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Coromandel International |
Results inline, Maintain estimates |
BUY
CMP: Rs 279 Target Price: Rs 435
n Results inline with estimates – Revenues at Rs 20.5 bn (+17% yoy), EBITDA margins at 10.9%, APAT of Rs 1.4 bn (-2% yoy)
n Raw material prices to go up by 6% - margins likely to remain stable on the back of 8-15% increase in fertiliser prices
n Sales spill over to the next quarter and recent price hike in fertilisers – to result in strong Q4FY11 performance (we expect APAT growth of 64% yoy)
n Maintain estimates of Rs 22.2 for FY11E (Rs 17.4 for 9MFY11) and Rs 28.9 for FY12E. Re-iterate BUY with target of Rs 435
Results inline with estimates….
Q3FY11 results for Coromandel International (CIL) were inline with estimates. Adjusted
for subsidy income of Rs 110 mn (relating to previous period), the company reported
revenues of Rs 20.5 bn, +17% yoy, ahead of estimates of Rs 17.3 bn. Extended rainfall
(resulting in delayed sowing) and disruption at one of FOSKAR’s (key supplier of phos
acid) rock phosphate mines – affected volumes adversely. Fertiliser sale volumes for
Q3FY11 increased marginally by 2% yoy to 862,000 mt (inclusive of 115,000 mt on
account of trading volumes for urea and MOP) – higher than our estimates. Higher
trading impacted EBITDA margins, which contracted by 90 bps yoy to 10.9% resulting in
overall EBITDA of Rs 2.23 bn, +8% yoy. Adjusting for EO of Rs 110 mn relating to
previous period – APAT showed a marginal decline of 2% yoy to Rs 1.44 bn and was
inline with estimates. AEPS for the quarter stood at Rs 5.1 as against Rs 5.2 previous
year.
….CIL likely to achieve implied growth for Q4FY11E
Despite a challenging environment, CIL posted strong results for Q3FY11. Revenues for
9MFY11 increased by 27% yoy to Rs 61.8 bn, while EBITDA improved sharply by 63%
over last year to Rs 7.5 bn (EBITDA margins 12.1%). AEPS for 9MFY11 stood at Rs
17.4 vs Rs 11.1 for 9MFY10. To meet our full year estimates CIL faces implied APAT
growth of 66% over last year at Rs 1.4 bn with implied Q4FY11E EPS of Rs 4.8. Delay
in sowing of key crops caused due to extended rainfall has resulted in spillover of sales
to the next quarter - likely to lead to healthy overall volume growth for Q4FY11.
Improvement in volumes clubbed with price hike of Rs 800/ mt (~9%) undertaken by the
company in Dec ‘10, stabilizing of operations at FOSKAR and sustained performance
from the company’s non-subsidy based business is likely to result in healthy revenue
and profitability for next quarter.
Maintain FY11E / FY12E estimates
In light of the above arguments, we maintain our earnings estimates for FY11E and
FY12E at Rs 22.2 and Rs 28.9 respectively. Recently the government has reduced
subsidy across complex fertilisers for FY12 by ~20%. CIL’s inability to source raw
material at lower costs or failure to pass on increased costs to farmers – is likely to pose
a risk to out FY12E EPS estimates. Despite this, with strong RoCE and RoE of 37% and
38% net debt-equity of 0.1x - CIL remains our preferred pick among complex fertiliser
companies. We maintain our target price of Rs 435 (15x FY12E EPS) and re-iterate
BUY on the stock.
CIL reported reduced sales in Q3FY11 due to lower raw material availability
caused by disruption in production at FOSKAR’s mines
Sales volumes for the quarter improved marginally by 2% yoy over previous year to
862,000 mt (vs 843,000 mt in Q3FY10). Own manufactured sales volumes for the quarter
declined by ~5% mainly on account lower availability of phos acid - as one of CIL’s key
supplier of this raw material – FOSKAR – faced disruption in production at its rock
phosphate mine. Operations have resumed as the management expects normal dispatches
for Q4FY11.
Phos acid supply contracts for Q4FY11 at 6% higher levels…..
Management indicated that it finalized the contracts for the supply of phos acid for Q4FY11
at US$ 830 / mt – at 6% increase from earlier contracts for Q3FY11 at US$ 780 / mt. It
attributed this 6% hike to the strengthening of the global phos acid prices. However, prices
of other key raw materials like ammonia remained stable at US$ 425 / mt while sulphur
declined marginally by 5-6% to US$ 175 / mt from US$ 190 / mt.
… however price increase of 15-25% likely to help maintain margins
Following the introduction of NBS, CIL had increased DAP and complex fertiliser prices by
6-10% in Apr ’10. As a second round, it has announced a further hike of 8-15% from Dec
’10. Consequently, DAP prices increased to Rs 10,750 / mt (from Rs 9,350 / mt) while
phosphatic fertiliser prices increased from Rs 6,295 / mt to Rs 7,895 / mt. The management
has further indicated that this price increase has been well absorbed by the farmers as the
farmer community has benefitted from the increase in MSPs across various crops. Sharing
its outlook on the global fertiliser industry, the management indicated that due to improved
weather conditions, global fertiliser demand witnessed a rebound in FY11 and they expect
fertiliser prices to remain buoyant, going forward.
Capex plans remain on track
CIL’s expansion plans at Kakinada plant for incremental production of 200,000 mt are
progressing well and the company is likely to see the projected increase in volumes by
Q2FY12. Post the ongoing expansion, the overall capacity for CIL is expected to increase
from 3.3 mn mt to 4.0 mn mt. Company’s JV at Tunisia for phos acid at capex of Rs 1.18 bn
is also likely to commence production by Q2FY12.
Company’s focus on non subsidy based business remains intact
Management guided that CIL continues to maintain its focus on the non-subsidy business
which contributed ~10% to revenues and ~26% to EBITDA in Q3FY11. CIL maintained that
its non-fertiliser business which includes pesticides, specialty fertilisers, micro nutrients,
retail and enjoys >20% margins is likely to drive the future earnings for the company. The
company plans to increase the contribution from this business from 30% to 50% in the next
three years. Sharing guidance about the retail wing of its non-subsidy business,
management indicated that the company plans to increase the number of retail stores from
423 to 600 by the end of FY12 and has plans to further expand in near by states of
Karnataka, Tamil Nadu etc.
Raw material price negotiations for FY12 likely to materialize by Mar ’11
Management also guided that although the company has finalized phos acid contracts with
suppliers at US$ 830 (+6% or +US$ 50 over Q3FY11) – negotiations for FY12 are still
underway and are likely to shape up and finalize by Mar ’11. In light of the recent reduction
in subsidy rates for nutrients by the government - for FY12 (ref to our Fertiliser Policy
Update - Impact of revised NBS scheme on Nov 23, 2010) - these raw material
negotiations are critical and are likely to have a strong impact on the company’s margins for
FY12E.
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