The Hindu Business Line : E.I.D-Parry: Hold

THE EID-Parry India stock is among the safer exposures in the sugar sector, with its strong balance-sheet, diversified revenue streams and good quality management.

However, the market already seems to have recognised this. At the current market price of Rs 177, the stock trades at a price-earnings multiple of about 18 times the trailing 12-month earnings of the standalone company. The price-earnings multiple would stand reduced to about 11 times, if you consolidate the financials of its subsidiaries, such as Coromandel Fertilisers.

Fresh exposures in the stock can be avoided for now, as valuation levels are high in relation to other sugar as well as commodity stocks.

Investors can hold the stock, as the company appears capable of delivering a 15-20 per cent earnings growth over the next two-three years.

We had previously recommended buying the stock at Rs 39 and Rs 45, adjusted for a 5-for-1 stock-split.

Supplies on a tight rein

The sugar sector continues to be in the favourable phase of the commodity cycle, with a tightening domestic demand-supply balance. Estimates of output for the 2005-06 sugar season (October-September) vary widely.

But if the output is at an optimistic 180-lakh tonnes; it will meet domestic consumption and leave a surplus of just about 25 lakh tonnes to be carried forward into the next season.

Exports of sugar (prompted by re-export obligations) and lower-than-expected cane output would be bullish for sugar prices, as they would lead to even tighter supplies.

Sugar prices have been showing firm trends, ruling about 15-17 per cent higher than last year's levels, over the past quarter.

Capex plans positive

Sector fundamentals apart, EID-Parry has ambitious investment plans that have the potential to ramp up earnings over the next 3-4 years. The company plans to take up its sugar crushing capacities from 13,800 tcd to 14,300 tcd by 2007-08, ramp up ethanol capacities from 12 to 42 million litres and create power cogeneration facilities for 77 MW. Through this, the forward integration exercise that has already been completed at the Nellikuppam unit, is proposed to be replicated at the other two locations. While forward integration is not new in the sugar sector, it is becoming a more paying proposition of late with the glitches in power and ethanol supply arrangements being ironed out. The integration exercise has the potential to expand profit margins.

The company is also looking to expand capacities in its sanitaryware and taps business, after making good headway in the Parryware range over the past couple of years. With construction activity at a high, growth prospects for these businesses appear bright. Parryware has been gaining market share despite competitive conditions. After the debt restructuring of the past couple of years, the company's balance sheet appears capable of taking on the additional burden from its expansion plans. These projects are sought to be financed through a mix of debt and internal accruals. Going by the funding plan and assuming the non-debt portion is financed out of the cash flows over the next three years, the debt:equity ratio will still remain at a comfortable 0.8:1, after the expansion plans are put in place.

Outlook

The favourable outlook for sugar prices, coupled with revenue streams from by-products and the Parryware business, suggests that EID Parry could deliver double-digit earnings growth over the next three-four years. But investors in the stock should be prepared for a degree of volatility in earnings, in the event of an unforeseen reversal in the sugar cycle. The company's core business will remain cyclical and earnings will be vulnerable to a sharp reversal in sugar prices, if the demand-supply balance returns to a surplus.

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