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Coromandel International Ltd
Leader in agriculture inputs; New Buy
Leader in agriculture inputs; Buy for over 40% upside pot’l
We initiate coverage on Coromandel International with Buy and SOTP based PO
of INR370. CRIN is the second largest phosphatic fertilizer producer in India with
leadership in well irrigated South Indian states. It is our top pick in Indian agri
space given i) sector high return ratios, ii) strong balance sheet and iii) improving
revenue mix and margin resilience. PO at 7xFY13e EV/ EBITDA values fertilizer
business at 30% cut to US peer Mosaic Co. as CRIN is only partially integrated.
Sector high return ratios merit higher valuation
CRIN trades at 5.8xFY12e EV/EBITDA which is at the lower end of trading range
for peers at 5x to 15x. This is despite its sector high return ratios at 41% RoE vs
peers in the range of 6%-21%. Better RoE is led by i) its cost leadership and ii)
high asset turnover led by non subsidy segments where capex intensity is lower.
High margin new segments to drive EBITDA growth
Non subsidy segments (pesticides, organic manure, farm mechanization etc) form
~24% of CRIN’s FY11e EBITDA. With its focus on scaling up these segments,
this proportion will likely rise to 36% by FY13E. We estimate 37% of incremental
EBITDA over FY11-13 to come from new opportunities of farm mechanization/
organic manure with over 50% margin. We are 20% above consensus led by this.
Steady cash flow from fertilizer; upside risk to margins
We expect CRIN’s fertilizer earnings to grow at steady 7% CAGR led by capacity
and as we bake in a conservative150bps margin decline in fertilizers to account
for unforeseen pricing pressures in raw material. However we see upside risk to
margins: i) as conversion margins in DAP (Di Ammonium Phosphate) are much
below peak & are expected to improve ahead and ii) as CRIN can protect margins
through brand premium/ changing product mix in the new policy regime.
Initiate with Buy; over 40% upside
Coromandel International is the second largest producer of phosphatic fertilizers
in India with a strong presence in South India (table 2). It produces and markets
complex fertilizers, pesticides and specialty nutrients. Through 423 of its rural
retail centers, CRIN sells its own products, other agri/ lifestyle products as well as
offers farm mechanization/advisory services. Backed by strong return ratios (41%
RoE/ 19% RoCE) and balance sheet, we believe CRIN is a unique investment
opportunity on the inputs side of Indian agriculture. Initiate coverage with Buy and
PO of INR370.
Investment thesis
New ‘Buy’ in an under-owned sector; PO INR370
CRIN trades at 5.2xFY13e EV/EBITDA vs peers in the range of 5x to 13xFY13e.
This is despite CRIN’s better return ratios, stronger balance sheet and free cash
flow with a possibility of scaling up in new opportunities like farm mechanization/
organic manure. Moreover given FII ownership at 5% the stock is under owned as
is the fertilizer sector in India. Rate the stock as Buy with PO of INR370 based on
SOTP. PO implies 7xFY13e EV/EBITDA- 30% discount to US peer Mosaic Co,
justified in our view, as CRIN is only a partially integrated producer.
Strong return ratios/ balance sheet; expect 18% EPS CAGR
While over 70% of CRIN’s loans are working capital linked, it has marginal net
debt. With 19% RoCE and 41% RoE CRIN has sector high return ratios. We
estimate 18% EPS CAGR led by capacity expansion and 20% revenue growth
over FY11-13 along with strong free cash flows.
Indian Fertilizer Company ‘focused only on agriculture’
Given historical regulations, fertilizer companies in India diversified in related/ unrelated
businesses. CRIN limited its diversification to fertilizers, pesticides, soil
nutrients and services like mechanized farming. Currently it derives ~100% of
revenue from sales to farmers. With strong presence in farm inputs and
USD700mn market potential of newly introduced mechanized farming services,
we believe CRIN is one of the best exposures to Indian agriculture other than Jain
Irrigation (JNIDF, C-2-7, Rs193.1).
Policy change in complex fertilizers beneficial for margins
Since 2009, fertilizer policy shifted away from regulated returns in complex
fertilizers to import parity realizations. Moreover allowing for fixed nutrient based
subsidy, these changes also permit companies to vary farm gate prices within a
band. With these changes, companies like Coromandel should be able to
maintain margins through brand premium or changing mix on sustainable basis.
With recognized brands like Gromor, Parry Gold, Godavari in portfolio and
dominance in highly irrigated South Indian states, we think CRIN is the best
placed to benefit from new policy.
