Coromandel rides on good monsoon after 2 drought years

Lower raw material costs, reduction in inventory, improved subsidy payments to help earnings

After underperforming the benchmark indices for the last couple of years, the Coromandel International stock has been hitting 52-week highs recently. It hit a fresh 52-week high of Rs 340.8 on Tuesday before closing at Rs 339. This is on expectation that good monsoon after two consecutive years of weakness should rub off positively on agriculture growth and inventory liquidation in the current rabi season. Declining raw material prices and timely payment of subsidy, too, are expected to help. 

What has aggravated the situation for fertiliser companies, in addition to poor monsoon, is higher international fertiliser and raw material prices, excess channel inventory, and high subsidy receivables. Analysts at HDFC Securities say that, along with the above factors, currency volatility and policy paralysis dragged sector profits, which contracted by as high as 50 per cent for Coromandel International. The situation, however, is reversing now. 

Raw material (RM) prices are declining and falling natural gas prices are a positive. This will mean lower costs and even if fertiliser prices remain soft, the company (given falling RM costs) can still maintain good profitability. The delayed subsidy payments by government in the past have been one of the key reasons for higher interest costs and impact on profitability. However, as government had budgeted Rs 70,000 crore for fertiliser subsidy in FY17, analysts expect a similar amount to  be budgeted in FY18 budget, along with other measures, to drive agriculture growth. This would mean that about two-thirds of prior period subsidy overdues will be paid by the government, say analysts at HDFC Securities. Thus, interest costs on account of subsidy is estimated to decrease by almost 40 per cent or even more, adding to profit growth. 

The company, which is among the largest phosphatic fetiliser manufacturers, also has significant exposure to complex fertilisers and as the prices of fertilisers continue to fall, the use of complex fertilisers may increase. Further, the company is also producing unique-grade fertilisers and speciality nutrients, which are high-margin products. Thus, for the nutrient (fertiliser and related) business, analysts at UBS Research estimate a 12 per cent annual growth in profits before interest and tax (Ebit) over FY17-19.

In addition to the fertiliser business, which remains a major segment (three-fourths of revenue), the company has crop-protection business that is showing promise. Given the sharp pickup, boosted by exports in the first half of the financial year, the segment Ebit is expected to grow 22 per cent annually over FY17-19, which, UBS analysts felt, is not being factored in and can drive earnings upgrades and further rerating.