Why Coromandel International is a good long-term bet

Investors with a medium- to long- term perspective can consider buying the stock of Coromandel International, the country’s second-largest phosphatic fertiliser player.

Given the rising population and the demand for food, the long-term prospects of agri-input manufacturers appear healthy. Risks posed by climate change that hit crop outputs will continue to keep demand for fertilisers and crop- protection chemicals high.

Government measures to support farm income growth will also help. In Andhra Pradesh, a large market for Coromandel International, the State government launched Rythu Bharosa scheme in October 2019, which entitles each eligible farmer to a sum of ₹13,500 per year for agri- inputs.

Coromandel International has a strong product portfolio, developed in-house through its R&D facility. Aside from phosphatic fertilisers, it produces and sells speciality nutrients including organic fertilisers and crop-protection chemicals. It has direct connect with about 30 lakh farmers through various initiatives, which makes it easier to launch new products. The company has a pan-India reach through 10,000 dealers and 800 retailers, with a significant presence in Andhra Pradesh, Telangana and Karnataka.

The DBT (direct benefit transfer) process in fertilisers has stabilised well and subsidy can be claimed online now, according to Coromandel’s management. The subsidy outstanding as on September 30, 2019, for the company was at ₹ 1,849 crore vis-à-vis ₹2,626 crore during the previous year. Going ahead, if this situation improves further, it will reduce the amount of working capital needed, and save interest costs for the company.

At the current market price of ₹539, the stock of Coromandel International discounts its estimated earnings for 2019-20 by 17.5 times. It has traded at an average PE of 19.6 times in the past three years.

Strong demand outlook

Coromandel’s business is divided into two segments — nutrients and allied business (contributes 90 per cent to the revenue), and crop protection. The company’s revenue has grown at a CAGR of 3 per cent in the past three years, but operating profits managed a 19 per cent growth, thanks to improved margins on favourable sales mix.

In the September 2019 quarter, Coromandel reported a revenue of ₹ 4,855 crore, down 3 per cent over the same quarter last year.

The revenue from the crop- protection business declined 11 per cent y-o-y, while the revenue from the nutrient and other allied businesses declined 2 per cent y-o-y. The crop-protection business didn’t do well because of the slow progress in ramping up of production at the company’s Sarigam (Gujarat) plant, which was shut down in the June quarter. In the nutrient business, the savings made in the cost of inputs — because of a drop in market prices — was passed on to customers, which pulled down realisations and impacted sales growth.

Q3 and Q4, however, appear to be on a better footing. Production at the Sarigam plant stabilised by October 2019 — this should aid revenues in the second half. In a conference call with analysts post the September quarter (Q2) results, the company’s management indicated that it plans to launch pymetrozine, a rice insecticide, and also a broad-spectrum fungicide in the December quarter (Q3). The company will also launch several combination products in the months to come, it added.

The March 2020 quarter (Q4) looks promising, given expectations of a strong rabi season. With the South-West monsoon turning out to be the best in 25 years, groundwater has been recharged across the country; soil moisture, too, has improved, which is likely to help increase acreage in rabi and stoke demand for fertilisers and crop- protection chemicals.

Margins relief

For fertiliser manufacturers, availability and high cost of imported phosphoric acid are always an issue. But Coromandel has a large in-house capacity for producing phosphoric acid. In the current fiscal, it in fact expanded its phosphoric production capacity at its Visakhapatnam fertiliser unit and made the unit completely self-sufficient in its acid requirement. The EBITDA margin in the September quarter improved to 14.7 per cent, up from 13.3 per cent during the previous year. Margin expansion was thanks to good sales mix, besides soft raw material prices and operational efficiencies, according to the management. Net profit margins were also better in the September quarter, thanks to the lower corporate tax rates.

The operating profit margins of the company will get a boost in the coming quarters as phosphoric acid prices are coming down worldwide. The price of phosphoric acid in Q3 was $625 per metric tonne compared with the Q1 price of $655 per metric tonne.

The outlook for the margins over the next year is good, given cost savings on higher in-house production of phosphoric acid.

Further, the company’s conscious efforts to shift into non-subsidy businesses (crop-protection chemicals, organic fertilisers and retail business), should also help. Fast pay- out of subsidies will help in interest cost savings on working capital.

Coromandel has a strong balance sheet with no long-term borrowings.