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Overview
The analysis examines EID Parry, a leading sugar producer in India with significant presence across sugar, nutraceuticals and ethanol. It has strong parentage via the Murugappa group and enjoys market leadership in South India. While its sugar business faces volatility, EID Parry is expanding in higher margin segments like nutraceuticals and ethanol which offer growth visibility. The analysis recommends buying the stock given attractive valuations, structural tailwinds for ethanol and dietary supplements along with the company’s dominant position in its key geographies. However, over-dependence on the cyclical sugar vertical in the near term poses risks.
Company Introduction
EID Parry is a leading sugar producer in India with a significant presence in sugar, nutraceuticals, and ethanol production. It has an over 100 year operating history and is part of the reputed Murugappa conglomerate. The company has 8 sugar factories in South India with total crushing capacity of 43,400 TCD. It also owns 4 distilleries with capacity of 232 KLPD. EID Parry has been increasing focus on the higher margin nutraceuticals business through its subsidiary Valensa International. Its revenues have grown at 18% CAGR over 5 years driven by volume growth.
Should We Buy, Sell or Hold?
EID Parry stock looks attractive at current levels from a long-term perspective for the following reasons:
Attractive valuations
- Attractive valuations with single digit P/E of 9.6x and healthy dividend yield of 1.76%
Strong parentage
- Strong parentage of the Murugappa group and leading market position in South Indian sugar market
Expanding nutraceuticals business
- Expanding nutraceuticals business which enjoys higher margins. Valensa acquisition will further augment product portfolio
Debt reduction
- Reduction of debt over the years bringing down debt/equity ratio to a comfortable 0.13x
The company has delivered consistent profit growth of 27% CAGR over 5 years. While sugar business faces volatility, ethanol blending targets should provide volume visibility. Recent quarter results indicate good growth recovery. Overall the stock can be accumulated on declines for long term gains.
Key Ratios Explained
Some key ratios for EID Parry are:
Low P/E
- Low P/E of 9.6x indicates the stock is attractively valued on an absolute basis
Healthy ROCE and ROE
- Healthy ROCE of 27% and ROE of 16% shows efficient capital allocation by the company
Low debt/equity ratio
- Low debt/equity ratio of 0.13x signifies the company has reduced debt burden over the years
Good operating profit growth
- Good operating profit growth over the years as seen through 5-year OPM expansion from 5% to 10%
Reduction in working capital cycle
- Reduction in working capital cycle to just 5 days indicates improved liquidity
Low pledged holding by promoters
- Low pledged holding by promoters at 0.03% signifies low financing risk
The company has shown consistent improvement across key financial parameters. This indicates the management’s focus on profitable growth which bodes well for long term value creation. The healthy ratios make EID Parry a good bet from an operational efficiency and balance sheet perspective.
Promoter Holding
The promoter holding in EID Parry has been very stable in the 44-45% range over the past decade. This shows the high conviction of the promoters in the business and their focus on taking a long term view rather than offloading stake for short term gains. The promoters belong to the reputed Murugappa conglomerate which provides additional comfort regarding governance standards. The top shareholders are Ambadi Investments and Ambadi Enterprises together holding over 40% equity stake. There are also a number of family members and investment arms of the Murugappa group that hold shares in EID Parry signifying skin in the game for the promoter group as a whole.
FII/DII Holdings
In terms of non-promoter shareholding, the FII holding has seen a declining trend from 11.6% four years back to around 9% levels currently. This indicates that foreign institutional investors have turned cautious on the stock owing to the volatility and cyclicality issues plaguing the sugar sector. Profitability also witnessed pressure given the commodity downcycle over the last few years. However, DII holding has moved up from 1.9% to 4.5% over the same period. This shows that domestic mutual funds and insurance companies have taken a contrarian call and upped exposure sensing value in the EID Parry business model. The cheap valuation multiples have provided domestic institutions a good opportunity to accumulate the stock on declines. Their holding levels signify the long term positive outlook regarding earnings recovery over the next few years.
