Apart from the recent uptrend in the domestic sugar cycle that will help sugar firms witness a turnaround in fortune, Muruguppa group company EID Parry (EID) is taking steps that will help create value for its shareholders.
Recently, the company announced a scheme of arrangement wherein its listed subsidiary, Parrys Sugar Industries, will merge into EID, which analysts see as a value accretive step. Even otherwise, given the company’s investments, the stock is still considered to be offering good value.
For instance, the company has 63 per cent stake in Coromandel International, a leading fertiliser company, which has market capitalisation of about Rs 8,000 crore. Based on the market capitalisation, the value of EID's stake works out to Rs 5,000 crore compared to EID’s own market capitalisation of Rs 3,930 crore.
| REVIVAL IN FORTUNES | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Sales | 1536.7 | 1882.2 | 1909.9 |
| Net profit | 137.3 | 287.7 | 326.9 |
| EPS (Rs) | 7.9 | 16.6 | 18.9 |
| PE (x) | 28.6 | 13.6 | 12.0 |
| Standalone financials Source: Enam Securities | |||
This also suggests the market is not factoring in the value of its core sugar business and other investments. However, all this should change soon given the company’s reorganisation plan.
| KEY INVESTMENTS | ||
| In Rs crore | CMP (Rs) | Value of Investments |
| Coromandel Engg. | 150 | 1 |
| Coromandel Inter * | 285 | 5,057 |
| Parrys Sugar | 62 | 81 |
| St Bk of India | 2,197 | 2 |
| Total | NA | 5,140 |
| CMP as on 24/09/2012; * Represents value of EID's stake Source: CapitaLine Plus | ||
"We maintain a buy with the revised target price of Rs 351 per share. We value EID's 63 per cent holding in Coromandel at 20 per cent holding discount to its fair value of Rs 340 (which is five per cent lower than its current price of Rs 286) and EID's standalone business at 3.5 times its revised FY14 Ebitda of Rs 300 crore and all the other businesses at investment cost," said Kashyap Pujara, who tracks the company at ENAM Securities in a recent report.
“Not just from valuations point of view, EID Parry is looking good as both the fertiliser and sugar businesses are expected to do well. Coromandel, which is the largest complex fertiliser play in the country is expected to do well because of the demand and secured raw material. Additionally, the sugar business is expected to do well given the upturn in the sugar industry,” said S P Tulsian of sptulsian.com.
EID, with positive operating cash flow and a return on equity of 22 per cent, also has a good history of dividend distribution. Though the stock has risen 27 per cent in the current quarter to Rs 226 currently, there is a lot of steam left given the improving fundamentals.
The company’s shareholders’ meeting is scheduled on October 11 to consider the reorganisation scheme with Parrys Sugar Industries, where EID holds 65 per cent stake. The scheme entails issue five shares in EID against 19 shares of Parrys, which up on completion with result in Parrys being fully owned EID. The company, which reported revenues of Rs 515 crore and net loss of Rs 6 crore in 2011-12, currently has a market capitalisation of Rs 127 crore (debt of Rs 419 crore).
However, in terms of operational profile, Parrys Sugar produced 190,000 tonnes sugar in FY12, which is almost half of the quantity produced by the EID's standalone sugar business.
Parrys Sugar also exported 70.8 million (about 20 per cent of EID) units of power generated from its cogeneration capacity and produced 18.6 million (almost half of EID's production) litres of distillery. The reorganisation is aimed towards enhancing operational efficiencies of Parrys’ sugar business besides enabling it raising funds for future growth and expansion in other parts of the country.
While analysts are valuing EID’s investment in Parrys Sugar at Rs 6 per share, they believe these moves will result in strong operational gains and help create more value for the shareholders.
Meanwhile, EID, on a consolidated basis generates 20 per cent of its revenue from the sugar business, which is seen to be turning favourable. On a standalone basis though, sugar and power (excluding Parrys’ businesses) are the two key revenue generators for EID. The company operates in the southern states and is relatively better placed than peers given that the cane availability in the region is expected to remain better. Secondly, since the cost in terms of sugarcane procurement remains lower at Rs 215 per quintal, the company will be the key beneficiary of the uptrend in the sugar prices. The retail sugar prices have already shot up by over 30 per cent in last couple of months to Rs 40-42 a kg, which is good news for sugar realisations for both EID and Parrys.
Thus, in FY13, EID is expected to report average realisation at over Rs 31-33 per kg wherein Ebitda per kg is estimated at about Rs 3.5-4 compared to the negative Ebitda per kg in FY12. This is also a reason that over the next two years the company's financial performance will improve and thus should lead to rerating of the stock.
