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UBS Investment Research
Coromandel International
Investor concerns misplaced; Buy rating
Concern 1: lower conversion margins on DAP may impact profitability
A recent investor concern on Coromandel International (CIL) has been over lower
conversion margins for DAP (DAP price rise not enough vis-à-vis prices of raw
materials such as phosphoric acid). We would like to highlight that DAP as a % of
sales for CIL is not significant. The company was able to achieve stable margins
during earlier cases of lower/falling DAP conversion margins. We expect the
company to be able to achieve stable margins, though quarterly volatility is
possible. Its stable margins reflect its secure raw material linkages, low-cost
manufacturing, and government subsidies, in our view.
Concern 2 : higher DAP prices could impact demand
YTD in FY12, sales for DAP (not significant as % of sales for CIL) in India is
down 26% YoY. The key reason for this is that DAP prices rose significantly more
than urea prices. However, non-DAP complex fertiliser sales in India (more
relevant for CIL) are actually up YTD.
Maintain our positive view on stock—best agri play in India
We reiterate our view that CIL is emerging as a broad agri-inputs player. We
believe it remains well placed to benefit from opportunities in the Indian agri space
with its strategy of increasing the mix of its non-subsidy business (higher
margins/lower regulatory noise) from 26% to 50% of total earnings in three years.
Valuation: maintain Buy rating, price target of Rs416
We value CIL using DCF-based methodology. Our price target of Rs416 implies
FY13E PE of 13.2x. We assume a WACC of 12.85%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Coromandel International
Investor concerns misplaced; Buy rating
Concern 1: lower conversion margins on DAP may impact profitability
A recent investor concern on Coromandel International (CIL) has been over lower
conversion margins for DAP (DAP price rise not enough vis-à-vis prices of raw
materials such as phosphoric acid). We would like to highlight that DAP as a % of
sales for CIL is not significant. The company was able to achieve stable margins
during earlier cases of lower/falling DAP conversion margins. We expect the
company to be able to achieve stable margins, though quarterly volatility is
possible. Its stable margins reflect its secure raw material linkages, low-cost
manufacturing, and government subsidies, in our view.
Concern 2 : higher DAP prices could impact demand
YTD in FY12, sales for DAP (not significant as % of sales for CIL) in India is
down 26% YoY. The key reason for this is that DAP prices rose significantly more
than urea prices. However, non-DAP complex fertiliser sales in India (more
relevant for CIL) are actually up YTD.
Maintain our positive view on stock—best agri play in India
We reiterate our view that CIL is emerging as a broad agri-inputs player. We
believe it remains well placed to benefit from opportunities in the Indian agri space
with its strategy of increasing the mix of its non-subsidy business (higher
margins/lower regulatory noise) from 26% to 50% of total earnings in three years.
Valuation: maintain Buy rating, price target of Rs416
We value CIL using DCF-based methodology. Our price target of Rs416 implies
FY13E PE of 13.2x. We assume a WACC of 12.85%.
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