EID Parry - an agriculture titan disguised as a sugar business

[OpenSourceInvestor]

Business overview

EID Parry is part of the Murugappa group, one of the oldest business groups in India with 28+ businesses and a long history of fiduciary responsibility.

• Parry is the largest sugar manufacturer in South India. It started in 1842, when it opened the country’s first ever sugar plant at Nellikuppam, Tamil Nadu
• 30% of the sugar output is sold under the Parry brand, while 70% is sold in bulk.
  • The management team have indicated that they are planning to “move up the value chain”, with more focus on their branded line of sugar and nutraceuticals (spirulina , palmetto etc.).
  • The Indian government curbed sugar exports in 2023, in order to control domestic sugar prices
  • To combat the sugar business’s cyclicality, Parry has also significantly invested in distillery capacity, aligning with the Indian government’s plan for increased domestic energy supply.
• Their branded sugar and FMCG business (27% of their revenue) is scaling rapidly, with the number of distribution outlets increasing from 20k in 2021 to 110k currently
• Apart from this, they also have a power generation and sugar refinery businesses, both of which have struggled to maintain profitability. These two business have depressed the margins over the last five years, which were around 1% on average.
• Even if loss-making units break even, margins would only increase to a razor-thin 2-3%, reflecting the commoditized nature of the sugar industry.

The Murugappa group took over EID Parry in 1981 and now own 38.3% of business:

EID Parry, in turn, owns 56% of Coromandel International (ValuePickr page link), which it had co-founded in the 1960s.

• Coromandel is the largest private phosphatic fertiliser manufacturer, and 2nd largest overall. The company enjoys 60% market share in the ‘Rice Bowl’ regions of Andhra Pradesh and Telangana
• Around half of Coromandel’s sales come from exports, where they see significant headroom for growth
• IFFCO, which is a Fertiliser Cooperative, is the largest fertilizer producer in India, with roughly twice the revenues of Coromandel. Coromandel has been gaining market share, with revenues growing ~11% CAGR since 2019, while IFFCOs sales have remained flat

Balance sheet and capital allocation

• EID Parry had significant debt before 2020 but has since paid down a majority, leading to a fortress-like balance sheet and net cash of ₹23 billion (₹2300 crore) as of March 2024

• This gives them flexibility to invest in sugar-adjacent businesses (like distillery & nutraceuticals) and buy depressed assets during market downturns.

• Capital allocation has been hit-and-miss, with some of their ventures like Coromandel and the sugar distillery investments generating high ROCE , while other ones like the refinery have had very poor returns.

  • Overall , ROCE has been exceptional, averaging 26% since 2017
  • The management has expressed interest in further inorganic expansion in the FMCG space, but they have been pretty prudent so fair in sizing their capital investments, while maintaining a pristine balance sheet
  • Parry have also reduced their Coromandel stake from 60%+ to 56% currently. But don’t seem to have any plans to further trim their position.
    
    

• They haven’t fully reinvested their earnings. So, they do pay out dividends and have built up a cash position. An approximate capital deployment break-down over the last few years:

  • 50% re-invested into CAPEX
  • 30% paid out in dividend
  • 20% going to debt repayment or cash reserves

Valuation

Many of the previous valuations I’ve read online seem to take a comparative valuation approach with a “Hold-Co discount” added on top. However, I chose to employ a discounted cash flow analysis, assuming the earnings of Coromandel will flow through to EID Parry shareholders eventually, either via dividends or incremental equity ownership.

Warren Buffett follows a similiar approach, by using “look-though earnings” to value Berkshire Hathaway and other holding companies. Subsidiaries should only pay dividends if they cannot re-invest capital in their business at a high hurdle rate.

My estimates for value per share are given below. The full assumptions can be found here.

Notes:

• The Coromandel stake represents ~70% of EID Parry’s value per share, so it forms a core part of the investment thesis. At current prices, you are essentially getting the sugar business and assets for “free”, as the Coromandel stake and net cash are worth ₹755
• If I valued the Coromandel stake at their current market price instead of using a discounted cash flow method, EID’s 56% ownership of Coromandel equals ₹1112 per share (after subtracting 25% in taxes) - 20% higher than my bull case estimate of ₹914. The markets seem to be valuing Coromandel with double-digit growth expectations for the next decade.