Cost leadership: Efficient plants, location and procurement
To service its 3.5mn ton capacity in phosphatic/NPK fertilizers, CRIN has
developed strategic sourcing alliances for raw material. It also owns 14% stake in
rock phosphate miner Foskor SA. With phosphoric acid costs 1% to 3% lower
than the industry, it is one of the cost leaders in phosphatic fertilizers in India
(chart 3). Freight costs too are low as plants are close to user locations (chart 4)
DAP conversion margins are rising but are much below peak
As per our US Fertilizer analyst David Silver, DAP conversion margins are rising
but are much below peak. Given this as well as CRIN’s brand premium strategy
we believe, risk to margins in CRIN’s fertilizers business are low
Successful inorganic strategy
CRIN has successfully grown organically as well as inorganically. With acquisition
of Godavari Chemicals and Fertilizers in 2003 it became the second largest DAP
manufacturer in India and developed logistical synergies. Its successful purchase
of FICOM Organics in 2006 augmented its portfolio in plant protection. CRIN has
also ensured its phosphoric acid supply through inorganic route. Given this CRIN
is well placed to tap emerging opportunities in Indian agriculture.
Rural distribution helps forge strong customer relationships
CRIN owns rural retail centers in Andhra Pradesh. It has increased the number
from 20 in Dec-07 to 423 at the end of FY10. While all these centers are in
Andhra Pradesh, it plans to penetrate other states like Tamil Nadu, Karnataka
and Maharashtra over the next three to four years. We believe these centers build
strong customer relationships, reduce dependence on distributors, help marketing
new products/services and act as entry barriers for competition (chart 6).
Shift to non subsidy businesses will help earnings stability
In FY11E, ~24 % of CRIN’s EBITDA will come from non subsidy based segments
like pesticides, specialty nutrients, farm mechanization, organic manure etc. We
estimate a strong growth in the nascent opportunities of farm mechanization and
organic manure and expect this contribution to rise to 36% by FY13 (chart 8).
This should impart earnings stability by reducing dependence on cyclical
fertilizers.
Farm mechanization, organic manure large opportunities
As a part of farm mechanization services CRIN provides tilling and sowing
services to paddy farmers to address emerging labor shortage in rural India. As
per industry estimates this is an USD700mn annual opportunity. While CRIN will
offer these services for 10,000acres in FY11, it plans to service ~100,000acres
within the next 2/3 years. In its organic manure business CRIN sold ~20,000 tons
in FY09 and plans to sell over 1mn ton by FY14. With estimated EBITDA margins
over 50% and unorganized nature we see upside risk to estimates from these.
Table 3: Emerging high potential business segments
Farm Mechanization
#INR4,500/acre charged to farmer for tilling and sowing
# Services for only paddy growers currently- estimated annual opportunity of USD700mn
# INR7.5mn capex per machine that tills 4acres a day and employs 2 people per machine
#Currently owns 22 machines and has ordered 22 more machines
#Expect to reach 100000 acres in the next 2-3yrs
Organic Manure
# Retail selling price is INR4000-4500/ton vs estimated production cost of INR2000/ton
# Production based on contract basis from municipal waste
# Estimated EBITDA margins over 50%
#Expects to increase sale to 1mn ton in the next 2-3yrs. (chart 7)
Source: Company, BofA Merrill Lynch Global Research
We value CRIN on SOTP. We compare its valuations with Indian as well as
global industry peers. We believe, CRIN’s closest peer in India is Zuari Industries
and that in the global market is The Mosaic Company- a US integrated
manufacturer of phosphatic fertilizers.
SOTP based target price of INR370
Our target price is in line with SOTP based target of INR370 calculated as below.
Table 4: SOTP based target price of INR370
SOTP EV
Valuation
methodology Valuation multiple
Fertilizers 73,926
#Replacement value #10% discount to replacement value
#Based on INR20bn #Implies EV/EBITDA of 8xFY13e
per ton of NPK capacity
Pesticides + specialty nutrients 11,642 EV/EBITDA 6x 1yr fwd (FY13) in line with industry
Retail SBU + farm mechanization 5,316 Sales 1x 1yr fwd (FY13) sales
Organic manure 4,178 DCF 30% discount to DCF given execution risk
Ammonia and others (INR mn) 7,240 EV/EBITDA 6x1yr fwd (FY13) in line with industry
EV INR mn 102,302
Net debt- FY13 (2,693)
MV target INR mn 104,995
# of shares (mn) 283
Target price 370
Source: BofA Merrill Lynch Global Research
Attractively valued relative to peers
CRIN is attractively valued vs its Indian, Asian as well as US peers. It trades at a
8xFY13e PE and 5.2xFY13e EV/EBITDA which is at the lower end of trading
range for fertilizer peers. It is also at over 20% discount on trailing basis vs its
closest Indian peer Zuari Industries on EV/EBITDA. We believe these are
attractive valuations given CRIN’s i) sector high return ratios and ii) growth. On
our target price of INR370, CRIN would trade at an EV/EBITDA multiple of
7xFY13e- at 30% discount to its closest international peer Mosaic Co. We believe
the discount is justified given partially integrated nature of CRIN’s business.
