Why D-Street is not worried about this sugar company's poor FY24 show

The market seems to have taken EID Parry's poor FY24 show in stride. The stock has swelled 25 per cent since May 24, 2024, when the company announced its annual and quarterly results. The rally occurred despite the core sugar segment's operating profit declining 85 per cent in FY24.

EID Parry, which is among the market leaders of the packaged sugar industry, saw its sugar business hit in FY24 as adverse climate conditions affected sugarcane production and weighed on its export revenue. The company's ethanol production was also impacted as the government barred companies from producing the biofuel to keep sugar prices in check.

So, why is the market still bullish on the Murugappa Group company? Besides the prospects of a favourable monsoon and better sugarcane prices in India and Thailand this year, there is much more to the ongoing rally. Let's explore the factors driving the optimism:

• Expanding the addressable market: EID Parry is pulling out all stops to solidify its position in premium segments like brown sugar and others in the FMCG industry. In its Q4 FY24 earnings call, the company laid out its plans to expand into food essentials like staples. It recently entered the staples market with the launch of its branded rice products and has dal and millets next in line. The company sees large headroom in this segment and believes it can help it become a major force in the FMCG sector. After achieving this, the company eventually intends to enter high-margin ready-made products like idli dosa batter, among others. The idli dosa batter market is valued between Rs 1,500-4,000 crore and only 5-10 per cent of the industry is organised.
  
• Coromandel's foray into CDMO: EID Parry's crown jewel is agrochemical giant Coromandel International, in which EID holds a 56 per cent stake. Coromandel recently announced its diversification into the high-premium Contract Development and Manufacturing Organisation or CDMO sector due to stringent regulations and unviable subsidy rates in its traditional fertiliser industry. The market has assessed the development as positive for Coromandel and has also lifted EID Parry on the bourses.

Beyond the positives

EID Parry's diversification plan has been welcomed by the market, but the company is also facing many risks that the Street must take into consideration:

It is a commoditised play. Sugar business remains the company's core segment. Sugar, like any other commodity, follows a cyclical demand pattern and its production is also vulnerable to factors like the monsoon. In recent years, sugar consumption has continued to be muted, which has seemed to force the company to foray into other businesses.

However, the new market on its radar i.e., staples also falls under the commodity business. That too, it is among the lowest margin FMCG segments. Although EID plans to leverage its present brand and distribution network to later foray into the high-margin ready-made food segment, it will first have to tackle stiff competition from dominant incumbents like MTR and ID Foods to gain market share.

There is holding company risk. EID's market value is significantly derived from its underlying holding, which is Coromandel. EID with a market cap of Rs 14,000 crore owns Rs 26,000 crore worth of stake in the agrochemical titan. Coromandel's recent diversification plan is yet to be played out. Any unfavourable outcome there can severely drag EID as well. That said, the Murugappa Group's successful track record of running efficient businesses instils confidence in Coromandel's endeavour.

You can read about holding company risks in detail in our other story.

Investors' corner

EID Parry's promoters (Murugappa Group) have earned praise for their efficient management that has turned the corner for companies like Tube Investments, CG Power and Carborundum International in the past. That seems to be playing out in the case of both EID and Coromandel too, given the duo has been tapping into new avenues of growth.

EID's plan to make inroads into the lucrative ready-made food segment is commendable as the business offers exponential growth opportunity. However, it is a long-term strategy that will only materialise after the company succeeds in establishing the staples business and consolidating its supply and distribution networks. In the foreseeable future, establishing dominance in the new ventures will require the company to tackle challenges like high competition in the ready-made food market and cyclicality and slow growth in the staples business.

Also read: This company's Q4 net profit grew a staggering 45x! How did it pump out such gains?