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UBS Investment Research
EID Parry (India)
Initiate with a Buy on attractive valuation
„ A leading Indian agricultural firm with an increasingly integrated model
EID Parry (India) (EID) is a leading Indian agricultural conglomerate with sugar,
cogeneration, distillation, bio-products and agri-input operations. It has a 63%
stake in Coromandel International (CIL), which we think will benefit from growing
demand for agricultural nutrients and potential sector deregulation.
„ South India-based sugar capacity and stake acquisition positive
EID’s recent acquisition of new sugar capacity and increasing integration of
cogeneration and distillery operations at its sugar plants is complemented by its
presence in the higher yield, less politically sensitive South India. Further, its
refining JV with Cargill should help it take advantage of trade disparities and
partly mitigate volatility in earnings.
„ Consolidated average earnings growth of 28% in FY11-13E
We forecast standalone as well as pro-forma consolidated financials. We expect
standalone earnings to decline in FY11 due to volatile sugar prices and an
inventory loss booked in Q1 FY11. From FY12 we forecast earnings on more
normalised assumptions. However, on a consolidated basis, we estimate average
annual growth of 28% in FY11-13, on the first full-year contribution from
associates/JV business and earnings growth from CIL.
„ Valuation: initiate coverage with price target of Rs676.00
We initiate coverage of EID with a Buy rating and a sum-of-the-parts-based price
target of Rs676.00, which includes Rs448.00 for its stake in CIL. We believe the
company’s core sugar/bio-products business (bio-pesticides and nutraceuticals) is
attractive at 3x FY12E EV/EBITDA (adjusted for the CIL stake value).
EID Parry (India) (EID) is a leading Indian agricultural conglomerate with
businesses spanning sugar, cogeneration, distillation and agri-inputs. We initiate
coverage on EID with a Buy rating and a sum-of-the-parts-based price target of
Rs676.00, which is 32% above the current share price. We arrive at our price
target by valuing EID’s standalone sugar business, investments in associates/JV
and ascribing a 40% holding company discount to our price target for
Coromandel International.
EID’s expansion strategy of acquiring new sugar capacity and increasing
integration of cogeneration and distillery facilities at its sugar plants has been
well complemented by its presence in the high yield, and less politically
sensitive southern region of India. We therefore think it is well positioned to
take advantage of the sugar cycle. Further, we believe its refining JV with
Cargill will help it benefit from the trade disparities between domestic/global
market and partly mitigate volatility in earnings. EID’s 62.94% stake in
Coromandel International should also help it leverage the high demand for agri input.
We have forecast the standalone financials for the company, and have also
indicated proforma consolidated estimates. We expect FY11, to be a muted year
for the company on a decline in earnings due to volatile sugar prices and an
inventory loss booked in Q1 FY11. From FY12, given the high cyclicality and
uncertainty of the sugar industry, we forecast earnings on more normalised
assumptions. However, on a consolidated basis, we forecast average annual
growth of 28% in FY11-13, on the first full-year contributions from
associate/JV businesses and earnings growth from Coromandel International.
We base our Rs676.00 price target for EID on a sum-of-the-parts valuation,
which takes into account the valuation of the standalone sugar business,
earnings from associates and JV, and also the contribution of its 62.94% stake
in Coromandel International (Rs448/share). We value the standalone sugar
business and investments in associates and JV at Rs227/share (at a target
EV/EBITDA multiple of 6.3x, in line with peers). Our price target for
Coromandel International is Rs733.00 and we have applied a 40% holding
company discount. We believe the company’s core sugar/bio business is
attractive at 3x FY12E EV/EBITDA (adjusted for the CIL stake value)
Key catalysts
Q We believe a combination of lower-than-expected global production/cane
acreage of sugar and higher sugar prices are a key catalyst for the stock
(indicating an upcycle). This is because while cane costs in India are
determined by FRP/SAP and have consistently risen historically, sugar prices
have been fairly volatile. Any positive surprises on sugar prices would
provide upside to our earnings forecasts. We forecast domestic production
surpluses in the 2010/11E sugar season, after which we use normalised
assumptions for our forecasts.
Q FY12 is likely to be the first full year of operations for the subsidiaries’ and
JV’s investments in sugar business. This should add significantly to EID’s
earnings growth and be a key catalyst.
Q The deregulation of the sugar industry could be a big catalyst for the sector
and the stock.
Q Nutraceuticals acquisitions and growth could also be a stock catalyst:
Currently bio-pesticide and nutraceutical business contributes 5-8% of
overall EBIT. Expansion of EID’s product portfolio and better market access
in the US/EU (through the acquisition of distribution capability) could
improve the contribution of the bio-products and nutraceuticals business to
total earnings.
Q IFRS adoption could reduce the holding company discount in our sum-ofthe-parts valuation of EID. The IFRS framework considers consolidated
financial statements to be the general purpose financial statements of the
reporting entity, while the separate (or standalone) financial statements are
prepared at the discretion of the management. This is a significant departure
from IGAAP, where the presentation of separate financial statements is
mandatory and consolidated financial statements are usually prepared only
by listed companies for compliance with SEBI listing requirements. For
more details, please refer to our report—Q-Series®: What does IFRS mean
for Indian stocks?—by our India Strategist, Suresh Mahadevan, in
collaboration with KPMG in India, published 25 October 2010. With the
adoption of IFRS, investors may start appreciating the value of EID’s
holdings in Coromandel, with EID moving towards consolidated financials
as the key reporting format. This could reduce the holding company discount
in our sum-of-the-parts valuation.
Q Any increase in Coromandel share price (66% of our sum-of-the-parts-based
price target) could lead to a rise in EID’s share price.
Risks
Q Volatility in sugar prices—The global and domestic sugar industry is
highly cyclical, characterised by significant variations in sugar production.
This is driven by acreage, weather, exports/imports, and local regulations.
Any sharp decline in sugar realisations could dampen earnings.
Q Unfavourable regulatory environment—The domestic sugar industry is
subject to strong government control in the form of FRP (fair remunerative
prices) for cane pricing, levy quotas and monthly release quotas,
export/import restrictions, and other political pressures. Negative regulation
could impact cane costs and margins, as well as inventory and sales.
Q Difficulty in scaling up new stake acquisitions—EID has expanded its
integrated sugar operational capacity through investments in associates and its
joint venture. While our standalone forecast does not include the contributions
from these, any difficulty in scaling up operations and increasing utilisation
would impact our consolidated financials implied valuations.
Q Other uncertainties—Additional risks include adverse weather,
international trade barriers and competition.
Valuation and basis for our price target
We base our price target for EID on a sum-of-the-parts valuation. Our price
target of Rs676.00 is 32% above the current share price. We believe the stock is
trading a significant discount to its SOTP fair value. Our price target takes into
account the valuation of the standalone sugar business, earnings from associates
and JV and the contribution of EID’s 62.94% stake in Coromandel. We value
the standalone sugar business and investments in associates and JV at
Rs227/share (at a target EV/EBITDA multiple of 6.3x, in line with peers). Our
price target for Coromandel International is Rs733.00, to which we apply a 40%
holding company discount.
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