The Hindu Business Line : Coromandel Fertilisers: Buy

Coromandel Fertilisers has shown the ability to weather adverse business cycles in the past and has made the strategic moves to secure future earnings and growth.

The stock of Coromandel Fertilisers appears a good `value' buy for investors with a one-year investment perspective.

After the recent market decline, the stock trades at Rs 71, at a price-earnings multiple of eight times the likely FY-07 earnings (based on standalone financials).

There appears scope for a significant ramp-up in the company's earnings from current levels — from the likely merger of Godavari Fertilisers, expansion into new markets for agri-inputs and the steady growth prospects in the fertiliser business, given the domestic shortages.

Though fertiliser and agrochemical businesses are generally perceived as cyclical and risky, Coromandel Fertilisers (CFL) has shown the ability to weather adverse business cycles in the past and has made the strategic moves to secure future earnings and growth.

Business

CFL's business operations span phosphatic and complex fertilisers, insecticides, fungicides and herbicides.

As one of the largest manufacturers of phosphatic/complex fertilisers with an extensive distribution network in the South and East, CFL is well-positioned to capitalise on the persisting deficit for phosphatic/complex fertilisers in the domestic market.

The company's strategic moves to secure raw material supplies through long-term supply arrangements with global suppliers, such as Groupe Chimique Tunisien and Foskor, are also a source of competitive advantage in an industry where players enjoy limited pricing power.

With effect from April 2007, the domestic phosphatic fertiliser industry is likely to move to a system of import parity pricing.

CFL will be a key beneficiary of the new policy regime, given its scale advantages, high cost-efficiencies and access to raw materials at globally competitive prices.

Strong balance-sheet

The company has also steadily ramped up production volumes and sales at the acquired facility of Godavari Fertilisers over the past four years, with the latter's operations turning around and registering a net profit of Rs 43 crore on sales of Rs 1,418 crore in the nine months ended December 2006. CFL's equity stake in Godavari may climb to 90 per cent after its recent move to acquire IFFCO's stake in Godavari and make an open offer to the latter's shareholders.

This raises the possibility of a merger between the two companies at a later date. The addition of Godavari Fertilisers' operations to CFL has the potential to add substantially to earnings and sales, at the cost of marginal equity-dilution.

Though the proposed capex plans for fertilisers may require an additional infusion of funds, the company has the balance-sheet strength to absorb additional debt, without straining the earnings.

The strengths

In the agrochemicals business, CFL's advantages lie in its extensive distribution reach, which leaves room for marketing alliances with multi-national corporations (MNCs) and low-cost manufacturing capabilities for generic agrochemicals catering to the domestic and export markets.

In this context, a recent move to set up a pesticide formulation unit at Jammu could give the company significant cost-advantages (due to excise and tax exemptions), crucial in the price-sensitive market for crop protection chemicals.

The acquisition of Ficom Organics — an agrochem manufacturer — has helped the company acquire production bases in the northern and western regions, enabling it to cater to new markets and widen its geographic footprint.

In the nine months ended December 2006, CFL reported a 28 per cent growth in net profits, on the back of a 24 per cent growth in net sales.

The above factors make the stock a good addition to the portfolio of a conservative investor.

nvestors can use the current price levels and any weakness in the stock linked to the broad markets, to accumulate the CFL stock.

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