Fertiliser sales volume declined in Q1FY13, as expected, owing to high inventory at distributors’ end (on account of inventory push from companies during Q4FY12) and delay in monsoon. While the inventory issue will be eliminated Q2FY13 onwards, progress of monsoon and exchange rate movement will be primary parameters which will determine fertiliser sales volume. In the domestic fertiliser space, we are positive on Coromandel International (Coromandel).
High distributor inventory, delay in monsoon impact volumes
Non-urea sales volume declined 13.7% YoY in Q1FY13 owing to high level of distributor inventory at FY12 end as well as the delayed offtake of fertilisers by farmers due to poor start to Kharif monsoon. Even urea volume fell 5.5% YoY in Q1FY13 owing to delay in monsoon. The decline in non-urea sales during the quarter was expected as the sale of fertilisers from companies to distributors in Q4FY12 was up 52.5% YoY.
Outlook: Monsoon season holds key
Owing to dip in fertiliser sales volume, we expect most fertiliser companies to post subdued revenue and profitability growth in Q1FY13 YoY. Inventory levels at distributors’ end have moderated to a great extent during Q1FY13 and are likely to be at normal level Q2FY13 onwards. Nevertheless, progress of Kharif monsoon (which had been subdued during June) during July-August holds the key, along with the exchange rate movement.
Owing to the adverse exchange rate movement in Q1FY13, most fertiliser companies have hiked non-urea fertiliser prices ~20-25% at Q1FY13 end, impact of which is likely to flow Q2FY13 onwards. While this price hike is expected to have maximum impact on sales volume of high value fertilisers like DAP and MOP (most companies guiding for a YoY sales volume decline of 20-25% in these products), these volumes are likely to get shifted towards non-urea fertilisers with lower phosphatic (P) and lower potassic (K) content. While the MSP increase for various crops of 16-53% is likely to offset the impact of this farm gate price hike, progress of monsoon as well as exchange rate movement hold the key.
In our fertiliser coverage universe, we have ‘BUY’ on Coromandel and ‘HOLD’ on Chambal. Based on DCF, we have a fair value target of INR395 for Coromandel (CMP: INR247) and INR84 for Chambal (CMP: INR75).