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EID Parry: Not a one year story

Aug 16, 2006

Performance summary
EID Parry announced its 1QFY07 results some time ago. While the topline saw a marginal increase of 2% YoY, operating margins remained stable at the 1QFY06 levels. The bottomline growth has however come in at 824% YoY owing to an extraordinary profit. We would like to bring to investors notice that the results are not comparable YoY owing the demerger of the sanitaryware division into a separate company. The board recommended an interim dividend of Rs 4.5 per share (dividend yield of 2.2%).

Standalone picture
Rs(m) 1QFY06 1QFY07 (%) Change
Gross sales 1,777 1,762 -0.8%
Excise duty 115 69 -40.2%
Net sales 1,662 1,693 1.9%
Expenditure 1,437 1,462 1.8%
Operating profit (EBDITA) 225 231 2.4%
EBDITA margin (%) 13.5% 13.6%  
Other income 28 57 105.8%
Interest 19 1 -95.7%
Depreciation 74 72 -2.0%
Profit before tax 160 214 33.7%
Extraordinary item - 1,181  
Tax 43 312 625.6%
Profit after tax/(loss) 117 1,083 823.6%
Net profit margin (%) 7.1% 64.0%  
No. of shares (m) 89.3 89.3  
Diluted earnings per share (Rs)*   23.79  
Price to earnings ratio (x)*   8.5  
* 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 1QFY07?
Restructuring effect on the topline: EID Parry reported a 2% YoY growth in the topline for 1QFY07. The results are not comparable as recently the company hived off its sanitaryware division (Parryware) to focus purely on the sugar and related businesses. The division was transferred 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.

Segment-wise performance
(Rs m) 1QFY06 1QFY07 Change
Sugar 1,135 1,788 57.5%
PBIT margin (%) 8.7% 13.4%  
% of revenue 63.3% 98.7%  
Parryware 631 - -100.0%
PBIT margin (%) 12.9%    
% of revenue 35.2% 0.0%  
Bio products 26.00 23.00 -11.5%
PBIT margin (%) -48% -81.3%  
% of revenue 1.5% 1.3%  
Total revenues 1,792 1,811 1.0%

Sugar division: During the quarter, the company crushed 1.1 million tonnes (MT) of cane compared to 0.5 MT in the corresponding period. The average sugar realization for the quarter improved significantly to Rs 18,228 per MT from Rs 15,509 per MT in 1QFY06. As far as the power facility is concerned (that runs on bagasse), the company sold 43-m units to the TNEB Grid. Overall, including revenues from the sale of power, the sugar division reported a topline growth of about 57% YoY.

Bio-products division: Revenues declined by 12% YoY to Rs 23 m. However, prospects for this business is looking favorable in both domestic and overseas markets in the coming months. EID acquired the entire equity share capital of Parry Nutraceuticals, which has presence in the developed countries and caters mainly to the export market (the consideration paid was for Rs 320 m). Though not a big contributor to total revenues, this division captures the broader agricultural development story and de-risks revenues.

Cost break-up
As a % of net sales 1QFY06 1QFY07
Total Cost of goods 51.5% 64.4%
Staff Cost 10.1% 5.2%
Other Expenditure 24.8% 16.8%
Operating margins – Status quo: Operating profits during 1QFY07 have grown in line with the topline, resulting in stable margins YoY. Although the company has witnessed some pressure on the raw material costs front, in particular higher cane prices, lower staff costs and other expenditure as a percentage of sales have cushioned margins. This is indeed an impressive show because the sanitaryware division contributed to almost 48% of overall PBIT in 1QFY06 and is a major profit driver. The significant increase in sugar prices has driven performance. Though sugar prices may decline in the near term, given the capacity expansion plans, we expect operating margins to improve at the consolidated level going forward.

Extraordinary effect: The company reported an 824% YoY growth in bottomline for the quarter. However, this was on account of extraordinary income pertaining to the profit on sale of shares of Parryware Glamourooms Private to the tune of Rs 1.2 bn. Without considering the extra-ordinary income, the bottomline was up by 42% YoY. This is mainly due to lower interest cost.

What to expect?
At the current price of Rs 203, the stock is trading a price to earnings multiple of 8.5 times its 12 month trailing earnings. Considering its diverse and successful business interests, expansion plans and restructuring of business operations (through demerger of key business units into separate focused companies), we had recommended a HOLD* on the stock from a medium to long-term perspective in August 2006. We have assigned a FY09 target price of Rs 310 to the stock. We maintain our view.

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