Key risks
Company performance depends on govt. subsidy policy
Fertilizer companies receive part of their realizations in the form of govt subsidy.
While govt subsidy isolates the farmer partially against rise in fertilizers prices and
hence ensures demand, it also results in delay in receiving realizations. Moreover
in case of issuance of subsidy in the form of bonds fertilizer companies can face
cash crunch. Ex. Coromandel currently holds ~INR10bn govt bonds allotted in
FY09 towards payment of subsidy. However, with introduction of Nutrient Based
Subsidy govt will likely not release subsidy in the form of bonds going ahead.
Monsoon induces variability to annual performance
Given CRIN’s ~100% revenue comes from Indian farmers, monsoon performance
can impart variability to its annual performance. However, given CRIN’s cost
leadership, strong balance sheet and presence across agriculture value chain we
believe it is well placed to control the impact from this.
Raw material supply and prices key to performance
CRIN derives ~90% revenue from fertilizers where it converts rock phosphate/
phosphoric acid to DAP as well as other complex fertilizers. Given limited
backward integration, its performance depends on global prices for these raw
materials and its ability to procure at the right price. Given CRIN’s strategic
relationships with vendors and experience this risk is addressed.
Competition from imports can impact margins
With strong brand, market share in South India CRIN plans to follow brand
premium strategy in fertilizers. However, we believe there is a limit to benefits
from such strategy given possible competition from imported fertilizers.
Execution in new segments can be delayed
We expect CRIN to scale up its Farm mechanization and organic manure
business aggressively in the medium term. However given newness of these
segments for the company execution can be impacted for unforeseen reasons.
However, we believe this risk gets mitigated as CRIN is well placed to scale up
these offerings given its first mover advantage and established rural presence.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coromandel International Ltd
Leader in agriculture inputs; New Buy
Leader in agriculture inputs; Buy for over 40% upside pot’l
We initiate coverage on Coromandel International with Buy and SOTP based PO
of INR370. CRIN is the second largest phosphatic fertilizer producer in India with
leadership in well irrigated South Indian states. It is our top pick in Indian agri
space given i) sector high return ratios, ii) strong balance sheet and iii) improving
revenue mix and margin resilience. PO at 7xFY13e EV/ EBITDA values fertilizer
business at 30% cut to US peer Mosaic Co. as CRIN is only partially integrated.
Sector high return ratios merit higher valuation
CRIN trades at 5.8xFY12e EV/EBITDA which is at the lower end of trading range
for peers at 5x to 15x. This is despite its sector high return ratios at 41% RoE vs
peers in the range of 6%-21%. Better RoE is led by i) its cost leadership and ii)
high asset turnover led by non subsidy segments where capex intensity is lower.
High margin new segments to drive EBITDA growth
Non subsidy segments (pesticides, organic manure, farm mechanization etc) form
~24% of CRIN’s FY11e EBITDA. With its focus on scaling up these segments,
this proportion will likely rise to 36% by FY13E. We estimate 37% of incremental
EBITDA over FY11-13 to come from new opportunities of farm mechanization/
organic manure with over 50% margin. We are 20% above consensus led by this.
Steady cash flow from fertilizer; upside risk to margins
We expect CRIN’s fertilizer earnings to grow at steady 7% CAGR led by capacity
and as we bake in a conservative150bps margin decline in fertilizers to account
for unforeseen pricing pressures in raw material. However we see upside risk to
margins: i) as conversion margins in DAP (Di Ammonium Phosphate) are much
below peak & are expected to improve ahead and ii) as CRIN can protect margins
through brand premium/ changing product mix in the new policy regime.
Initiate with Buy; over 40% upside
Coromandel International is the second largest producer of phosphatic fertilizers
in India with a strong presence in South India (table 2). It produces and markets
complex fertilizers, pesticides and specialty nutrients. Through 423 of its rural
retail centers, CRIN sells its own products, other agri/ lifestyle products as well as
offers farm mechanization/advisory services. Backed by strong return ratios (41%
RoE/ 19% RoCE) and balance sheet, we believe CRIN is a unique investment
opportunity on the inputs side of Indian agriculture. Initiate coverage with Buy and
PO of INR370.
