Coromandel International

Despite a more than four-fold gain from its 2009 lows, the stock of Coromandel International (Coromandel) remains a good exposure for investors with a three-year perspective.

The company's adept handling of the ups and downs of the commodity cycle underline its cost and operational efficiencies. Growth prospects appear quite bright in both the fertiliser and agrochemicals business over the next three-five years.

Untapped potential in new businesses such as micronutrients, organic fertilisers and rural retail into which Coromandel has just charted forays also holds promise. At the current market price of Rs 395, the stock trades at a PE of about 10 times its estimated FY-11 earnings. While the stock's historic PE has been lower, higher valuations may be here to stay, with an increasingly friendly policy environment for fertilisers, the company's growth prospects and successful de-risking of operations from cycles.

Market expansion

Coromandel's prospects in its core business of complex/phosphatic fertilisers are underpinned by the big supply deficit in the domestic fertiliser market, which is met by imports. It is these domestic shortages that have helped Indian fertiliser producers register fairly strong volume growth even in the bad monsoon years in recent times. In 2009-10, a drought year, Coromandel's fertiliser sales volumes still grew by 33 per cent.

Increasing pressure to improve foodgrains availability and crop yields is expected to contribute to higher fertiliser use over the medium term. Over a four-five-year span, the market for DAP and complexes alone is estimated to increase from 160 to 200 lakh tonnes. Correcting the imbalance in fertiliser use also requires the government to incentivise DAP and complexes more than urea. Competitive edge

Having added steadily to its capacity through investments and buyouts , Coromandel today operates about 32 lakh tonnes of fertiliser capacity; this is proposed to be expanded to 42 lakh tonnes over the next two-three years at an investment of Rs 300 crore. While marketing this output should not pose a significant problem, it is raw material supply that could be a critical success factor. However, on this count too, the company appears to be making the right strategic moves, by inking overseas pacts and investing in capacity for phosphates and ammonia. These linkages have enabled the company to emerge as one of the low-cost domestic producers of its products.

NBS, more flexibility

Then, the policy environment for fertilisers is also becoming more conducive. Take the transition to the nutrient-based subsidy (NBS) regime, which has taken effect from April 1 this year. With both the selling prices as well as the subsidy elements on decontrolled fertilisers hitherto fixed by the government, the cost or procurement efficiencies of individual players did not make a material difference to their competitive position. That is set to change now. Subsidies for fertilisers too were based on the product and not on the nutrient content, placing products such as urea at an advantage.

With the NBS offering compensation to producers for every kg of N, P or K present in the product, such advantages will be removed. Players such as Coromandel will have vast flexibility to alter their product mix and differentiate its brands to capture market share. In another important move, the government has also allowed marginal leeway to producers to hike selling prices to make up for any under-recovery. While a sizeable increase in fertiliser prices may not be possible, this does allow efficient producers such as Coromandel to enjoy greater pricing flexibility.

In the near term, transition to NBS has meant substantial hikes in the subsidies for several grades of phosphatic and complex fertilisers. Taken with the modest price increases of 6-7 per cent in selling prices taken by producers, players such as Coromandel should see both price and volume driven growth accelerating this fiscal, making up for any raw material increases.

New drivers

Coromandel has also charted forays into several new non-fertiliser businesses that could piggyback on its extensive rural distribution network. The company already markets agrochemical formulations and is building capacity to cater to the growing contract manufacture requirements of players in this market.

It is also investing in the manufacture of micronutrients and organic fertilisers, nascent markets with good potential. The company is investing in a rural retail network, which it plans to use both for procurement of farm products and to deliver consumer goods.

Coromandel has managed an impressive scaling up of its sales and profits over the last five years, helped partly by inorganic growth. While its sales expanded at 32 per cent compounded annually, net profits have risen at an impressive 47 per cent.

Given that Coromandel's sales realisations are linked directly to global fertiliser prices, the company did see a blip in its sales, reporting a 33 per cent decline in revenues in 2009-10, over 2008-09. . However, volume growth remained strong. And with raw material prices correcting even more sharply than product prices, Coromandel managed to marginally expand its operating profit margins and close the year with nearly flat profits.

via BL