Coromandel International: Sowing seeds for growth

The stock of the country’s leading phosphatic producer Coromandel International has fallen by almost 15 per cent in the last six months, due to weaker-than-expected performance. In the recent June quarter too, the company’s profit took a beating on three counts.

First, inadequate availability of key raw material phosphoric acid forced the company to produce other low grade complex fertilisers in place of di-ammonium phosphate (DAP).

Second, adverse revenue mix due to higher share of trading revenues — particularly DAP — led to a moderation in the company’s profitability. Third, Coromandel’s working capital borrowing witnessed a sharp rise in the June quarter due to delay in subsidy payment by the government. The consequent increase in interest outgo and forex premium (on raw material imports) ate into the company’s profit.

But these concerns have begun to abate.

Coromandel has secured phosphoric acid supplies for the next two quarters. This should help the company resume DAP production. With a pick up in the demand for other grades of complex fertilisers, the company should be able to liquidate its channel inventory over the next two quarters.

Higher contribution from own manufactured fertilisers should provide a leg-up to Coromandel’s profitability in the coming quarters. The stock now trades at about 10 times its 2016-17 earnings, below its historical average of about 12 times. Investors with a two- to three-year horizon can consider buying the stock.

Coromandel has completed negotiations for buying phosphoric acid for the next two quarters. Availability of phosphoric acid from the company’s Tunisian joint venture initiative TIFERT should help it ramp up DAP production over the next two quarters. This should improve operating profit margin.

Also, the company has started receiving subsidy from the government, which was outstanding since April 2015. This should help Coromandel pare its working capital borrowing and ease the pressure on bottomline.

To reduce dependency on government subsidy, the company has been scaling up its non-subsidy businesses, such as agrochemicals and specialty chemicals. In the June quarter, the non-subsidy businesses accounted for 44 per cent of Coromandel’s consolidated operating profit, higher than the 40 per cent share two years back.

The performance of Sabero Organics, acquired by Coromandel in 2011, has improved steadily over the past few quarters.

The company is ramping up utilisation levels at its Sarigam plant (Gujarat) and also plans to increase capacity. In the June quarter, Coromandel’s overall agrochemicals business, which includes Sabero, faced demand issues in India and Latin America (Latam).

In the domestic market, unseasonal rabi rainfall played spoilsport. Sales in the Latam geography were hit due to a change in the product preference of customers and adverse weather conditions.

However, the company managed to scale up presence in its Asian and African markets — that largely made up for the slowdown in the domestic and Latam markets. Further, the company plans to strengthen its agrochemical brands, such as Mancozeb; this will improve realisations and support growth.

The profitability of Coromandel’s agrochemicals business should also benefit from the fall in gas prices. The company’s single super phosphate (SSP) business, which includes Liberty Phosphates acquired in 2013, has seen healthy growth.

Its market share in SSP has increased to 16 per cent from 12 per cent over the year. Coromandel’s specialty fertilisers business is also gathering pace. All these should help the company reduce dependency on subsidy as well as improve profitability. However, given the company’s high dependency on import of raw materials, further rupee weakness against the US dollar may hurt profitability.

COMMENT NOW