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EID Parry: Not sweet at all! - Views on News from Equitymaster
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EID Parry: Not sweet at all!
May 29, 2007

Performance summary
Sugar company EID Parry (EID) announced its results for the last quarter and full year ended March 2007. For the full year, while the topline fell by 40% YoY, the bottomline was down 92% YoY (excluding the extraordinary item). We would like to bring to the investors’ notice that the results for the year ended 31st March, 2007 includes operations of Nutraceuticals division for 7 months from 1st September, 2006 and the results of the previous year include operations of Parryware division for 11months and hence to that extent the results are not comparable.

Standalone picture
Rs(m) 4QFY06 4QFY07 (%) Change FY06 FY07 (%) Change
Gross sales 3,544 769 -78.3% 9,785 5,832 -40.4%
Excise duty 135 44 -67.4% 523 315 -39.8%
Net sales 3,409 725 -78.7% 9,262 5,517 -40.4%
Expenditure 2,876 722 -74.9% 8,005 5,063 -36.8%
Operating profit (EBDITA) 533 3 -99.5% 1,257 454 -63.9%
EBDITA margin (%) 15.6% 0.4%   13.6% 8.2%  
Other income 33 39 18.2% 520 374 -28.2%
Interest 9 -11   74 -21 -128.4%
Depreciation 68 88 29.4% 292 329 12.7%
Profit before tax 489 (35) -107.2% 1,411 520 -63.2%
Extraordinary item -     - 1,181  
Tax 51 73 42.7% 252 430 70.5%
Profit after tax/(loss) 438 (108) -124.7% 1,159 1,271 9.7%
Net profit margin (%) 12.8% -14.9%   12.5% 23.0%  
No. of shares (m) 89.3 89.3   89.3 89.3  
Diluted earnings per share (Rs)*         14.23  
Price to earnings ratio (x)*         8.3  
* 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 the sugar business, the company was also engaged in farm inputs and parryware. It underwent a restructuring exercise to have greater focus on its sugar, sanitaryware and bio-products business.

What drove the performance in FY07?
Bitter topline: EID reported a 40% YoY decrease in the topline during FY07 with sugar sales reporting a 22% YoY decline. Higher cane prices, lower recoveries due to earlier start of the crushing season and the government-imposed ban on exports took their toll on domestic sugar realizations. The prices of sugar fell below the cost of production in the second half of the year. During the year, the drop in turnover was mainly due to a decline of 30% in sugar sales volume. Supply of Power to the grid registered a growth of 73% YoY over last year mainly due to increase in generation of power from the 18 MW Cogeneration plant at Pudukottai commissioned in March 2006. 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 13% to the total sales in FY06 and to that extent the revenues are down in this quarter. Hence the results are not comparable on YoY basis.

The Bio Pesticides division of the company recorded a 45.9% YoY growth in the revenues with its contribution to the total sales doubling to 5% in FY07. With America and Europe continuing to be the major markets, the exports have done well. Parry Nutraceuticals was merged with the company effective 1st September 2006 and is currently functioning as a division of the company. This division clocked a turnover of Rs Rs111 m for the 7 months period ended 31st March 2007.

The industry scenario still remains bleak. There is an over production and the expected level of production this year is 27 m With the current realization companies are finding it difficult to break even; therefore the sugar division will be hit hard. The by-products however would remain strong. Government of India followed by Maharashtra, Karnataka and Andhra Pradesh announced support measures to facilitate removal of surplus sugar stocks through buffer stocks and exports. Sugar Industry in Tamil Nadu is currently at a huge disadvantage due to other states extending support measures for exports. The industry has approached the Tamil Nadu Government to extend similar support like Maharashtra to export sugar. Till further notice on this, the performance is likely to get affected.

Cost break-up
As a % of net sales 4QFY06 4QFY07 FY06 FY07
Total Cost of goods 67.8% 11.0% 60.8% 61.9%
Staff Cost 3.3% 20.1% 6.1% 7.5%
Other Expenditure 13.2% 68.4% 19.5% 22.4%

Higher cost dent margins: Faster growth in expenses led to a 5.4% YoY decline in the operating margins. All the expenditure heads have witnessed an increase as a percentage of sales. On segmental basis, the lower profitability in sugar segment is on account of lower realization of sugar prices and an increase in sugarcane prices. The drop in sugar profits by 42% mainly contributed for lower operating EBIDTA during current year.

Segment-wise performance
(Rs m) 4QFY06 4QFY07 (%) Change FY06 FY07 (%) Change
Sugar 3,051 605 -80.2% 7,291 5,655 -22.4%
PBIT margin (%) 15.3% -11.2%   10.9% 5.4%  
% of revenue 84.9% 71.7%   70.4% 75.6%  
Parryware 418 - -100.0% 2,325 - -100.0%
PBIT margin (%) 11.0%     53.8%    
% of revenue 11.6% 0.0%   12.7% 0.0%  
Bio products 112 221 97.3% 257 375 45.9%
PBIT margin (%) 28% 21.7%   16% 11.2%  
% of revenue 3.1% 26.2%   2.5% 5.0%  
Others 12 18 50.0% 477 1,453 204.6%
% of revenue 0.3% 2.1%   4.6% 19.4%  
Total revenues 3,593 844 -76.5% 10,350 7,483 -27.7%

Bottomline tumbles: For the year (excluding the extraordinary item), the company witnessed a 92% YoY decline in net profits. Lower operating margins combined with lower other income led to lower net margins. The depreciation cost increased due to the capacity expansions. For 4QFY07, EID reported loss as selling prices of sugar were below the cost of production.

What to expect?
At the current price of Rs 118, the stock is trading a price to earnings multiple of 8.3 times its 12-month trailing earnings. The year has been bad with the fortunes of the sector changing in the 2nd half of the year led. EID Parry faced pressure on all the fronts as it derives majority of its revenues from the sugar division. EID is augmenting its total crushing capacity to 19500 TCD by year-end. Also the total capacity of cogen facilities will be at 65 MW. This would increase its volumes. It is also planning to grow the other divisions-nutraceuticals and bio pesticides and reduce dependence on sugar business. Though 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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