Coromandel International: Buy

Volatile prices for fertiliser inputs, uncertainty in subsidy receipts and lack of pricing power made for fluctuating fortunes for fertiliser makers such as Coromandel International (Coromandel) in recent years. However, recent changes in fertiliser policy promise greater earnings stability and brighter prospects. Coromandel's strategic shift towards non-subsidy businesses such as crop protection, nutrients, agro services and rural retail is also beginning to yield fruit. This may allow the company to significantly scale up in size and profitability over a three-year period. A muted set of quarterly numbers have caused the stock to correct in the past six months and investors can use this opportunity to add it to their portfolio.

At its current market price of Rs 337, the stock trades at about 13 times its trailing 12-month earnings and about 10 times its FY-13 earnings.

The past couple of quarters saw considerable uncertainty for phosphatic and complex fertilisers on the forecast of a sub-normal monsoon, soaring prices of fertiliser inputs and a government-imposed ceiling on selling price. Protracted price negotiations with suppliers (especially potash) also resulted in producers curtailing production in the first part of the kharif. These problems reflected in Coromandel's numbers, with the company closing the six months ended September 2011 with a mere 5 per cent growth in sales.

However, most of the concerns have eased in recent weeks. The monsoon has proved to be quite normal in August and September, resulting in a pick-up in the demand for fertilisers. Latest numbers from the Agriculture Ministry suggest that DAP sales for the April-September period at 44 lakh tonnes were short of estimated requirement of 71.45 lakh tonnes. In the case of complexes, sales were at 49 lakh tonnes against demand of 52 lakh tonnes. The government has also announced fairly large increases in minimum support prices of key crops this year. This, combined with the spill-over effect of a good monsoon, should lift Coromandel's sales for the rest of this fiscal.

Uncertainties relating to profitability too have receded. On the policy front, the government seems to be going all out to ensure adequate fertiliser supplies. To start with, the nutrient-based subsidy payable to phosphatic and complex producers was revised upwards at the beginning of the season to account for higher input prices. Thereafter, the government did away with the informal price ceiling on phosphatic and complex fertilisers, thus restoring pricing power for Coromandel. This allows the company to take gradual price increases to account for swings in input costs, a comfort it has never enjoyed in the past.

DAP and complex fertiliser makers have already put through three selling price increases totalling about 25 per cent in the past year to offset higher input costs. Newfound pricing power combined with Coromandel's procurement efficiencies have resulted in its pre-tax profits expanding 24 per cent in the first half of 2010-11, after excluding prior period subsidy receipts.

Coromandel's expansion plans, which include raising its complex fertiliser capacity at Kakinada from 32 lakh to 40 lakh tonnes and a Greenfield Single Super Phosphate unit at Punjab, may help it take advantage of the surge in demand for phosphates expected over three-four years. The company's strategic stake in South Africa's Foskor and Tunisia (expected to begin production this fiscal) allows it to tie up nearly 80 per cent of its phosphate requirements through long-term contracts. This, with its high-cost efficiency, gives it a distinct edge in a free-market regime.

Diversification

Coromandel is also making a strategic foray into other agricultural inputs to reduce policy risks and reliance on subsidy. In crop protection, the company has expanded capacities through the inorganic route — buying out Ficom Organics, Pasura Biotech and recently Sabero Organics — and leveraging on its distribution network to expand sales in the domestic and export markets. Coromandel's agrochemical sales have grown at a compounded annual rate of 23 per cent in the last three years and made up 6 per cent of revenues in 2010-11. Specialty nutrients, water soluble fertilisers and organic manure is another nascent, but unregulated area, that holds promise. With the market prices of traditional fertiliser products likely to be freed gradually, farmers are likely to shift consumption patterns towards specialised nutrients.

One of Coromandel's most promising forays yet is its entry into rural retail stores that market agricultural inputs. This initiative allows the company to directly access the end-consumers for its entire range of products. Another new offering is the company's farm mechanisation service where it plans to hire out equipment to farmers at a monthly rental. This service could have considerable potential given the growing shortage and rising costs of farm labour. With 423 such ‘Mana Gromor' centres already up and running in Andhra Pradesh, the company now plans to scale it up to other states. Non-subsidy businesses brought in 27 per cent of Coromandel's operating profit in FY 11.

A return on equity of 36 per cent (FY 11), a debt-to-equity ratio of 0.7 and a steadily rising dividend payout (topped off by the proposed bonus debenture issue) reinforce the company's status as a preferred stock market exposure in the agri-inputs space.

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