Coromandel Fertilisers

Concerns about an erratic monsoon have beaten down the valuations of fertiliser stocks significantly in recent trading sessions.

Investors can use this opportunity to buy the Coromandel Fertilisers stock (Rs 183), which offers a bargain, trading at a price earnings of just six times its estimated earnings for 2009-10.

Coromandel Fertilisers’ status as one of the largest and cost-efficient producers of fertilisers and its extensive distribution network suggest that its prospects will not be materially impacted by a single deficit-monsoon season. In fact, despite the erratic monsoon, sales of complex and phosphatic fertilisers have already grown by 55 per cent in April-June 2009. There also remains a 25-per cent deficit in domestic supplies of DAP and complexes.

Coromandel Fertilisers’ businesses span phosphatic and complex fertilisers, pesticides, micro-nutrients and other farm inputs, with a marketing presence in 13 States. A wide fertiliser product mix, overseas buys which have secured supplies of raw materials, and scaling up of capacity through the integration of Godavari Fertilisers have enabled Coromandel to sustain strong growth over the past five years, amid the ups and downs of the agricultural cycle.

The company has managed a 50-per cent compounded annual growth rate in both sales and net profit in the past five years, even as the earnings per share have expanded from Rs 5 to over Rs 30.

The year 2008-09 was particularly challenging for Coromandel with a sharp rise, followed by a crash, in prices of raw materials such as ammonia, phosphoric acid and sulphur, which resulted in a dip in realisations starting the fourth quarter.

The Government’s decision to discharge a part of its subsidy obligations through bonds also contributed to a substantial mark-to-market loss. However, the current year appears less challenging on both counts. With raw material prices stabilising and global fertiliser prices correcting (subsidy is linked to import parity prices), realisations and revenues may dip; but volumes will grow and margins may be maintained. A sharp cut in the Government’s subsidy outgo and assurances that these would be paid mainly as cash, may result in better recoveries and lower working capital requirements for players this year.

Over the medium-term, the policy proposal to move from a product-based subsidy to a nutrient-based one, may serve to wean farmers away from cheaper urea and act as a strong demand driver for players such as Coromandel.