EID Parry

The stock of EID-Parry offers a good investment proposition for investors with a two/three-year holding period, as it trades at a deep discount to the intrinsic value of its sugar and farm input businesses put together.



The company's earnings from its core sugar business may be under pressure in the near term due to carryover effects of a surplus sugar season. However, the picture is likely to improve over the next one year with a rebound in sugar realisations, payoffs from capacity additions and a favourable turn to the policy environment. The stock's market price of Rs 496 discounts the company's consolidated earnings (Rs 45.9 a share after accounting for the profit share from Coromandel) for the trailing 12 months by about 10.8 times. This is at a discount to frontline sugar companies such as Balrampur Chini Mills (13 times) and well below valuations enjoyed during favourable phases in the sugar cycle.

EID-Parry controls capacities for crushing 32,000 tonnes of cane a day and generating 150 MW across locations in Tamil Nadu, Karnataka, Andhra Pradesh and Maharashtra. The geographic spread of its mills allows it to diversify risks relating to weather, cane availability and pricing. . The company has used the cyclical downturn to acquire mills such as GMR Industries at attractive valuations. A 2,000 tpd sugar refinery in joint venture with Cargill has just commenced operations. These moves may begin to pay off over the next couple of years, as the sugar cycle enters a more favourable phase.

EID-Parry reported a loss from its standalone sugar business in the first half of this fiscal (lean season), due to losses at its acquired subsidiaries and high cane prices that were not compensated by realisations. However, earnings are expected to improve in the current year with firming domestic sugar prices, higher export realisations and lower procurement costs.

With export prospects looking up, the domestic sugar balance for 2010-11 (October to September) is now expected to be tighter than forecast, and closing stocks may be adequate to meet just three months' demand, providing support to prices. A tighter global market has already helped international sugar prices double from lows, allowing players with coastal capacities to export their surpluses at good realisations. The domestic policy environment is also turning favourable with the recent cut in levy quotas and likely relaxations in curbs on exports and sugar futures trading.

EID-Parry's investment book may provide support to valuations even if the sugar turnaround is delayed. The company's 62.9 per cent stake in Coromandel International alone is valued at Rs 5,600 crore at current market prices. Even after ascribing a holding company discount of 25 per cent, this translates into a value of Rs 485 a share for EID Parry investors.

via BL