The Hindu Business Line : EID Parry: Hold

DESPITE the 30 per cent appreciation in stock price since August 2004, shareholders can continue to hold the EID Parry stock. The company's earnings prospects are bright and the stock holds potential for further capital appreciation. The surge in stock price has helped bring its valuation levels close to that of frontline sugar companies such as Balrampur Chini Mills.

But at a price-earnings multiple of about 10 times its trailing 12-month earnings (about Rs 32), the stock cannot be deemed expensive as earnings growth will continue to be boosted by firm sugar prices. Investors with a one/two-year horizon can consider buying the stock in the event of a 10-15 per cent decline in price, in line with broad market trends.

Sweet boost from prices

EID Parry India has continued to deliver robust performance in the quarter and half-year ended September 30 2004, with profits from operations (without considering exceptional income) expanding by about 22 per cent on the back of a 14 per cent growth in sales.

Cash flows from sale of investments and businesses have brought in Rs 22.3 crore this half-year, resulting in a more than two-fold expansion in net profits.

The company's non-sugar businesses — Parryware and bio-products — have reported improved profitability, aiding strong profit performance.

However, it is the sugar business, which doubled its profits, that has been the key contributor to the company's sterling performance.

Sugar prices in July-September have ruled about 20 per cent higher than last year's levels, factoring in the 30 per cent drop in output in the 2003-04 sugar season, which ended in September. As the April-September period marks the lean period for sugar companies (when crushing is yet to commence in earnest), the company liquidated accumulated inventories at lucrative prices, sharply bolstering its profits.

The seasonal peak

The second half of the year usually represents the peak period of crushing, as well as sales (with the onset of the festival season) for sugar companies. This year, sugar prices should continue to rule firm, given the tight supply situation.

The shortfalls in cane plantings for the current season suggest that the cyclical downturn in sugar production could last one more year.

With the import duty on sugar pegged at 85 per cent, import of white sugar is also unlikely to bridge supply shortfall in a big way.

Favourable policy tilt

The key risks for sugar mills as they enter the 2004-05 crushing season are the shortfalls in cane availability, coupled with rising competition for procurement of cane that could lead to an escalation in input costs.

However, a couple of recent policy changes may smoothen the way for companies such as EID Parry.

For one, the government has recently relaxed the re-export obligation for sugar mills, which import raw sugar from the global markets.

Mills will now be allowed to import raw sugar at zero import duty for sale in the domestic markets, provided they undertake re-exports within a 24-month window.

This will enable mills situated in close proximity to the ports to keep their sugar capacities operational and cash in on high domestic prices, even if there are glitches in cane availability.

Second, the Government recently proposed to peg the Statutory Minimum Price (SMP) payable for cane to a higher base recovery rate. This will effectively reduce procurement costs for mills that pay cane prices linked to the SMP.

Expanding presence

The company is also adding facilities to improve its product mix and process by-products. The company controls crushing capacities at four locations totalling 14,000 tonnes per day and a 24 MW cogeneration unit. Facilities to produce ethanol and additional power cogeneration capacities are also proposed to be put up. The company recently commissioned a 30,000 tonne sugar refinery, which will enable EID Parry process imported raw sugar, for sale in the domestic and export markets. A foray into branded sugar, which may deliver a price premium, is also on the cards. These facilities may help EID Parry stabilise earnings during a downturn in the sugar cycle.

Funding the capital expenditure required for these expansion plans may not impose an unduly strain the company's finances. For one, EID Parry recently generated surplus cash from the sale of its investments in small businesses and in Parry Confectionery.

Second, debt restructuring has brought down the company's debt-equity ratio to a modest 0.6. This provides the company with considerable flexibility to fund its capex of Rs 80-100 crore, planned over the next couple of years. The stock trades at Rs 320 levels.

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