Coromandel International Research Report: PINC Research

PINC Research has recommended a hold on Coromandel International with a target of Rs 316 with the following investment rationale:

Coromandel International‘s Q3FY11 results were inline with our expectations as net sales grew by 16.3% YoY to ~Rs 20.4 billion (PINCe 14.7% and ~Rs 20.1 billion respectively). Coromandel International‘s OPM contracted slightly by 96bps to 10.8% resulting in an overall operating profit of Rs 2.2 billion. Other income was down 9.2% to ~Rs 331 million. Consequently, net profit increased marginally by 3.8% YoY to ~Rs 1.5 billion.

Coromandel International‘s Manufactured fertilisers volume for the quarter fell ~5% to ~7.4 lakh tonnes from ~7.79 lakh tonnes due to disruption in supply of phosphoric acid as one of its key suppliers “FOSKAR” faced production issues at its rock phosphate mine. Coromandel International‘s Operations have resumed since then as management expects normal volumes for Q4FY11. However, better sales volume from fertiliser trading business (Urea at ~74,000 tonnes and DAP at ~41,000 tonnes) contributed to modest rise in overall sales volumes of Coromandel International. As a result, volume for the quarter increased by 2% YoY to ~8.62 lakh tonnes vs ~8.43 lakh tonnes in Q3FY10.

Indian government has reduced subsidy for complex fertiliser under NBS scheme by ~15-20%. Despite this small blip, we believe Coromandel International is well placed with its ability to increase fertiliser prices at farmers’ level, better negotiation for raw material prices in international market and rising proportion of non-subsidy business (micro-nutrients/ specialty fertilisers). These factors should enable Coromandel International to maintain its margins with no major impact on profitability.

We have slightly decreased our FY12 estimates of Coromandel International by 8.5% following government’s move of ~15-20% reduction in subsidy for complex fertiliser. At the CMP of Rs 279, Coromandel International trades at FY11 and FY12 P/E of 14.1x and 12.4x and EV/EBITDA of 4.1x and 4.1x respectively. We maintain our ‘Hold’ recommendation with a target price of Rs 316 (22.5 FY12E EPS)