I had initially bought EID Parry in March 2022 and added to my position subsequently, so my average cost is ₹508 (much lower than current levels). The stock now looks close to fairly valued, with the gap between price and value narrowing significantly since the beginning of 2024. The stock currently represents 10% of my India portfolio - I plan to hold it for the next several years (or ideally forever).

PPFAS has also invested in EID Parry since January 2024. However, it currently represents a small portion (0.2%) of their flexi-cap fund. They appear to have stopped adding to their position since February 2024, when the share price was around ₹600.

Future growth potential

The current stock price seems fairly valued, but provides some free “call options” that I haven’t consider yet in the valuation:

• EID Parry
  • Indian sugar consumption could grow significantly: Indian per-capita consumption is around 22kg per year, while developed countries are at 36kg per year.
  • The Indian government drops the sugar export ban, leading to higher sugar realization prices
  • The Indian government ramps up the Ethanol blending program to reduce reliance on energy imports (similiar to Brazil)
  • FMCG grows to become a significant part of the business (similiar to ITC’s successful scale-up)
  • The freehold land bank owned by EID Parry, which they estimate to be valued at ₹394 Cr (or ₹22 per share of EID Parry)
• Coromandel could significantly ramp up export volumes: their current capacity is 4.5MMT (million metric ton), while the largest global crop nutrient manufacturers are close to 20~30MMT

Risks

• EID Parry
  • Global sugar prices plummet lower than EID’s production costs, leading to under-utilization and losses
  • The Indian government sets the MSP (minimum support price) for sugar purchases from farmers and could end up squeezing EID’s sugar margins.
  • Poor monsoons or pest related issues in South India, leading to lower sugar cane yields
• Coromandel faces significant litigation risks related to toxic chemical handling. The most recent example was a gas leak at Ennore on Dec 2023, which resulted in a fine of ₹6 Cr.

Sources

Let me know your views and if there are any risks I didn’t mention.

Disclosure: invested, potentially biased.

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Thanks,
Sharad

[hardik_shah1]

Hi Sharad,

I have been tracking this, and the only thing stopping me from adding to my portfolio is the sugar business. Their attempts at moving up the value chain have not been as successful to date. How do you look at the distillery operations?

What would your yardstick of success be for the standalone business where it moves from pure commodity to semi-commodity?

Thanks in advance

[OpenSourceInvestor]

Hi Hardik,

Thanks for your comment. If you look at my base case valuation above, just the coromandel stake cash on the balance sheet is equal to the current share price. Hence you are getting the sugar business virtually for free. I think it is a low margin and commoditised business . They are just in the first stages of diversification into FMCG, so we will only see the results in 3-4 years. The ethanol business will help them reduce cyclicality, but i don’t expect it ever to reach a non commoditised margin level or ROCE. I see them earning only 3-5% margins on the standalone business. The only positive is that management seems to have realised this and is looking to deploy earnings in higher return ventures.

So, essentially my bet is based on their Coromandel stake, look through earnings and ability to reinvest earnings in high return ventures. Will monitor growth in FMCG and branded sugar in the next few quarters to see if they are able to pivot successfully.

[R_Banka]

Hi Sharad

Thanks for the writeup. Just like to add one point here-
You mentioned that 30% of the sugar output is sold under the Parry brand, while 70% is sold in bulk. I am sharing their sugar sales mix. They sold 25% in trade, rest 75% was in higher realisation retail and institutional sugar sales. The share of trade sugar is decreasing over the years.They make Rs 2.5-3.5 per kg more in non retail sale. This will make them competitive in the commodity business.

[OpenSourceInvestor]

Hi , thanks for the comment and agreed. They also have another opportunity to increase realization if the government removes the ban on exports. I think government would eventually take this step, as sugar stock seems to have exceeded local demand at the moment and there is no longer a risk of local supply crunch / excessive sugar prices.

