EID Parry: Tough going - Views on News from Equitymaster

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EID Parry: Tough going

Aug 10, 2007

Performance summary
  • EID Parry reported a 57% YoY decline in the topline for 1QFY08. Low domestic and international prices, rupee appreciation making exports unattractive and the inventory carrying cost led to the dismal performance of the sugar division, leading to the revenues fall by 55% YoY.

  • Higher expenses lead to operating profits falling by 191% YoY and margins enter the negative mark.

  • Operating loss aided by higher depreciation charges (due to level of inventory and lower sugar realisation) has led to the bottomline decline of 124% YoY.

Standalone picture
Rs(m) 1QFY07 1QFY08 (%) Change
Gross sales 1,762 794 -54.9%
Excise duty 68.8 62 -10.2%
Net sales 1,693 733 -56.7%
Expenditure 1,462 943 -35.5%
Operating profit (EBDITA) 231 (210) -191.2%
EBDITA margin (%) 13.6% -28.7%  
Other income 57 69 21.5%
Interest 1 5 462.5%
Depreciation 72 107 47.9%
Profit before tax 214 (253) -218.0%
Extraordinary item 1,181 -  
Tax 312 1 -99.6%
Profit after tax/(loss) 1,083 (254) -123.5%
Net profit margin (%) 64.0% -34.7%  
No. of shares (m) 89.3 89.3  
Diluted earnings per share (Rs)*   (0.72)  
* 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, 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 1QFY08?
Going gets tougher: EID Parry reported a 57% YoY decline in the topline for 1QFY08.The industry scenario continues to remains bleak. With production of 27 m, the sugar realizations have fallen below the cost of production. The companies are finding it difficult to break even; therefore the sugar division continues to be hit hard. Governments of major sugar producing states have announced relief packages for the sugar mills. The Government of Tamil Nadu is yet to take any steps to mitigate the sufferings of the mills and this is affecting the financial performance of the company. Till further clarity on this, the performance is likely to get affected.

Segment-wise performance
(Rs m) 1QFY07 1QFY08 (%) Change
Sugar 1,788 801 -55.2%
PBIT margin (%) 13.4% -29.8%  
% of revenue 98.7% 91.3%  
Bio products 23 76 226.2%
PBIT margin (%) -80.3% -3.6%  
% of revenue 1.3% 8.7%  

Sugar division: Low domestic and international prices, rupee appreciation making exports unattractive and the inventory carrying cost led to the dismal performance of the sugar division leading to the revenues falling by 55% YoY. During the quarter, the company crushed 1.3 million tonnes (MT) of cane compared to 1.1 MT in the corresponding period. The average sugar realization for the quarter declined significantly to Rs 13,712 per MT from Rs 18,227 per MT in 1QFY07. The selling price was lower than the cost of production. As far as the power facility is concerned, (that runs on bagasse) the company sold 64-m units (up 49% YoY) to the TNEB Grid

Bio-products division: Revenues rose by 226% YoY in 1QFY08. The contribution to the revenues from this segment has increased to 8% from 0.8% in 1QFY07. Though not a big contributor to total revenues, this division captures the broader agricultural development story and de-risks revenues. 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.

Consolidated view
Rs(m) 1QFY07 1QFY08 (%) Change
Gross sales 5,967 5,606 -6.1%
Excise duty 168 180 7.4%
Net sales 5,799 5,425 -6.4%
Expenditure 5,161 4,852 -6.0%
Operating profit (EBDITA) 638 573 -10.1%
EBDITA margin (%) 11.0% 10.6%  
Other income 97 102 5.4%
Interest 82 223 171.3%
Depreciation 176 244 38.4%
Profit before tax 477 209 -56.2%
Extraordinary item 1,181    
Tax 423 194 -54.0%
Profit after tax/(loss) 53 14 -73.1%
Share of profit/(loss) from assosiates -41 (113)  
Minority interest 17 -  
Net profit 1,211 (98) -108.1%
Net profit margin (%) 20.9% -1.8%  

Consolidated basis: The topline has fallen by 6% YoY. This was mainly due to a 55% YoY drop in sugar revenues. However, farm inputs and bio pesticides segment grew by 14% YoY and 215% YoY respectively. The farm inputs contributed 83% of the revenues.

Standalone cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 64.4% 57.0%
Staff Cost 5.2% 15.1%
Other Expenditure 16.8% 56.6%

Operating loss: The decline in revenues aided by higher expenses led to the operating loss in 1QFY08. While raw material costs have fallen as a percentage of sales, this was mainly due to higher inventory. Labour costs and other expenses have increased by 26% YoY and 46% YoY respectively. This led to the operating profits fall by 191% YoY and margins enter the negative zone.

On segmental basis, the loss in sugar segment is on account of lower realization of sugar prices and an increase in sugarcane prices. While the sugar segment reported a PBIT loss of Rs.384 m for the quarter (Profit of Rs.175 m in 1QFY07), the PBIT for the Cogeneration Segment was up 99% YoY and that of the distillery segment increased by 270% YoY. This provided some saving grace to the results. The bio pesticides segment though still in loss, the performance has improved. On the consolidated basis, the operating margins fell by 0.4% YoY. Strong performance by the farm inputs division led to offsetting some of the loss of the sugar division.

Bitter bottomline: Operating loss aided by higher depreciation charges has led to the bottomline decline of 124% YoY on a standalone basis.

What to expect?
The company is planning to cut down dependence on sugar by two-thirds to around 30% of sales over the next three years. It is also planning to increase the share of revenues from cogeneration of power and its distillery operations, both of which require by-products of sugar production. At present, power, distillery and other products constitute only 12% of sales. The company would set up cogeneration plants in each of its five sugar factories, and three additional distilleries. This will nearly double the cogeneration power capacity to 127 MW by 2009 and increase distillery production by four times to 200 kl a day by the same period. Expansion into cogeneration of power and distillery units would help the company generate a stable flow of income and also cut its production cost because of captive power generation. The company is planning to invest Rs 3 bn towards expanding its capacity in the next two years.

EID Parry’s profits were severely affected by: 1) the sharp decline in sugar prices; 2) high cane costs and 3) the valuation of closing inventory at market realization. Also, interest costs are rising sharply due to an increase in inventory-carrying costs.

We believe that the worst is not over yet, as falling sugar prices and rising inventory-carrying costs will likely keep the group’s profits under pressure. Further decline in sugar prices can cause further losses. However, we believe that given the company’s strong investment portfolio and efforts at reducing its dependence on the sugar business, it might well turn out to be a good long-term bet. Thus, while risks are definitely on the lower side, the high level of uncertainty makes it a high uncertainty, high reward proposition.

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Aug 7, 2020 (Close)


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