Investment thesis
New ‘Buy’ in an under-owned sector; PO INR370
CRIN trades at 5.2xFY13e EV/EBITDA vs peers in the range of 5x to 13xFY13e.
This is despite CRIN’s better return ratios, stronger balance sheet and free cash
flow with a possibility of scaling up in new opportunities like farm mechanization/
organic manure. Moreover given FII ownership at 5% the stock is under owned as
is the fertilizer sector in India. Rate the stock as Buy with PO of INR370 based on
SOTP. PO implies 7xFY13e EV/EBITDA- 30% discount to US peer Mosaic Co,
justified in our view, as CRIN is only a partially integrated producer.
Strong return ratios/ balance sheet; expect 18% EPS CAGR
While over 70% of CRIN’s loans are working capital linked, it has marginal net
debt. With 19% RoCE and 41% RoE CRIN has sector high return ratios. We
estimate 18% EPS CAGR led by capacity expansion and 20% revenue growth
over FY11-13 along with strong free cash flows.
Indian Fertilizer Company ‘focused only on agriculture’
Given historical regulations, fertilizer companies in India diversified in related/ unrelated
businesses. CRIN limited its diversification to fertilizers, pesticides, soil
nutrients and services like mechanized farming. Currently it derives ~100% of
revenue from sales to farmers. With strong presence in farm inputs and
USD700mn market potential of newly introduced mechanized farming services,
we believe CRIN is one of the best exposures to Indian agriculture other than Jain
Irrigation (JNIDF, C-2-7, Rs193.1).
Policy change in complex fertilizers beneficial for margins
Since 2009, fertilizer policy shifted away from regulated returns in complex
fertilizers to import parity realizations. Moreover allowing for fixed nutrient based
subsidy, these changes also permit companies to vary farm gate prices within a
band. With these changes, companies like Coromandel should be able to
maintain margins through brand premium or changing mix on sustainable basis.
With recognized brands like Gromor, Parry Gold, Godavari in portfolio and
dominance in highly irrigated South Indian states, we think CRIN is the best
placed to benefit from new policy.
Cost leadership: Efficient plants, location and procurement
To service its 3.5mn ton capacity in phosphatic/NPK fertilizers, CRIN has
developed strategic sourcing alliances for raw material. It also owns 14% stake in
rock phosphate miner Foskor SA. With phosphoric acid costs 1% to 3% lower
than the industry, it is one of the cost leaders in phosphatic fertilizers in India
(chart 3). Freight costs too are low as plants are close to user locations (chart 4)
DAP conversion margins are rising but are much below peak
As per our US Fertilizer analyst David Silver, DAP conversion margins are rising
but are much below peak. Given this as well as CRIN’s brand premium strategy
we believe, risk to margins in CRIN’s fertilizers business are low
Successful inorganic strategy
CRIN has successfully grown organically as well as inorganically. With acquisition
of Godavari Chemicals and Fertilizers in 2003 it became the second largest DAP
manufacturer in India and developed logistical synergies. Its successful purchase
of FICOM Organics in 2006 augmented its portfolio in plant protection. CRIN has
also ensured its phosphoric acid supply through inorganic route. Given this CRIN
is well placed to tap emerging opportunities in Indian agriculture.
Rural distribution helps forge strong customer relationships
CRIN owns rural retail centers in Andhra Pradesh. It has increased the number
from 20 in Dec-07 to 423 at the end of FY10. While all these centers are in
Andhra Pradesh, it plans to penetrate other states like Tamil Nadu, Karnataka
and Maharashtra over the next three to four years. We believe these centers build
strong customer relationships, reduce dependence on distributors, help marketing
new products/services and act as entry barriers for competition (chart 6).
Shift to non subsidy businesses will help earnings stability
In FY11E, ~24 % of CRIN’s EBITDA will come from non subsidy based segments
like pesticides, specialty nutrients, farm mechanization, organic manure etc. We
estimate a strong growth in the nascent opportunities of farm mechanization and
organic manure and expect this contribution to rise to 36% by FY13 (chart 8).
This should impart earnings stability by reducing dependence on cyclical
fertilizers.
Farm mechanization, organic manure large opportunities
As a part of farm mechanization services CRIN provides tilling and sowing
services to paddy farmers to address emerging labor shortage in rural India. As
per industry estimates this is an USD700mn annual opportunity. While CRIN will
offer these services for 10,000acres in FY11, it plans to service ~100,000acres
within the next 2/3 years. In its organic manure business CRIN sold ~20,000 tons
in FY09 and plans to sell over 1mn ton by FY14. With estimated EBITDA margins
over 50% and unorganized nature we see upside risk to estimates from these.
