 2.3% from 15.4% in 3QFY06. On nine-month basis the company reported a 91% YoY growth in bottomline. However, this was on account of extraordinary income pertaining to the profit on sale of investment to the tune of Rs 1.2 bn. without considering the extra-ordinary income, the bottomline was down 73% YoY.

Consolidated basis: Due to restructuring consolidated results are not comparable, for 3QFY07, while the topline was at Rs 7,051 m, the operating and net margins were at 7.8% and 3.0% respectively.

What to expect?
At the current price of Rs 121, the stock is trading a price to earnings multiple of 5.9 times its 12-month trailing earnings. The company has 69% stake in Coromandel Fertilisers. This calculates to Rs 88 from the stake. So the entire sugar and Parryware business is valued at Rs 33. The company has lined up its expansion plans, which will factor in from FY08. Also its JV with Cargil and ROCA will help the company perform better. Though currently due to surplus sugar and export ban, the sentiment in the sugar sector has turned negative, from a long-term perspective, we remain positive on the company’s prospects.

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