Sales/Profit Trend
EID Parry has posted a healthy sales CAGR of 18% over the past 5 years till FY22, reflecting steady volume growth across all its business segments of sugar, distillery and nutraceuticals. The geographical presence is concentrated mainly in South India where the company has a strong leadership especially in the sugar market of Tamil Nadu, AP and Karnataka. The volume growth has translated well into higher profitability too with OPM showing a rising trend to reach 10% currently. This has been possible owing to growth in the more high margin distillery and nutraceuticals verticals which have provided an offset to the volatile sugar operations. As a result, net profit registered 27% CAGR growth over 5 years till FY22. However, performance witnessed some pressure in FY23 with sales growing at tepid 7% rate and profits actually declining by 4%. This can be attributed to the inherent cyclicality issues with the sugar business. Cane availability as well as sugar prices tend to be volatile from year to year impacting capacity utilization levels and thereby profit margins. But volume visibility is improving going forward owing to the rising ethanol blending targets of the Government providing a steady demand outlook over the long run.
Debt Position
EID Parry has consciously worked on reducing its debt burden over the years to strengthen its balance sheet. Long term debt levels which were close to ₹4,600 cr 10 years back have steadily declined in the succeeding years to reach sub ₹900 cr levels as of Sep 2022. As a result, the debt-to-equity ratio has also seen a decreasing trend and stands at a comfortable 0.13x currently. This provides confidence regarding the financial stability of the company enabling it to comfortably service interest costs without straining profitability. The strong operating cash flows have also resulted in high cash & equivalents balance of over ₹3,000 cr on books providing a solid liquidity buffer. Overall, EID Parry finds itself in a net cash positive situation currently on a consolidated basis. This will support growth investments and indicate the management’s conservative philosophy focused on financial prudence.
Competitor Comparison
The sugar industry space is highly competitive with the presence of players ranging from large conglomerates like Balrampur Chini, Bajaj Hindusthan to relatively smaller companies like Mawana Sugars, Sakthi Sugars etc. EID Parry emerges as one of the better placed sugar manufacturers owing to its market leadership in South India, strong branding across regions and the backing of the reputed Murugappa group. In terms of financial parameters, it scores well on sales growth, OPM, ROCE, lower debt and attractive valuation multiples compared to the industry median levels. However, being predominantly focused on the cyclical sugar vertical makes growth and earnings susceptible to fluctuations depending on cane availability and sugar prices. In this context, EID Parry’s strategy of diversifying into the more stable ethanol and high growth nutraceuticals segments provides resilience. The recent acquisition of US based nutraceutical firm Valensa by subsidiary Coromandel International also promises access to the global dietary supplements space valued at over $140 bn. This along with leadership in cane rich South Indian market makes EID Parry a relatively better play compared to other sugar stocks from a long term orientation.
Stock Valuation
EID Parry is trading at attractive valuations with a P/E ratio of just 9.6x currently compared to the industry average of 12.1x. This cheap pricing does not fully reflect the company’s market leadership in South India, growth prospects in ethanol and nutraceuticals along with the strong parentage of Murugappa group. The price-to-book ratio is also reasonable at 1.4x. More importantly, there is a significant upside when comparing the stock’s current market price of Rs 539 to its intrinsic value estimate of Rs 2,325 per share. This indicates EID Parry is considerably undervalued based on its growth runways and profitability potential over the long term.
