Investors with a two-to-three-year investment horizon can consider investing in the stock of India’s largest private sector phosphatic fertiliser manufacturer, Coromandel International. With an annualised phosphatic fertiliser capacity of 4.5 million tonnes, the company has one of the best-in-class return ratios and a strong balance sheet. Part of the Chennai-based EID Parry Limited group, which holds 56.31 per cent in Coromandel International, the latter is poised to sustain healthy growth over the medium term. At the current market price of ₹943, the stock trades about 14.5 times its trailing twelve-month earnings. We believe the stock to be a good diversification idea for investors with a moderate risk appetite for four reasons.

First, the company has a diversified business comprising fertilisers, agro-chemicals, and retail. Fertiliser is a stable business, given that the government subsidises fertiliser prices in India. The fertiliser industry can be divided into two segments, namely Urea/Nitrogenous and Complex/Phosphatic. Between the two segments, urea is highly controlled by the Government while phosphatic fertilisers segment has been partially de-controlled. A fixed subsidy (revised annually or even half yearly in some cases) is paid by the Government, and the balance is recovered from farmers.

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However, the government revises the subsidy component in the event of fluctuations in the input costs to insulate farmers from global price increases. This lends stability to the operations of fertiliser players. Coromandel, with an annual fertiliser capacity of 4.5 million tonnes per annum (includes NPK complexes and Single super phosphate), is the largest in the private sector and operates 16 integrated manufacturing units wherein the company manufactures fertilisers, crop protection chemicals and other micronutrients. The company has a differentiated portfolio comprising complex fertiliser grades such as 20:20:0:13, 28:28:0, 12:32:16 and 10:26:26 and caters to over 3 million farmers in the country.

In addition to this, the company also sells micronutrients such as boron, sulphur, and crop-specific, water-soluble fertilisers, under its flagship brand name ‘Gromor’. These products enjoy margins higher than traditional fertilisers and are not under the subsidy ambit. The company also has a large agrochemicals/crop protection chemicals portfolio such as fungicides, weedicides and herbicides and ranks fifth in the country. Coromandel has a retail business through which it caters to the farming community, offering an entire range of agri inputs and services such as crop insurance. The company currently has a network of 750 stores spread over Andhra Pradesh, Telangana and Karnataka.

Second, the company has in place long-term tie-ups for sourcing key raw materials such as phosphoric acid, ammonia, rock phosphate and sulphur, which gives it an edge over the competition. Besides tie-up for supply, Coromandel also has made strategic investment in some of these ventures. For instance, Coromandel holds 14 per cent equity stake in Foskor, a vertically integrated phosphoric acid manufacturer in South Africa producing 7.2 lakh tonnes annually, which helps the company secure raw material supply at competitive prices and also access to niche assets. Likewise, the company holds 15 per cent stake in the India-Tunisia Joint venture initiative TIFERT (Tunisian Indian Fertilisers), which produces about 3.6 lakh tonnes of phosphoric acid.

Third, strong balance sheet with negligible debt to equity ratio (0.2 times) most of which is short term borrowings, is commendable. As of September 2022, the company had a total debt of ₹1,660 crore, compared to networth of ₹7,425 crore. The healthy return ratios – Return on equity of ~27 per cent and return on capital employed of ~ 35 per cent are the other positives for Coromandel. Also, the company’s improving working capital cycle in the last two years adds to strength, thanks to the timely payment of subsidies by the government. While in the last six months, the receivable cycle has increased marginally due to higher crude and raw material prices, the current softening of crude oil prices should benefit fertiliser makers by way of lower raw material costs and thereby reduction in the total subsidy.

Finally, the stock is currently trading at an attractive 14.5 times its trailing twelve-month earnings. The stock has in the past traded between 15-17 times. The average price to earnings multiple for the industry has been pegged at 15 times, on a trailing 12-month eearnings basis. The strong earnings growth potential in the medium term adds to the attractiveness of the stock.

In the latest September 2022 quarter, the company grew operating profit and net profit by 43 per cent and 42 per cent respectively to ₹1,057 crore and ₹741 crore. For the half year period, the operating profit grew by 42 per cent while net profit grew 45 per cent to ₹1,741 crore and ₹1,240 crore. In the first half of FY23, the company sold 19.7 lakh tonnes compared to 18.99 lakh tonnes. Of this, the manufactured fertilisers was 17.94 lakh tonnes, compared to 16.95 lakh tonnes last year, implying a 6 per cent growth year-on-year. The EBITDA per tonne rose by 36 per cent in the 1HFY23 to ₹8,837 a tonne, compared to ₹6,456 a tonne same period last year. 

Any further delays on the subsidy front and higher crude oil prices may be the key risks to the earnings estimate.

Why
Stable business
Strong balance sheet
Attractive valuation
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