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Coromandel International – Improving Fortunes!


Company Name – Coromandel International Limited (Coromandel International)


Current Share Price – INR 902 (January 07, 2023)


Market Cap – INR 26,520 cr


 

1. What is interesting about the stock?

“Roti, kapda aur makaan”, the crisp dialogue that encapsulated the basic needs of mankind, before someone added “internet”. Food security is the primary responsibility of any country, as the Europeans found out to their dismay with runaway inflation thanks to their food bowl, Ukraine being attacked by Russia. In a monsoon-dependent country with a large population like India, food security is of strategic importance and agri-chemicals play a key role in ensuring that. One large player in that space in India is Coromandel International.


Coromandel International Limited is an Indian corporation founded in the early 1960s by IMC and Chevron Companies of USA and EID Parry (part of Murugappa Group, now holding ~56%), headquartered in Hyderabad, Telangana, India. Originally named Coromandel Fertilisers, the Company is in the business of fertilizers, pesticides, and specialty nutrients. It has sixteen manufacturing units located in the states of Andhra Pradesh, Tamil Nadu, Maharashtra, Gujarat, Rajasthan, Madhya Pradesh, Uttar Pradesh, and Jammu and Kashmir.


The Company is the second largest manufacturer and marketer of phosphatic fertilizers in India (after IFFCO). The company has an overall market share of 16.3%, however, it has a market share of more than 50% in Andhra Pradesh, Telangana, and the neighboring states. Coromandel accounts for nearly 22% of India’s total phosphate fertilizer production capacity.


One key aspect of this business is the dependence on revenues coming from subsidized products. For the Company, it has ranged between 82-89% in the last few quarters, which essentially means that it is dependent on the Government’s release of payments to maintain its cash flows. With the Direct Benefit Transfer (DBT) scheme and the current dispensation’s farmer focus, the Company has seen better cash conversion ratios.


Like the pharmaceuticals business, the chemicals business has a unique opportunity. Many patented molecules are coming off patent, giving Indian chemical companies a chance to capitalize by becoming large-scale manufacturers of these products.


Growth Opportunity in Crop Protection Segment


26 crop protection molecules are going off patent between this year and last. This provides a huge growth opportunity for generic manufacturers who can introduce new products and boost profits. The Company is in the top 5 crop protection chemical manufacturers and is the third largest producer of Mancozeb globally. In the last quarter, it grew by only 1%, but the management is confident that new launches will do well in the coming quarters and is expecting a 5% annual growth rate from this division.


Growth in Phosphatic Fertilizer Division


The phosphatic fertilizers segment is seeing huge growth across the country. The Company has a significant presence in the high agricultural input-consuming South, West, and East India markets. Higher raw material prices have caused farmers to move from DAP-type fertilizers to NPK-type fertilizers. NPK fertilizers are cheaper to manufacture for the company, and as the share of NPK fertilizers increases it will also cause company profits to improve.


Higher Margins due to Backward Integration


China’s new environmental norms have caused an increase in key raw materials for most companies. To counter this, the company has invested in Phosphoric Acid manufacturers in South Africa to ensure price control and supply control of phosphoric acid, a key raw material for the business. This has helped the Company improve margins in the recent quarter already.


2. Key Historical Financials


  • Revenue increased by 35% in FY22 and 64% in Q2FY23 on a YoY basis

  • EBITDA margin has fallen from 13-14% in FY20 and FY21 to 11% in FY22 and H1FY23

  • Working capital position significantly improved in FY21 with a sharp fall in debtor and inventory days – leading to a high CFO/EBITDA ratio. Improvement continued in FY22

  • ROCE and ROE were at 35% and 27% respectively in FY22 – quite healthy

  • Net cash position of ~INR 1,500 cr

3. What is my view on company valuation?


The Company has traditionally traded at a median P/E level of 17x, but on a TTM basis is currently trading at 13.9x due to selling by mutual funds in the last quarter. Typically, around the budget time, agri-chemicals businesses get a re-rating because of expectations of budgetary support. In the last 5 years, the Company has traded in the P/E range of 13-22x.


The management is a reliable one, the Company belongs to a well-known group, there are growth opportunities that it is working on, has no long-term borrowings. It seems to have all the fundamental reasons to be a good investment opportunity for the medium to long term.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • The Crop Care Federation of India has proposed to ban 27 products, of which Coromandel produces 4: Mancozeb, Malathion, Acephate, and Monocrotophos. These products make up roughly 45% of Coromandel’s crop protection revenues. Any such proposals if passed can adversely affect the Company’s business.

  • The agri-chemicals business is dependent on budgetary allocations from the Government of India. Any cuts in the subsidy from the Government can adversely affect the bottom line and topline of the Company

  • As Indian agriculture is still dependent on monsoons, a good season is important for the growth of the fertilizers business

 

About the Author


I have over 17 years of experience in private equity and public markets. I am an engineer by background an MBA from a premier institute in India.


Disclosure


I have had no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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