Recommendation from Sugar sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year 

EID PARRY (India) : GENERATING ‘SWEET’ PROFITS

HERE IS WHY
✓Strong presence in sugar production
✓Ambitious expansion plans
✓Expanding top-line

The sugar industry over the past few years has seen a change in its business structure. A new paradigm in the form of ethanol has been added that has reduced its cyclical format. One such company benefiting out of this shift is E.I.D. Parry, which is engaged in the production of sugar, nutraceuticals and ethanol production. It also has a significant presence in the farm inputs business including biopesticides through its subsidiary, Coromandel International Limited. The company is one of the leading entities of the Murugappa Group.

As of FY22, 74 per cent of the company’s revenue was derived from sugar followed by distillery (19 per cent), power generation (7 per cent) and other nutraceutical products (2 per cent). It creates science-based formulations of nutraceutical supplements, functional foods, general nutrition products, functional cosmetic ingredients and pharmaceutical formulations. 

In the power segment the company has an aggregate cogeneration capacity of 140 megawatts and sells nearly 52 per cent of the generated power. The company is engaged in the production of industrial alcohol and ethanol as well and has four distilleries. In FY22 it completed the erection and commissioning of a new 60 KLPD distillery at Bagalkot. It has six sugar factories with the capacity to crush 40,300 tons of cane per day, generating 140 MW of power. It has five distilleries with the capacity of 297 KLPD. 

During FY22 the company commenced activities for setting up of a 120 KLPD greenfield grain-based distillery at Sankilli with a capital outlay of around ₹92 crore. The plant is expected to be commissioned and fully operational during the last quarter of the FY23. At Nellikuppam, ethanol production capacity has been increased to 65 KLPD from 45 KLPD. Further expansion to 90 KLPD is being envisaged. The company has capex plans of about ₹285 crore and ₹230 crore during FY23 and FY24, respectively, which is expected to be majorly funded through internal accruals and partly through term debt

It is also exploring opportunities to convert sugar, distillery and nutraceutical by-products (waste) into value-added products suitable for aquaculture, poultry and animal husbandry. The company has developed nutrient-rich, eco-friendly, soil-less media from sugar cane bagasse both for the international and domestic markets. Its strategy of expanding retail footprint includes intensive brand-building and market-storming initiatives, which has been fruitful so far. Sales of branded sugar rose to nearly 22 per cent of the domestic sales of FY22 as against 18 per cent in FY21.

The company’s top-line has been expanding at a CAGR of 12 per cent over the past three years. Its revenue in Q1FY23 increased to ₹7,146 crore, representing an increase of 26 per cent quarter over quarter and 64 per cent year over year. The net profit in the June quarter is at ₹494 crore, up by 77 per cent from the previous quarter and 120 per cent from the previous year. The stock is currently trading at an attractive PE of 10 times. We believe that this scrip is undervalued compared to its future potential, solid fundamentals and positive outlook. Therefore, our recommendation is to BUY.