Table 3: Emerging high potential business segments
Farm Mechanization
#INR4,500/acre charged to farmer for tilling and sowing
# Services for only paddy growers currently- estimated annual opportunity of USD700mn
# INR7.5mn capex per machine that tills 4acres a day and employs 2 people per machine
#Currently owns 22 machines and has ordered 22 more machines
#Expect to reach 100000 acres in the next 2-3yrs
Organic Manure
# Retail selling price is INR4000-4500/ton vs estimated production cost of INR2000/ton
# Production based on contract basis from municipal waste
# Estimated EBITDA margins over 50%
#Expects to increase sale to 1mn ton in the next 2-3yrs. (chart 7)
Source: Company, BofA Merrill Lynch Global Research
We value CRIN on SOTP. We compare its valuations with Indian as well as
global industry peers. We believe, CRIN’s closest peer in India is Zuari Industries
and that in the global market is The Mosaic Company- a US integrated
manufacturer of phosphatic fertilizers.
SOTP based target price of INR370
Our target price is in line with SOTP based target of INR370 calculated as below.
Table 4: SOTP based target price of INR370
SOTP EV
Valuation
methodology Valuation multiple
Fertilizers 73,926
#Replacement value #10% discount to replacement value
#Based on INR20bn #Implies EV/EBITDA of 8xFY13e
per ton of NPK capacity
Pesticides + specialty nutrients 11,642 EV/EBITDA 6x 1yr fwd (FY13) in line with industry
Retail SBU + farm mechanization 5,316 Sales 1x 1yr fwd (FY13) sales
Organic manure 4,178 DCF 30% discount to DCF given execution risk
Ammonia and others (INR mn) 7,240 EV/EBITDA 6x1yr fwd (FY13) in line with industry
EV INR mn 102,302
Net debt- FY13 (2,693)
MV target INR mn 104,995
# of shares (mn) 283
Target price 370
Source: BofA Merrill Lynch Global Research
Attractively valued relative to peers
CRIN is attractively valued vs its Indian, Asian as well as US peers. It trades at a
8xFY13e PE and 5.2xFY13e EV/EBITDA which is at the lower end of trading
range for fertilizer peers. It is also at over 20% discount on trailing basis vs its
closest Indian peer Zuari Industries on EV/EBITDA. We believe these are
attractive valuations given CRIN’s i) sector high return ratios and ii) growth. On
our target price of INR370, CRIN would trade at an EV/EBITDA multiple of
7xFY13e- at 30% discount to its closest international peer Mosaic Co. We believe
the discount is justified given partially integrated nature of CRIN’s business.
Key risks
Company performance depends on govt. subsidy policy
Fertilizer companies receive part of their realizations in the form of govt subsidy.
While govt subsidy isolates the farmer partially against rise in fertilizers prices and
hence ensures demand, it also results in delay in receiving realizations. Moreover
in case of issuance of subsidy in the form of bonds fertilizer companies can face
cash crunch. Ex. Coromandel currently holds ~INR10bn govt bonds allotted in
FY09 towards payment of subsidy. However, with introduction of Nutrient Based
Subsidy govt will likely not release subsidy in the form of bonds going ahead.
Monsoon induces variability to annual performance
Given CRIN’s ~100% revenue comes from Indian farmers, monsoon performance
can impart variability to its annual performance. However, given CRIN’s cost
leadership, strong balance sheet and presence across agriculture value chain we
believe it is well placed to control the impact from this.
Raw material supply and prices key to performance
CRIN derives ~90% revenue from fertilizers where it converts rock phosphate/
phosphoric acid to DAP as well as other complex fertilizers. Given limited
backward integration, its performance depends on global prices for these raw
materials and its ability to procure at the right price. Given CRIN’s strategic
relationships with vendors and experience this risk is addressed.
Competition from imports can impact margins
With strong brand, market share in South India CRIN plans to follow brand
premium strategy in fertilizers. However, we believe there is a limit to benefits
from such strategy given possible competition from imported fertilizers.
Execution in new segments can be delayed
We expect CRIN to scale up its Farm mechanization and organic manure
business aggressively in the medium term. However given newness of these
segments for the company execution can be impacted for unforeseen reasons.
However, we believe this risk gets mitigated as CRIN is well placed to scale up
these offerings given its first mover advantage and established rural presence.
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