Chennai:

The latest is the Rs140-crore equity Parrys Sugars Refineries Pvt Ltd venture with Cargill International. EID Parry would hold 51-per cent stake.

The joint venture company will set up a stand-alone sugar refinery in Kakinada, Andhra Pradesh at an outlay of Rs325 crore. "The refinery is expected to start operation by December 2007 with an initial capacity of 600,000 tonnes per annum (tpa) and the final capacity will be 1,000,000 tonnes tpa. It will be set up in a special economic zone (SEZ) or as an 100 per cent export-oriented unit," says vice chairman A Vellayan.

Three days ago EID Parry announced its 50:50 venture with the global bathroom products major Roca, Spain. (See: Roca buys into Parryware Glamourooms Private Limited for Euro 50 million).

At a time when the company has announced an investment of Rs850 crore and is also in the process of acquiring the New Horizon Sugar Mills, Pondicherry, the Cargill joint venture has taken industry watchers by surprise.

But standalone sugar refineries near the markets are the current global industry trend. According to Daudi Lelijveld, project manager, Cargill Sugar, Geneva, the European Union's decision to cut export subsidies on sugar has resulted in a deficit of 6-million tonnes in other markets. The estimated shortfall in the markets that could be served from India is around three million tonnes.

"Cargill has set up such refineries in Brazil and Mexico. We are in the process of setting up a 1-million tpa refinery in Syria," he adds.

It is this emerging opportunity that the two promoters are hoping to cash in on by the proposed port-based refinery. The refinery will bring in a net foreign exchange earnings to the tune of Rs150 crore a year for the country.

According to K Raghunandan, vice president, EID Parry, "The average conversion cost is around $70 per tonne and we will be competitive." The confidence stems from the fact that EID Parry has the prior experience in refining the imported raw sugar for re-export.

Explaining the rationale for the venture managing director P Rama Babu says, "We have proved our expertise in sugar refining. We are good at handling ports and other infrastructure need for this project. Cargill is the global leader in sugar trading with a trading volume of 11 million tonne per year. It will bring its network, expertise in logistics to the table." At any point of time the inventory level at the plant will be just two shiploads.

He underscores that the new venture will not impact EID Parry's import of raw sugar for conversion.

The project will have a debt component of Rs185 crore. According to D Kumaraswamy, chief financial officer, a loan of Rs140 crore will come from the Sugar Development Fund. "After drawing funds from all the sources the final debt:equity ratio will by .75. The pay back period is four years."

For EID Parry, funding is not a major problem as it is flush with funds. The company received Rs275 crore by selling 50-per cent stake in Parry Glamourooms and has also raised low-cost loans to the extent of Rs150 crore.

Towards the top position Interestingly the two new joint ventures is only a part of the EID Parry''s restructuring exercise that started in 2003. Till that time the company was an amalgam of varied businesses like fertilisers, pesticides, sanitaryware, bio-products and also held investments in group companies like Parry Confectionery.

With the dramatic changes in the domestic and global industrial scene, the $1.6-billion Murugappa group decided to be only in those businesses in which it could be the number one or two in the industry.

In line with that vision, EID Parry decided to focus on sugar and become a major integrated sugar player. This was done by expanding its exiting units and also adding to them power co-generation and distilleries and acquiring other sugar units. The company is aiming for a 20,000-tonne crushing capacity per day total.

To achieve that, the company needed the management's focused attention and several hundred crores.

The company decided to unlock management time and money by (a) selling its investments in subsidiaries - Parry Confectionary sold to Lotte, Korea, for Rs45 crore in 2004 (b) demerger of fertiliser and pesticide divisions into Coromandel Fertilisers Limited in 2003 for Rs110 crore (c) sale of Netlon and the General Marketing and Travels business to another group outfit for Rs12.25 crore and (d) selling stake in subsidiaries to foreign companies -50 per cent in Parryware Glamourooms for Rs275 crore in 2006.

Consequent to the restructuring exercise, the EID Parry is now predominantly a sugar company with bio products contributing Rs25.66 crore to the turnover. Nevertheless the company has investments in companies like Coromandel Fertilisers, Parry Nutraceuticals (acquired in 2006 for Rs32 crore) and the joint ventures.

Beneficial restructuring Says Kumaraswamy, "The demerger and sale of divisions lightened debt portfolio. Consequently the interest cost to went down."

While that benefited the company, the restructuring exercise has also enhanced the shareholders wealth. Prior to the restructuring the company''s Rs10 share used to change hands at the bourses for Rs60. After the stock split, the value of the Rs2 share (par value) today trades at around Rs292.

Similarly, the rise in market prices of Coromandel Fertiliser''s share has benefited the EID Parry shareholders, who were allotted 1 share of Coromandel Fertiliser for every 3 shares of EID Parry when the fertiliser and pesticide business was demerged.

"Thirdly, the shareholders received higher dividends. For instance, the board has recommended a dividend of 225 per cent including an one time dividend to of 90 per cent for FY 2006 on a net profit of Rs115.84 crore," says Kumaraswamy.

Meanwhile the EID Parry is fast implementing its Rs850 crore investment programme. "Over a period of two years all our investment projects will go on stream," says Babu.

On completion of all these projects, the sugar production will increase to around 8 lakh tonne, power generation to 130 MW and distillery capacity to 240 kilo litres per day. According to him, the acquisition of New Horizon Sugar Mills at Pondicherry will be completed this fiscal.

On the likelihood of an increase in the interest cost in the coming years and the source of funding for the projects Kumaraswamy says, "The projects will be funded from the sale proceeds of businesses sold, internal accruals and institutional loans." During FY 2006 the interest cost went up by Rs3.89 crore to Rs7.39 crore.

Meanwhile Babu is happy with the sales of branded sugar Parry's Pure refined sugar. "We are selling good quantity every month. We have also started selling another brand White Label. Around 3,900 outlets in Chennai stock the product."