Improved volumes and higher product prices mean sunny days ahead for Coromandel International. Revenue and profitability will be on a better pitch

BUOYANT fertiliser prices and the recent upward revision of subsidy rates for nutrients by the government augur well for Coromandel International (CIL). The company draws over three-fourths of its revenue from complex fertilisers and revised rates are likely to compensate rising input costs. CIL's vast distribution network and strong product portfolio will help it post strong profitability margins, going ahead.

BUSINESS:

A part of the Murugappa Group, Coromandel International is a subsidiary of EID Parry (India), which holds 62.9% stake in the company. Headquartered in Hyderabad, Coromandel is engaged in the business of farm inputs, which includes fertilisers, pesticides, and specialty nutrients. It has ventured into retail business with over 425 rural retail centres in agri and lifestyle segments. The company has eight manufacturing facilities located in Andhra Pradesh, Tamil Nadu, Maharashtra, Gujarat and Jammu and Kashmir. Its products are marketed across the country through an extensive network of dealers.

GROWTH OUTLOOK:

CIL intends to double di-ammonium phosphate production volume at its Kakinada plant to 4 million tonnes per annum over the next two quarters. It has entered into a 118-crore joint venture with Tunisia for phosphoric acid production, which is likely to commence in the next 2-3 quarters.

The company expects its future earnings to be driven by its non-subsidy and non-fertiliser business. Currently, while the former contributes nearly 10% to the total revenue, the latter forms 30%. The company plans to increase business share of its non-fertiliser segment, including pesticides, specialty nutrients, micro-nutrients, and retail, to 50% in the next three years. To increase its market presence and reach in states like Karnataka and Tamil Nadu, CIL plans to increase the number of retail outlets by over 40% to 600 by FY12-end.

Following introduction of nutrient-based subsidy in April 2010, CIL has introduced two price hikes of DAP and complex fertilisers. It raised prices by 6-10% in April 2010 and again by 8-15% in December. The government has revised the subsidy rates upwards, which should benefit the company in coming quarters.

FINANCIALS:

In nine months ended December 2010, CIL's revenue rose 26% yearon-year to 6,350 crore while net profit rose 63% to 623 crore. Improved sales led to a 240-basis point rise in the operating margin.

Sales volumes remained steady year-onyear in October-December due to the extended rainfall, resulting in delayed sowing and disruption at one of the rock phosphate mines that led to lower availability of phosphoric acid.

However, delayed sowing is likely to have a spillover effect in March 2011 quarter, which could increase sales volumes. Also, operations at the mine have resumed and are likely to add to the company's growth during the quarter.

VALUATIONS:

At the current market price of 335.6, the stock trades at nearly 13 times its earnings for the trailing 12 months. Improved volumes during the March 2011 quarter, coupled with nearly a 9% price hike taken by the company in December 2010 quarter, is likely to result in healthy revenue and profitability for the company in the coming quarters. Also, CIL is likely to benefit from the sustained performance of its nonsubsidy based business.