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Aarati Krishnan

Sanitaryware and bio-products also hold potential.

THE spin-off of EID-Parry's farm inputs division to Coromandel Fertilisers has turned out to be a winning proposition for both the companies involved in the restructuring, even in the short term. Coromandel Fertilisers has, as expected, closed the year with strong profit growth. The spin-off was expected to leave EID-Parry with lower sales and profits in 2003-04 — the first year of transition — as the division contributed one-third of the company's profits and over half its revenues. But thanks to a revival in its sugar business, EID-Parry reported impressive profit growth for the year, despite the de-merger.

After the sharp fall in recent weeks, the EID-Parry stock trades at a price-earnings multiple of about eight times its latest earnings (six times on the consolidated earnings). Investors with an appetite for risk may consider buying into the stock, especially on any significant decline in price in line with broad markets.

Well-timed move

It appears that the timing of the de-merger has helped minimise the impact of the transfer on EID Parry's financials. On the one hand, 2002-03 was a depressed year for the farm inputs division. This has ensured that the transfer of this division, effective April 2003, has impacted revenues and profits less than it would have, under normal circumstances.

On the other hand, the recovery in the sugar business has also materialised just at the right time for EID-Parry. The sharp drop in sugar production in 2003-04, which set off an upward spiral in sugar prices, has propped up the company's profits. While EID-Parry reported a 56 per cent drop in its sales for 2003-04 on account of the loss of revenues from the farm inputs division, its post-tax profits were higher by a whopping 60 per cent, at Rs 43.2 crore. The company's per share earnings now stands at Rs 24.2 on a stand-alone basis and at Rs 35.6 on a consolidated basis.

Significant savings in interest costs have also boosted the company's profit margins this year. With sugar output expected to recover only in 2005-06, firm trends in prices can be expected to continue. With the farm inputs division spun off, sugar will be the mainstay for EID-Parry, with residual businesses such as sanitaryware and bio-products together accounting for about one-third of the profits.

New capacities to kick in

The company has also announced plans to expand sugar crushing capacity to 20,000 tonnes and to add another 22 MW power cogeneration unit. The contribution from these facilities can be expected to bolster revenues and profits, even if cane-crushing volumes drop on account of lower cane availability. A new 30,000-tonne sugar refinery will also open up the option of importing and refining raw sugar, which could help keep the facilities operational during periods of lean cane availability.

Cash flows realised by the company from the sale of its stake in Parry's Confectionery to Lotte Confectionery and a couple of its divisions to Parry Engineering, may help EID-Parry part fund these expansion plans.

Given that the company has steadily brought down the levels of debt in its balance-sheet, it also has the leeway to raise additional debt.

The risks

Like other sugar companies, EID-Parry's earnings would be subject to the risks of changes in government policy on cane prices, sugar releases and the levy-free sale ratio which mills are subject to. However, initial signals from the new government on a package for restructuring the sugar sector appear positive.

The Government has indicated that the flow of credit to sugarcane farmers would be stepped up and that mills may be encouraged to import raw sugar to tide over the coming shortage.

Both these measures may help take the heat off players such as EID Parry, as cane availability drops sharply in the ensuing seasons.

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