Right Product Profile | Value Research Coromandel International's focus on high-margin & non-subsidised fertiliser products makes it an attractive bet…
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Coromandel International's focus on high-margin & non-subsidised fertiliser products makes it an attractive bet…

Coromandel International Ltd. (CIL) is the flagship company of the Murugappa group. It is a subsidiary of EID Parry (India) Limited (EIDP) which holds 62.94 per cent stake in the company.

The business
CIL produces farm inputs comprising fertilisers, pesticides and speciality nutrients. It is also into rural retailing in Andhra Pradesh through its “Mana Gromor Centres” set up in various parts of the state. The company has eight manufacturing facilities located in Andhra Pradesh, Tamil Nadu, Maharashtra, Gujarat and Jammu and Kashmir.
Its subsidiaries include Coromandel Mauritius, Coromandel Getax Phosphates Pte Ltd, Singapore and Coromandel Brasil Limitada, Brazil. In addition, it holds 15 per cent equity stake in Tunisia Indian Fertilisers Company Ltd, Tunisia and 14 per cent (combined holding of Coromandel and CFL Mauritius Limited) equity stake in Foskor (Pty) Ltd, South Africa. In 2009-10, the company had set up a joint venture company, Coromandel SQM Pvt Ltd along with SQM International Ltd, Chile for setting up a manufacturing facility in Kakinada for producing water-soluble fertilisers.

Sectoral outlook
India’s current pace of economic growth is spurring the demand for foodgrains and other agricultural commodities. With the economy expected to continue growing at above 8 per cent in 2011, demand for fertilisers is likely to remain strong. According to a recent report from Fitch Ratings, “The demand-supply gap will remain high since no significant greenfield capacity addition is expected to take place in 2011.”
Key concerns for fertiliser manufacturers are rising input prices and delays in allocation of natural gas that is holding up capacity expansion.
The fertiliser subsidy bill for the fiscal year ending March 2011 is likely to be higher than the initial budgetary estimates. However, Fitch expects the government to meet its subsidy obligations and also make sufficient provision for fertiliser subsidy in the Budget for FY12. Moreover, the government has already declared its intention of continuing with its nutrient-based subsidy (NBS) in FY11-12 for phosphate-based and potassium-based fertilisers (P and K), albeit at reduced rates. The adequacy of these rates will depend upon the international prices of relevant commodities (raw materials) and the industry’s ability to secure them at competitive rates. The NBS has received an enthusiastic response from the industry since its introduction in FY10-11. According to Fitch, the inclusion of urea under NBS is the next step that could be implemented in 2011. The subsidy rates for urea will determine the level of demand and urea manufacturers’ profitability.
Fitch has a stable outlook on India’s fertiliser sector for 2011, on account of continuing demand-supply gap and the likelihood of adequate budgetary support from the government towards fertiliser subsidy. However, fertiliser manufacturers’ profitability and credit profile remain highly dependent on the government’s subsidy policy. Any unfavourable changes in the existing fertiliser regime could change the sector’s outlook to negative.

Strengths
Efficient raw material supply: CIL has strong strategic tie-ups with FOSKOR, SQM and Tunisian Indian Fertilisers (TIFERT) for supply of key raw materials.
Investing in infrastructure: The company continues to invest in infrastructure facilities, including raw material godowns and bagging and distribution facilities. This will enable the company to handle higher volumes of raw materials and finished goods as its production capacity increases.
Strong customer relations: The company connects directly (bypassing wholesalers, distributors and dealers) with clients through a network of 423 stores called Mana Gromor Centres. “Coromandel enjoys strong customer relationships due to various initiatives like educating and working with local farmers to improve soil productivity. Thus, it enjoys brand loyalty and customer retention,” says Madhumita Ghosh, vice president, PMS and Research, Unicon Financial Intermediaries.
Size: It is the second-largest manufacturer of phosphate fertilisers in India.
High-margin products: It has a wide range of non-subsidised products which command high margins and face low regulatory risk.

Concerns
Dependence on imports: According to Archit Singhal, research analyst, Globe Capital, “The company sources 94 per cent of its raw materials from outside India. While its raw material prices are determined globally, its products are priced in the local currency.”
More competition: Given the attractive opportunities in the sector, Singhal thinks more companies are likely to enter the non-subsidised product market from the conventional fertiliser segment.

Opportunities
CIL is better placed compared than its peers as it focuses on non-subsidised products. This segment has higher margins and lower regulatory risks leading to steady earnings growth. According to Singhal, “Customised fertilisers could be an attractive opportunity for CIL. These products are designed for specific soil and crop types and also for a particular crop stage.” He further adds: “The current policy requires sourcing of inputs from the market rather than use of captive production. A change in policy could also be a key catalyst.”
The company focuses on growth in specialty nutrients and organic compost. “The management is looking to expand the gross margin of non-subsidised product businesses from 30 per cent to 50 per cent in three to four years,” says Ghosh. “Within the subsidised product business (that is, fertilisers-DAP and complex fertilisers), Coromandel aims to increase the proportion of complex and customised fertilisers in its product mix, based on its technical know-how and understanding of farmers’ needs. It plans to reach its target within the next three years,” she adds.

Financials
The company’s total debt, which stood at Rs1,001.98 crore in FY08 almost doubled in FY10 to Rs1,917.79 crore. The company’s earnings per share (EPS) has grown at a higher compounded annual growth rate (CAGR) of 45 per cent over the past four years, compared to an average of 7 per cent for peers. Its average return on equity (ROE) was 33 per cent over the same period compared to 19 per cent for peers. “High debt-to-equity ratio is not a major concern, considering the healthy growth in EPS and high ROE,” says Ghosh.

Valuations
The stock is currently trading at a trailing 12-month price-to earnings (P/E) ratio of 12.19 (as on April 8, 2011). This is slightly above its five-year median P/E of 9.1. On the basis of five-year CAGR in EPS (12-month trailing) of 48.4 per cent its price-earnings to growth (PEG) ratio comes to 0.3 times. One may accumulate the stock at current levels.




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