Buy Rationale
EID Parry stock presents a good buying opportunity for investors currently for the following reasons:
Leadership in cane-rich South Indian sugar market
- Leadership in cane-rich South Indian sugar market provides competitive advantages
Expanding presence in allied segments
- Expanding presence in allied segments like distillery and nutraceuticals offers growth visibility beyond sugar cyclicality
Recent Valensa nutraceuticals acquisition
- Recent Valensa nutraceuticals acquisition by subsidiary Coromandel International to drive international expansion
Attractive valuation
- Attractive valuation at P/E of 9.6x makes risk-reward favorable from a medium to long-term perspective
Strong parentage and prudent management
- Strong parentage and prudent management of Murugappa group lends comfort
While the sugar business faces volatility, the diversification along with industry tailwinds in ethanol blending and nutraceuticals signify potential for consistent growth and margin expansion over the coming years. EID Parry is well placed to capitalize on these opportunities while trading at reasonable valuations. Hence, investors can accumulate the stock on dips.
Industry Growth Outlook
The sugar sector is expected to benefit from Government policies aimed at reducing surplus domestic stock piles through measures like compulsory ethanol blending. The target of 20% blending by 2025 will provide volume visibility for integrated sugar companies involved in distillery operations like EID Parry. There is also increased health consciousness driving higher consumer demand for nutraceuticals, herbal supplements, etc., which augurs well for EID Parry’s ambitions in this segment. The global dietary supplements market is projected to grow at 8%+ CAGR over the next 5 years to reach a size of $220 billion by 2028. EID Parry through its subsidiary Coromandel International will look to tap this potential via acquisitions like Valensa and expanding its product portfolio to leverage the market opportunity.
Risk Factors
Industry Risks:
- Sugar business has inherent cyclicality and volatility tied to cane production, sugar prices, and regulatory dynamics.
- Ethanol policy changes regarding blending targets, pricing, etc. can impact volume offtake.
Company Specific Risks:
- High dependence currently on the sugar vertical for the majority of sales makes earnings susceptible to fluctuations.
- Aggressive diversification into new areas like nutraceuticals carries execution risk.
Management Risks:
- No criminal or integrity issues noticed against the current management.
- Top team spearheaded by Managing Director S Suresh has rich experience in the industry.
- Promoter group Murugappa has a strong reputation for corporate governance.
The cyclicality-prone sugar business, which accounts for 70% of revenues, poses a major risk in case of adverse movements in cane availability or sugar prices. However, higher ethanol volumes will offset volatility while the nutraceuticals foray adds a growth driver.
Long Term Outlook
EID Parry looks well positioned for long-term growth on the back of expanding ethanol capacities, entry into the high-growth nutraceuticals segment, and continued dominance in the South Indian sugar market. The healthy balance sheet, strong parentage, and prudent management also lend confidence. The Government’s rising ethanol blending targets expected to reach 20% by 2025 provide multi-year volume visibility. The global dietary supplements industry, projected to grow at an 8%+ CAGR, also offers scope to scale the nutraceuticals play via products as well as overseas acquisitions.
Short Term Outlook
In the near term of 2-6 months, EID Parry’s performance would continue to have linkages to the sugar cycle and commodity prices. Cane crushing is expected to pick up from January onwards in the key states of Tamil Nadu and Karnataka. This, along with diversion for ethanol, should support capacity utilization levels for the coming quarters. However, high-cost inventory may cap margin expansion in the very short term. The Valensa nutraceuticals acquisition would also take some time to begin contributing meaningfully to the top-line. But a healthy OPM profile of 12% offers support against cost pressures. Overall, sugar operations are expected to stabilize in the coming months backed by a volume uptick. The stock could see rangebound movement subject to broader market direction.
Medium Term Outlook
Over the medium term of 2-3 years, EID Parry would likely benefit from steadying sugar fundamentals as the surplus stock situation improves in the domestic market. The structural growth drivers in the form of ethanol blending and nutraceuticals exports coming into play shall aid in margin expansion from current levels. The company has guided for doubling ethanol capacity over the next 2 years to 500 KLPD. Higher efficiencies from the upgraded plant along with better by-product realization would aid profitability. The fast-growing dietary supplements business also promises operating leverage benefits once it starts scaling up significantly. Healthy ROCE and ROE profiles of 27% and 16%, respectively, signify potential to sustain double-digit growth rates over this period.