Coromandel International is a blue chip stock belonging to the respected Murugappa group. It is India’s biggest private sector manufacturer of complex fertilizer (complex fertilizers are a combination of nitrogen, phosphorus or potassium mixed in varying proportions to get different compositions). It has grown rapidly by the inorganic route of acquiring Godawari Fertilisers, Sabero Organics and Liberty Phosphate. Coromandel has a dominant presence in the four southern states. It is also now (after the acquisition of Liberty Phosphate) a big player in Maharashtra, Madhya Pradesh and Rajasthan. Complex fertilizers are expected to become essential for agriculture in the next few years and Coromandel will be the biggest beneficiary with the implementation of the nutrient based subsidy (NBS) scheme.
In Q4 2013, Coromandel International returned very poor results. Its’ consolidated net profit was down 82.54 percent to Rs 11.7 crore as compared to Rs 67 crore in the same quarter last year. The consolidated total income slumped 24.36 percent to Rs 2,080 crore versus Rs 2,750 crore on a YOY basis. Coromandel’s consolidated EBITDA margin was 4.1% as compared to the 5.7% YOY.
The reason for this disappointing performance by Coromandel is because the consumption of complex fertilizer has been low. The demand has slumped from 22 Million tonnes in FY 2012 to 15-16 Million tonnes in FY 2013. This is because the prices of complex fertilizer (as compared to that of urea) are high, the monsoon was delayed and inventory levels were high.
However, the position is likely to change in the foreseeable future. According to Kapil Mehan, MD of Coromandel International, the domestic capacity is still much lower than even the reduced demand and the demand is going to grow to around 18 million tonne because the field inventories with the farmers, as well as the retailers, as well as the state institutions have come down and most of the inventories have travelled upwards to wholesalers and companies. He expects demand to pickup in FY 2014 and onwards if there is a normal monsoon. He also pointed out that the total domestic capacity of the country is only about 12-12.5 million at 100 percent capacity utilisation and so, the backlog will be met through imports. This spells good news for Coromandel International.
Coromandel has also commissioned its “C-Train project” in Kakinada on March 22 2013 which will add a capacity of 4.25 lakh tonne to the existing capacity This is a very versatile plant and can produce any type of complex grade fertilizers. In FY 2014-15 it is expected to be able to achieve full capacity utilisation. Another new plant of super phosphate has been commissioned in Rae Bareli in March 2013.
In terms of valuations, Coromandel is suffering from low expectations and is consequently quoting at reasonable valuations of about 10 times FY 14 estimated earnings per share of Rs. 18. This means that the downside is limited. On the other hand, if the monsoon is normal (as is expected), the sentiment will change and Coromandel will see a good upside.