It is an opportune time for investors with a one-to-two year perspective to invest in the country’s second largest complex fertiliser producer, Coromandel International. The 17 per cent fall in the stock price in the last one year, despite strong fundamentals and robust outlook, make the stock a good investment idea. At the current price of Rs 260, the stock trades at an attractive 9.4 times the company’s 2013-14 earnings.

The company has reduced risk in its business through shift in focus towards non-subsidy businesses such as crop protection solutions (pesticides), specialty nutrients and rural retail. As a result, the proportion of subsidy income for the company reduced from 52 per cent last year to 35 per cent currently.

FERTILISER CAPACITY

With a complex fertiliser capacity of 32.6 lakh tonnes, Coromandel is the country’s second largest manufacturer next only to IFFCO. Key fertilisers include di-ammonium phosphate (DAP), single super phosphate (SSP), and various NPK complex grades.

Coromandel has been one of the key beneficiaries of the nutrient-based subsidy policy for phosphatic fertilisers unveiled in February 2010. During the period 2010-12, its revenues grew at an annual rate of 24 per cent; profits grew by 22 per cent during the same period.

The company is expanding its fertiliser capacity by adding an additional complex train at Kakinada. On completion, Coromandel’s complex fertiliser capacity will increase to 40 lakh tonnes, up 23 per cent. The additional train is expected to come on stream by second half of the current fiscal.

The phosphoric acid requirement for the augmented capacity will be met through supplies from Coromandel’s joint venture company TIFERT (Tunisian Indian fertiliser) in which it holds 15 per cent stake.

Political issues in Tunisia had delayed the commissioning of TIFERT’s phosphoric plant and resulted in cost overrun. With most of the issues resolved now, the JV’s commercial production is expected to start by the second half of this fiscal.

The full benefit from the expanded fertiliser capacity of Coromandel is likely to accrue in 2013-14. This, along with increase in retail prices and stable raw material cost, should support the company’s growth in 2013-14. But any further delay in availability of phosphoric acid from TIFERT may place a risk on the company’s growth in 2013-14.

Crop protection

With the acquisition of Sabero Organics in 2011, Coromandel now ranks among the top five pesticide formulation companies in India. However, 2011-12 was a challenging year for the crop protection segment, due to the Supreme Court ban on its key product endosulfan (10 per cent of sales) and inadequate rainfall in key markets such as Andhra Pradesh, Karnataka and Maharashtra. However, launch of other captive products by Sabero helped Coromandel mitigate the loss from ban of Endosulfan.

Export sales from markets such as Argentina, Brazil, Europe and Australia contributed 52 per cent to Sabero’s revenue in 2011-12, while India accounted for the rest. Sabero’s revenues declined 13 per cent in the last fiscal to Rs 358 crore. This was on account of production restrictions at the company’s Sarigam plant in the first half of the fiscal, due to an order by the Gujarat High court.

However, with the removal of these restrictions and capacity enhancement through implementation of environment management system projects, sales growth is expected to pick up in 2012-13.

Specialty nutrients

Coromandel is scaling up its specialty nutrients business through which it sells water soluble fertilisers, organic manure and secondary and micro nutrients. In March 2012, Coromandel SQM, a joint venture of the company with the Chile-based SQM, commenced production of water soluble fertilisers from its new plant at Kakinada. With an annual capacity of 15,000 tonnes, this plant will help the JV improve market share. The revenues from this segment grew 31 per cent in 2011-12.

Rural Retail chain

Addition of 200 new agri retail centres in Andhra Pradesh and Karnataka lifted the rural retail segment’s revenue by 11 per cent. The company currently operates 641 Mana Gromor centres across these two States and plans an entry into Maharashtra. With the restructuring in the rural retail strategy, these stores will now focus on agri-inputs and will exit life-style products business. This should help push agri input sales for Coromandel.

Healthy financials

Coromandel’s revenues grew 14 per cent in 2011-12 to Rs 9,992 crore. Operating margins declined by 3.5 percentage points to 10.3 per cent, due to volatility in the price of key raw materials such as ammonia, phosphoric acid and rupee weakness against US dollar. Adjusted net profit declined by 3 percent to Rs 699 crore.

Though the return on equity moderated by 10 percentage points in 2011-12, it remained at a healthy 32 per cent in 2012-13. With expansion in capacities, the company’s financial performance is expected to improve over the next two years.

(This article was published on August 18, 2012)
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