Renewed agri focus boosts Coromandel

Given the huge demand-supply mismatch in agricultural products and need to increase productivity, companies manufacturing complex fertilisers and agrochemicals are likely to see strong growth.

Coromandel International which has positioned itself as complete farm inputs company, is poised to benefit from its ability to manufacture wide variety of complex fertilisers with high operational efficiencies apart from increasing focus on high margin specialty nutrient products.

Business
Coromandel International, a Murugappa group company is the second largest producer of phosphatic fertilisers in India. The company is engaged in the business of farm inputs comprising of fertilisers, crop protection products and specialty nutrients and retail.

The company’s product offerings in fertilisers segment include Di Ammonium Phosphate, complex fertilisers with different composition of nutrients which are sold under well established brand names like Gromor, Godavari, Parry gold and Parry super. The company has four manufacturing plants located at Visakhapatnam, Kakinada, Ennore and Ranipet with a total manufacturing capacity of 3.26 million metric tonne (mmt).

The company in its specialty nutrient business segment manufactures and markets a range of products like sulphur, water soluble fertilisers, micronutrients like born, zinc and sulphozinc and organic compost.

The crop protection portfolio consists of insecticides, fungicides and herbicides which are sold in India and abroad.

Coromandel also provides agri input solutions to the farmers and offers lifestyle products through its rural retail chain of Mana Gromor Centres. The company currently operates 423 retail centres in rural Andhra Pradesh. The company plans to increase the number of stores to 600 by end of fiscal 2012 and also expand its operations to adjoining southern states.

Investment rationale
Coromandel is a play on structural agricultural growth. With world population increasing fast accompanied by rapid urbanisation and decreasing arable land, the demand for food has far exceeded the supply. This increases the need to improve the farm yield and raise crop productivity by using more of nutrients, fertilisers and crop protection products. In recent years, there has been an increase in crop prices supported by higher MSPs fixed by the government, which is also encouraging farmers to go for branded products to improve crop yields. This would benefit Coromandel which has strong brands in its portfolio.

The company is lowest cost manufacturer of phosphate-based fertilisers leveraging on its backward integration to manufacture intermediates, high capacity utilisation levels, captive power, desalination and storage facilities. Coromandel has strategic tie up with major raw material suppliers globally and also has negotiating power, reducing the input supply risk.

Coromandel is increasing its capex to boost capacities at its existing plant that would result would result in capacity increase from 3.25 million metric tonne currently to 3.6 million metric tonne by the second quarter of FY12 and to 4 million metric tonne by mid FY13. The company, which currently imports and sells urea, is also considering setting up or acquiring a urea plant in coming years.

The government’s recent decision to substantially increase subsidy for complex fertilisers for FY12 by 10-15% over FY11 levels would also help the company to keep its margins intact without hiking the product prices.

The company’s non-subsidy businesses such as specialty nutrients and pesticides are expected to be key growth drivers going ahead. The company has positive outlook on specialty nutrients segment driven by increase in the areas under horticultural crops, government’s aggressive promotion of micro irrigation, increase in acreage of Bt cotton and hybrid paddy and widespread deficiency of organic compounds in the soil. The non-subsidy businesses are growing at a rate of over 30% per annum and currently contribute 12% to consolidated revenues and 26% to operating profits. The management aims to increase the operating profits share from this segment to over 40% in next 2-3 years time.

Concerns
Any significant rise in key raw material costs may affect the margins. Any adverse policy action by government on subsidy front may also impact its profitability even though the company has power to alter its mix and raise selling prices because of strong brand image.

Valuations
Led by higher volumes and better product mix, the company’s revenues are expected to grow at CAGR of 19% over FY10-FY12 while the operational efficiencies and increasing contribution from high-margin, non-subsidy business will result in net profit growth of 26% CAGR over the same period. At CMP of ¤285.35, the stock of Coromandel trades at a P/E of 12.66 times its expected FY11 earnings and 10.72 times its FY12 earnings, respectively. Investors with medium term view can consider buying the stock on declines.

Disclaimer: The writer does not hold any shares in the company.