[OpenSourceInvestor]

Update on EID Parry:

Q3FY25 results: good YoY improvement in top and bottom lines (see table below).

Also, govt has lifted the ban on sugar exports partially on January 20, 2025, allowing industries to export one million metric tonnes of sugar in the 2024-25 season ending in September. Should further improve sugar margins. Link: Centre lifts ban, gives nod for sugar export - The Hindu

Cheers,
Sharad
OpenSourceInvestor

[RajAnalyst]

Correct me if I am wrong. EID Parry has a market cap of 14400 Cr at the current mkt price of 700. It owns 56% of Coromondel Intl which has a market cap of 50000 Cr at current price of 1700. Thus the value of Coromondel itself is about 28000 Cr (double of EID mkt cap). Besides, EID has a promising sugar, fmcg, distillery and nutraceuticals business with sales of about 3000 Cr and a PBT of 115 Cr (FY 24)

From a standalone perspective as well as a holding company, it seems to be at a very low valuation

[rajeshmeda]

The real unlocking can happen when they have finite FMCG growth plans are on. That is going to be a growth trigger furthr

[OpenSourceInvestor]

Yes, agreed. Another way to look at this is earnings: EID Parry standalone earnings (3 yr average) were around 200 cr. Coromandel standalone earns 1700cr. EID shareholders are entitled to 56% of those earnings (which 952 cr.). So total earnings = 200+952 =1152 cr.

EID enterprise value (market cap minus net cash) is 9400 cr. So that gives an earnings yield of 12% , or PE ratio of 8.15. It looks cheap, but not outrageously cheap. I think it is still a good long term hold, especially if their sugar business demonstrates steady profitability. Management should also consider buying back shares at these levels to benefit long-term shareholders.

[Narendarpurohith]

Hi OpenSourceInvestor,

I have two questions, and I would really appreciate it if you could help me understand the business better.

1. Why is the distillery segment making losses? Can you explain its unit economics, raw material sourcing, and other relevant factors?

2. How does the refinery segment operate? Since they sell at market prices, how do pricing, costs, and margins work?

I am new to the sugar industry and trying to understand its various aspects, so your insights would be extremely helpful.

Thank you!

[OpenSourceInvestor]

Hi Narendar,

Thanks for the questions!

1. Distillery segment was originally set up to produce ethanol from cane sugar molasses. However, the profit margins came under pressure in late 2023 due to government restrictions on using sugarcane juice/syrup for ethanol production. The govt. took this step to try to control sugar prices. So, EID had to adopt a “multi-feed approach”, supplementing the sugar molasses with grain (rice and maize). However, distilling these grains is not as profitable as cane sugar molasses. The distillery segment is still profitable, but margins are a lot lower than initially assumed by EID when they did the CAPEX for distilleries. I don’t know the exact unit economics, but they sold ethanol for 60~63 INR/litre last year and made 3%~10% profit margin (before tax) depending on the quarter. I think the profitability of this segment will improve, as the demand for ethanol will increase in the long term (next 10~20 years).

2. Refinery segment : they process raw sugar to create refined sugar and earn a “spread”. Their main costs are energy, labor, and maintenance expenses. This is a pure “trading” type business, where they try to buy raw sugar at low prices and sell refined sugar at higher prices and hope to cover expenses and make a profit. However, sugar prices and demand tend to fluctuate a lot, resulting in negative margins for them in the last few years (see table below). They seem to have acknowledged this is a poor / cyclical business with low ROCE and have closed some of their plants already. They will potentially be selling off more assets and shutting down this division in the future - they have said they are exploring options for this, but not made any firm commitments.

Source:

* Q1 FY25 investor presentation

* Q3 FY25 Con call

Cheers,
Sharad
OpenSourceInvestor

[Narendarpurohith]

Thank you for your response to my question.

[Dr.Bharath_Murugavel]

https://youtu.be/h_fdPgjp4bI?feature=shared Must see