Coromandel International Ltd
(BSE Code: 506395) (CMP: Rs.399.95) (FV: Re.1) By Amit Kumar Gupta
Incorporated in 1961, Secunderabad based Coromandel International Ltd (CIL) is a subsidiary of E.I.D. Parry (India) Ltd which manufactures and trades in farm inputs. It operates through two segments: Nutrients and Other Allied Businesses; and Crop Protection. It offers phosphatic fertilizers; crop protection products including insecticides, fungicides and herbicides; speciality nutrients such as water soluble and organic fertilizers, bentonite sulphur, micronutrients and organic compost. It operates 800 stores under the ‘Mana Gromor’ name in Andhra Pradesh, Telangana and Karnataka, which offer farm inputs and farm mechanization services. It offers its products under the following brands: Gromor, Godavari and Double Horse. It exports its crop protection products to Latin America, Africa, Europe and Asia.
During Q1FY19, CIL’s volumes declined 7.1% YoY while revenue grew 11.8%, primarily on account of multiple price hikes taken over the past few months (Di Ammonium Phosphate [DAP] prices rose ~25%). Moreover, the Ministry of Fertilizers’ data reveals a strong traction in Q2FY19 volumes so far. Sales volume for July and August stood at over 1.2 MMT, which is ~81% of our volume estimate for Q2FY19.
So far in Q2FY19, CIL has achieved 99% of the volume estimate for urea, 86% for DAP, 80% for nitrogen, phosphorus and potassium (NPK) and 74% for single super phosphate (SSP). The only disappointment comes from potassium chloride (MOP), where CIL has clocked only 17% of our estimated volumes. However, given the relatively low volume mix of MOP, we believe that its sluggishness is unlikely to hamper the overall growth estimates.
We expect the strong acreage trend in key crops to continue aiding growth. Further, good rainfall in key states of Andhra Pradesh, Telangana, Karnataka, Maharashtra and Odisha also provides comfort. We expect overall volume growth of 7% and revenue growth of 16.8% in FY19.
Key markets for CIL are Andhra Pradesh, Telangana, Maharashtra, Karnataka, West Bengal and Odisha, which together account for 93% of its NPK/DAP volumes and 73% of its overall volumes. On the onset of the 2018-19 Kharif season, we had estimated that the sowing area under paddy, soybean and sugarcane is set to rise in these six states while that under cotton and pulses is likely to dip. We had also estimated that the overall fertilizer consumption will increase given that paddy, soybean and sugarcane are relatively high-fertilizer-consuming crops. According to the Department of Agriculture and Cooperation, the overall acreage grew 5% in Telangana, 7% in Karnataka and 11% in West Bengal, but declined by 1% in Andhra Pradesh and 2% in Maharashtra. On the other hand, the acreage of paddy, soybean and sugarcane grew across these six states.
The acreage of soybean was up 6%, paddy 2% and sugarcane 4%. On the other hand, the acreage of cotton and pulses was down by 2% each. The average four-year fertilizer consumption of pulses and cotton across the key states is 1.4-2.1 t/ha and 1.1-2 t/ha, respectively while consumption is much higher in paddy (1.5-2.1 t/ha), soybean (~2.6 t/ha) and sugarcane (1.6-2.7 t/ha). We believe that the crop mix change has been instrumental in driving volume growth for CIL in Q2FY19 so far and the company is well on track to achieve its full-year volume growth estimate of 7%. We believe that CIL has fared well so far in FY19 and that the outlook for volume growth is positive. The mix shift towards higher-fertilizer consuming crops is expected to boost its volumes by 12% in Q2FY19 and 7% in FY19. Further, multiple price hikes taken in the past few months are likely to aid revenue growth. We keep our estimates unchanged and expect 12%/11% revenue/PAT CAGR over FY18-20.
Technical Outlook: The stock looks good on the daily chart for medium-term investment. It has formed a downward channel pattern on the daily chart and a close above Rs.425 with volumes will push the stock higher. The stock trades below all important moving averages like the 200 DMA level placed at Rs.480 on the daily chart. Start accumulating at this level of Rs.399.95 and on dips to Rs.350 for medium-to-long term investment and a possible price target of Rs.490+ in the next 12 months.