Sunday, October 4, 2009


Healthy topline growth and rising margins, due to higher sugar prices
We believe that EID Parry (India) Ltd (EID) will ride the upturn in the sugar cycle, which coincides with the capacity enhancements of its integrated operations. Its topline and adjusted PAT are projected to grow at a two year CAGR of 61% to reach Rs 19.6 Bn and 68% to Rs 3.6 Bn by FY11, respectively. We expect margins to improve further to 16.2% and 17.6% in FY10 and FY11, respectively from around 9.3% in FY09.

Presence in south India bless EID with a longer cane-crushing season
EID’s sugar mills located in Tamil Nadu and Puducherry enjoys geographical advantages in the form of long crushing season (240 days in a year, as against 175 days in North India). This enables higher utilisation of EID’s combined 19,000 TCD sugar capacities.

Well placed to deal with sugarcane shortage
EID is well-placed than most of its peers in Tamil Nadu and other UP-based sugar producers, due to its better relationship with farmers enabling better availability of cane and proximity to ports enabling raw sugar refining. Besides, the company’s sugar mills are integrated for making power and spirits from its by-products, which helps in de-risking the business.

Port-based refining capacity to aid growth in long term
EID is setting up a one million tonnes per annum sugar refinery in a SEZ at Kakinada, through a 51:49 JV with global food giant Cargill. It is expected to be operational within the next 6 months. We expect the JV to contribute nearly Rs 430 Mn to EID’s profitability in FY11.

Regulatory risk in sugar industry can temper our fundamental grading
Despite expected robust financials over the medium term, government policies on sugar and sugarcane prices will continue to influence and render volatility to the overall profitability of sugar manufacturers, including EID. The non-linkage of sugarcane cost to sugar realisation is the key negative for the industry and would continue to result in huge volatility in EID’s earnings.

Coromandel fertilisers to contribute 39% to EID’s valuation
With a 62.9% stake in Coromandel, EID receives significant dividends from CFL. With an expected decline in CFL’s profitability; we expect dividend payment to reduce to Rs 654 Mn in FY11. Nevertheless, the subsidiary will remain a key contributor in the EID’s consolidated operations and valuation (we value EID’s stake in CFL at Rs 154 per share).

We assign EID a ‘4/5’ grade on Fundamental and ‘4/5’ on Valuation
EID’s fundamental grade of ‘4/5’ indicates that the company’s fundamentals are ‘Superior’ relative to other listed securities in India. The grading factors in the current buoyancy in the sugar industry, good management and EID’s position in the industry. However, the grading could be lowered if there are significant regulatory changes, which influence sugar realisations. The valuation grade of ‘4/5’ indicates potential ‘Upside’ (Fundamental value of Rs 394) from the current market price of the stock.

To see the full report: EID PARRY LIMITED