At a time when even stocks with weak fundamentals are trading at high valuations, here’s a stock which, despite its sound prospects, still trades cheap. With a well-diversified business model and a valuable investment book, the stock of sugar maker EID Parry currently trades at an over 50 per cent discount to its fair value of ₹319 a share — arrived at on a sum-of-the-parts basis. The sugar business has been valued at a 25 per cent discount to its replacement cost; bio-pesticides and nutraceuticals at 10 times their expected 2014-15 earnings; and the company’s investment in fertiliser maker Coromandel International at a 25 per cent discount to its current market price.

Better sugar realisation and higher ethanol sales will drive the company’s growth in the current fiscal. Also, the long-awaited reforms on cane pricing, if approved, may provide a boost to EID’s profits in the medium term. Investors with a one-to-two year investment horizon can consider buying the stock.

A well-diversified business with interests in bio-pesticides, nutraceuticals and fertilisers (through its subsidiary Coromandel International) insulates EID from the cyclicality risk of the sugar business. This makes it resilient even during down-cycles.

A recovery in the prospects of the Indian sugar industry in the current fiscal, helped by revival in the global sugar cycle and policy measures announced by the Government augur well for EID Parry.

Lower sugar production in Brazil, the world’s largest sugar maker, in 2014-15 may support sugar prices globally. Higher realisation on sugar exports coupled with an increase in the export subsidy (to ₹3,300 a tonne from ₹2,277 a tonne) will benefit Indian sugar exporters including EID Parry.

Likewise, the recent move to increase import duty on raw sugar (from 15 per cent) to 40 per cent is expected to have a positive rub-off on the domestic prices.

The Government’s decision to provide additional interest-free loan of up to ₹4,400 crore to sugar mills will provide relief in the short term.

However, the proposed policy to link the sugarcane price to the end product realisation (sugar and its other by-products), if announced, will be the big game-changer for the ailing sugar industry, which has been stressed by the current ad-hoc and irrational cane pricing mechanism.

Weathering the challenges

Inadequate rainfall in the southern states due to a weak monsoon impacted the company’s sugar production and sales in 2013-14. However, the south-west monsoon in Tamil Nadu and Puducherry — EID’s key cane growing areas — has been normal so far this year. A normal rainfall during the ensuing North East monsoon will benefit EID Parry. However, the progression of El Nino and its impact on the North East monsoon could be a risk.

While the performance of its principal sugar business was lacklustre in 2013-14 due to the poor North East monsoon, the company’s bio-pesticides and nutraceuticals segments witnessed healthy growth. EID’s bio-pesticides sales (5 per cent of sales) grew about 33 per cent in 2013-14, and the segment’s operating margin improved by 2.2 percentage points to 23.4 per cent.

Revenues of the nutraceuticals segment (4 per cent of revenues) grew 21 per cent in 2013-14, and it posted an operating profit as against a loss in the year before. In April this year, EID acquired nutraceuticals player Alimtec SA Chile — this should help boost the segment’s revenues. Even as EID’s full-year performance was tepid due to weakness during the first nine months of 2013-14, its profitability improved in the March quarter.

Improving fortunes

After a loss of about ₹56 crore in the December quarter, the sugar segment (72 per cent of revenues) posted profit of nearly ₹56 crore during the March quarter.

Similarly, the co-generation (6 per cent of revenues) power business turned profitable clocking an operating profit of about ₹18 crore, compared with a loss of about ₹8 crore in the December quarter. The distillery segment’s profits (13 per cent of revenues) rose 38 per cent sequentially last quarter.

The Government’s intent to increase the mandatory ethanol blending from the current 5 per cent to 10 per cent, if implemented, will be a big positive for the sugar industry as a whole. This can buffer EID’s performance from fluctuations in the core sugar business.

EID has an attractive investment book which includes group companies -Parry Sugar Industries, Carborundum Universal and Coromandel Engineering besides the 62.56 per cent stake in fertiliser major Coromandel International (valued at ₹188 a share).

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