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EID Parry: A long term play! - Views on News from Equitymaster

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EID Parry: A long term play!
Oct 20, 2006

Performance summary
EID Parry announced its 2QFY07 results yesterday. While the topline saw a decline of 24.2% YoY, the bottomline fell by 6% YoY. Operating margins fell by 110 basis points 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) 2QFY06 2QFY07 (%) Change 1HFY06 1HFY07 (%) Change
Gross sales 2,234 1,694 -24.2% 4,011 3,456 -13.8%
Excise duty 144 103 -28.1% 259 172 -33.4%
Net sales 2,090 1,591 -23.9% 3,752 3,284 -12.5%
Expenditure 1,813 1,398 -22.9% 3,250 2,861 -12.0%
Operating profit (EBDITA) 277 193 -30.4% 502 423 -15.7%
EBDITA margin (%) 13.2% 12.1%   13.4% 12.9%  
Other income 201 200 -0.6% 229 257 12.0%
Interest 23 -2   42 1 -98.3%
Depreciation 74 89 19.9% 148 161 9.0%
Profit before tax 381 305 -19.8% 541 518 -4.3%
Extraordinary item -     - 1,181  
Tax 101 42 -58.3% 144 354 146.4%
Profit after tax/(loss) 280 263 -6.0% 397 1,345 238.5%
Net profit margin (%) 13.4% 16.5%   10.6% 40.9%  
No. of shares (m) 89.3 89.3   89.3 89.3  
Diluted earnings per share (Rs)*         23.58  
Price to earnings ratio (x)*         7.1  
* 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 2QFY07?
Topline ‘restructured’: EID Parry reported a 24% YoY decline in the topline for 2QFY07. 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. Hence the results are not comparable on YoY basis.

Sugar division: The sugar division recorded a top line growth of 5.8% YoY during the 2QFY07. The PBIT margins fell to 8.5%, as compared to 9.5% in 2QFY06. This was mainly due to lower realisations of the sugar sales. On the power front, the operation of the cogeneration plant at the sugar factory at Pudukottai got stabilised. The company has also obtained endorsement on the distillery license for making ethanol at Nellikuppam. This will help the company generate higher revenues in the coming quarters.

Bio-products division: While the revenues increased by 26% YoY a loss of Rs 3.8 m was reported for 2QFY07, mainly on account of product launch expenses. Though the division contributed only 2.8% of the topline in this quarter, the prospects for this business is looking favorable in both domestic and overseas markets in the coming months.

Segment-wise performance
(Rs m) 2QFY06 2QFY07 (%) Change 1HFY06 1HFY07 (%) Change
Sugar 1,584 1,675 5.8% 2,719 3,464 27.4%
PBIT margin (%) 9.5% 8.5%   9.2% 11.0%  
% of revenue 64.6% 87.2%   111.0% 180.3%  
Parryware 631 - -100.0% 1,262 - -100.0%
PBIT margin (%) 13.5%     13.2%    
% of revenue 25.7% 0.0%   51.5% 0.0%  
Bio products 43 54 26.4% 69 77 11.8%
PBIT margin (%) 7% -7.1%   -14% -29.2%  
% of revenue 1.7% 2.8%   2.8% 4.0%  
Others 193 192   214 1,399  
% of revenue 7.9% 10.0%   5.0% 28.3%  
Total revenues* 2,450 1,921 -21.6% 4,264 4,940 15.8%
* excluding intersegment revenues

Input pressures affect margins: The raw material costs as a percentage of sales have increased by 530 basis points (5.3%), and this is the primary reason why the company’s operating margins have contracted by 100 basis points. Had it not been for the savings on the wages and other expenses front, the fall in operating margins would have been even higher. The fall in margins could also be attributed to a restructuring of the business. The Parryware business contributed nearly 35.6% to the PBIT in 2QFY06 and was a major profit driver.

Cost break-up
As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 58.7% 64.1% 55.5% 64.2%
Staff Cost 7.1% 5.6% 8.4% 5.4%
Other Expenditure 21.0% 18.2% 22.7% 17.5%

Extraordinary effect: The company reported a 6% YoY decline in the net profits. This was mainly due to fall in margins and restructuring effect. However the net margins have increased. On half yearly basis the company reported a 286% 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 58.8% YoY.

What to expect?
At the current price of Rs 167, the stock is trading a price to earnings multiple of 7.1 times its 12-month trailing earnings. 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. With surplus in sugar expected in the coming season, the sugar prices have dipped in this quarter. However, EID Parry has lined up major expansion plans, which will help it to increase the volumes. Also, its joint venture with Cargil and diversified business division being benign to its margins, we maintain our view.

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