EID Parry: Losses continue

Performance summary

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• The dismal scenario in the sugar sector continues to affect EID Parry. On a standalone basis, lower realisations and higher costs lead to losses both at the operating and net level.
  

• On a consolidated basis, the topline has grown by 111% YoY, while bottomline falls by 22% YoY.

Standalone picture

Rs(m)	2QFY07	2QFY08	(%) Change	1HFY07	1HFY08	(%) Change
Gross sales	1,716	1,700	-1.0%	3,478	2,494	-28.3%
Excise duty	104	84	-18.7%	173	146	-15.3%
Net sales	1,613	1,615	0.2%	3,305	2,348	-29.0%
Expenditure	1,414	1,818	28.6%	2,876	2,761	-4.0%
Operating profit (EBDITA)	199	(203)		429	(413)
EBDITA margin (%)	12.3%			13.0%
Other income	202	281	38.9%	257	350	36.4%
Interest	-2	25		-1	29
Depreciation	90	109	21.5%	162	216	33.3%
Profit before tax	313	(56)		525	(308)
Extraordinary item	-	-		1,181	-
Tax	42	1	-96.7%	354	3	-99.1%
Profit after tax/(loss)	271	(57)		1,352	(312)
Net profit margin (%)	16.8%			40.9%
No. of shares (m)	89.3	89.3		89.3	89.3

What is the company’s business?

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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 the sugar business, the company was also engaged in farm inputs and parryware. It underwent restructuring to have greater focus on its sugar, sanitaryware and bio-products businesses.

What has driven performance in 2QFY08?

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No improvement: Low domestic and international sugar prices, rupee appreciation and high inventory carrying cost affected the performance of the company during the quarter. The selling price of sugar prevailing currently is lower than the cost of production. During the quarter, the company crushed 1.2 m tonnes of cane compared to 1.1 m tonnes in 2QFY07. The overall production of sugar increased by 9.6% YoY. The average sugar realization was Rs 12,799 per MT in 2QFY08 as compared to Rs 16,543 in 2QFY07. The company exported 71.8 m units to the TNEB Grid in the quarter. This was higher by 81% YoY as compared to 2QFY07, mainly due to the new 22 MW power plant at Pugalur being commissioned. The sugar segment showed a growth of 4% in the quarter. The bio-product division did well to report a 30% YoY growth in revenues.

Segment-wise performance

(Rs m)	2QFY07	2QFY08	(%) Change	1HFY07	1HFY08	(%) Change
Sugar	1,675	1,744	4.1%	3,464	2,545	-26.5%
PBIT margin (%)	8.5%	-11.8%		11.0%	-17.5%
% of revenue	95.7%	94.7%		97.2%	93.6%
Bio products	76	98	29.5%	99	174	75.8%
PBIT margin (%)	2.6%	13.1%		-16.9%	5.8%
% of revenue	4.3%	5.3%		2.8%	6.4%
Total revenues	1,751	1,842	5.2%	3,563	2,719	-23.7%

On a consolidated basis, the net sales were up 111% YoY for 2QFY08. The growth was mainly driven by 137% YoY growth in the farm input segment. The standalone sales contributed 8% to the total sales, down from 17% in 2QFY07.

Consolidated view

Rs(m)	2QFY07	2QFY08	(%) Change	1HFY07	1HFY08	(%) Change
Gross sales	9,744	20,263	107.9%	15,711	25,868	64.6%
Excise duty	273.7	265	-3.3%	441.7	445	0.7%
Net sales	9,470	19,998	111.2%	15,269	25,423	66.5%
Expenditure	8,306	18,344	120.9%	13,467	23,196	72.2%
Operating profit (EBDITA)	1,164	1,654	42.0%	1,802	2,227	23.6%
EBDITA margin (%)	12.3%	8.3%		11.8%	8.8%
Other income	95	151	60.0%	192	253	32.3%
Interest	69	183	163.6%	151	405	167.8%
Depreciation	201	207	3.3%	377	451	19.7%
Profit before tax	989	1,415	43.1%	1,466	1,624	10.8%
Extraordinary item	-	-		1,181	-
Tax	352	575	63.7%	775	770	-0.6%
Profit after tax/(loss)	637	840	31.7%	1,872	854	-54.4%
Share of profit/(loss) from associates	114	-		132	-
Less: Minority interest	188	401	113.0%	229	513	124.2%
Net profit	564	439	-22.1%	1,775	341	-80.8%
Net profit margin (%)	6.0%	2.2%		11.6%	1.3%

Downturn continues: Increase in the operating expenses at a faster rate than the topline led the company to yet again report an operating loss for 2QFY08 on a standalone basis. Losses have been further accentuated with the prevailing selling price of sugar being lower than the cost of production. Even on a consolidated basis, the margins have declined by 4% YoY.

Standalone cost break-up

As a % of net sales	2QFY07	2QFY08	1HFY07	1HFY08
Total Cost of goods	63.6%	85.4%	64.0%	76.6%
Staff Cost	5.7%	6.8%	5.5%	9.4%
Other Expenditure	18.3%	20.3%	17.5%	31.7%

On a segmental basis, the sugar segment continues to post losses on account of lower realization from sugar and an increase in sugarcane prices. However, the cogeneration and distillery segments provided some saving grace to the overall performance by reporting profits of Rs 96.7 m and Rs 34.1 m respectively. The bio pesticides segment witnessed improved performance with margins touching 13.1% in 2QFY08 from 2.6% in 2QFY07.

Further losses: Loss at the operating level coupled with higher depreciation charges has also dragged the bottomline into the red on a standalone basis. Having said that, higher other income and considerably lower tax expenses have cushioned the blow to a large extent. On a consolidated basis, the profits down 22% YoY led by lower operating income and higher interest costs. Higher other income provided some relief though.

What to expect?

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The Cabinet Committee of Economic Affairs (CCEA) had announced a slew of measures to provide relief to the ailing sugar industry on ethanol across the country, providing subsidised loans to sugar mills to clear their cane arrears, extension of export subsidy by one more year from April 19, 2008 to April 18, 2009. Although the ethanol reforms are positive, unless issues related to the alignment of cane costs with the sugar prices and increasing the distillation capacity are not addressed, the impact is not significant. Also, unless major problems like decontrol of the sector are not tackled; minor relief packages are unlikely to make any substantial impact. The sector scenario continues to remain bleak.

The Board of Directors have approved, subject to the approval of the shareholders, the proposal to buy-back the fully paid up equity shares of Rs.2 each of the company from the shareholders at a maximum price of Rs 160 per equity share. 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 risk, high reward proposition.