n Q3FY13 results disappointed on margins front. EBITDA
margins dipped to 5.3% (-390bps yoy & qoq), lowest since
implementation of NBS. PAT stood at Rs 684mn, -53% yoy
n Coro announced acquisition of Liberty Phosphate, leading
SSP player with ~1mn capacity & market share of 14%, at
deal price of Rs 241 / share valuing it at approx Rs 4bn
n Sharp drop in fertiliser volumes (-21% 9MFY13) and higher
inventories continues to affect profitability. However, we
believe volumes will pick up in FY14 on revival of demand
n With continued pressure on margins we are downgrading our
FY13/FY14 est by 27/20% to Rs 15.1/22.8 and target price to
Rs 320. However upgrade to BUY due to price correction
Margin dipped to 5.3% (-390bps yoy/qoq), lowest since NBS
Coromandel’s results disappointed on margins front. EBITDA margins dipped to 5.3%
(-390bps yoy & qoq), lowest since implementation of NBS. Though revenues at Rs
24.2bn, -5% yoy were ahead of est (of Rs 20.2bn) driven by higher volumes, EBITDA
came much lower at Rs 1.3bn, -45% yoy (est of Rs 1.9bn). Coromandel reported PAT at
Rs 684mn, -53% yoy lower than est of Rs 1bn.
Acquisition of Liberty Phosphate to strengthen its position in SSP
Coromandel has announced acquisition of Liberty Phospate, a leading SSP player with
capacity of 826,000 mtpa of SSP, 165,000 mtpa of NPK. Liberty is a leading SSP player
domestically with an established brand & strong distribution network with a market share
of 14% domestically. At acquisition price of Rs 241 / share (13% premium to closing
price of 24th Jan’13) valuing it at approx Rs 4bn, the deal is valued at EV/EBITDA of
4.2x, EV/Sales of 0.8x & P/E of 6.5x based on FY12 earnings. We believe valuations
are reasonable and it will strengthen Coromandel’s position in SSP.
Sluggish demand and higher inventory continues to affect margins
Sharp drop in complex fertiliser demand (industry vols down by ~21% ytd) and higher
inventory level in the system are putting pressure on margins and working capital.
Coromandel also witnessed 28% drop in sales volumes. However, we expect demand to
pick up from next year which is likely to boost company’s earnings.
Downgrade FY13/FY14 earnings, upgrade to BUY on sharp correction
On back of margin pressure and poor results, we have downgraded our FY13/FY14 est
by 27/20% to Rs 15.1/22.8. These est do not include consolidation of Liberty Phosphate.
Subsequently we have also revised our target price from Rs 340 to Rs 320 (14xFY14E)
and upgrade the stock to BUY from Accumulate on sharp correction in the stock price.
We expect softening in raw material prices and rebound in consumption will be key
driving factor for earnings growth.
LIBERTY PHOSPATE ACQUISITION
Coromandel has announced acquisition of Liberty Phosphate, leading SSP
player
Coromandel has announced acquisition of Liberty Phospate, a leading SSP player with
capacity of 826,000 mtpa of SSP, 165,000 mtpa of NPK & 5000 MT of magnesium
sulphate. Liberty Phospate has 4 manufacturing units situated at Udaipur (Rajasthan),
Nandesari (Gujrat), Kota (Rajasthan) and Pali (Maharashtra). Liberty is also setting up one
more unit of 1.32 lakh mt at Raebarely in the State of Uttar Pradesh to cater to the growing
demand of Northern & Eastern India. Coromandel’s board has also approved the
acquisition of 100% equity stake of Liberty Urvarak Limited and acquisition of business
undertaking of M/s. Tungabhadra Fertilisers and Chemicals Company Limited as a going
concern on a slump sale basis.
Liberty’s products are marketed across pan-India with primary markets being Rajasthan,
Madhya Pradesh, Gujarat, Haryana, Uttar Pradesh, Karnataka & Maharashtra. Liberty
enjoys a market share of 14% based on total SSP demand domestically.
Liberty acquisition at reasonable valuations
Coromandel will acquire 8 mn fully paid equity shares of Liberty Phospate representing
56.28% of Liberty's equity @ Rs 241/share resulting in outflow of Rs 2bn. Further, company
will also make an open offer for acquiring 4mn equity shares (upto 26% of Liberty) at Rs
241/share resulting in outflow of Rs 0.9 bn. Coromandel plans to finance the entire
acquisition through internal accruals. Liberty Phospate had net debt of Rs 420mn at the
end of Q2FY13.
Liberty Phospate generated Rs 4.9bn of sales & net profits of Rs 535mn during FY12. On
a YTD basis, Liberty Phospate has generated sales of Rs 3.7bn with net profits of Rs
271mn. At acquisition price of Rs 241 / share (13% premium to closing price of 24th
Jan’13) the deal is valued at EV/EBITDA of 4.2x, EV/Sales of 0.8x & P/E of 6.5x based on
FY12 earnings. We believe valuations are reasonable given Liberty’s leadership position in
SSP segment, access to raw materials, established brand, strong distribution network,
increasing acceptance of SSP fertilizers by the farmers.
Liberty acquisition to give overnight access to SSP capacity & new markets
Coromandel’s acquisition of Liberty will give it overnight access to an established brand
with capacity of 826,000 mtpa of SSP, 165,000 mtpa of NPK & 5000 MT of magnesium
sulphate. Liberty’s “DOUBLE HORSE” brand is well accepted in the markets and company
enjoys a market share of 14% in SSP domestically. Acquisition of Liberty will enhance
Coromandel’s product portfolio and increase company’s geographic footprint in
Northern/Eastern markets.
Liberty also has long-term contracts with the local suppliers of rock phosphate and
sulphuric acid which are the key raw materials for production of SSP. Liberty sources rock
phosphate from Rajasthan Mines (~50% of requirement) and sulphuric acid from Hindustan
Zinc. Owing to secured access to raw materials, strong brand positioning, established
distribution network, Liberty was able to clock a capacity utilization of 60% in FY12
compared to sub-50% average capacity utilization for SSP industry. Liberty also operates
on a low cost business model as its manufacturing locations are situated nearby its raw
material sources as well as its addressable markets.
SSP has emerged as a cost-effective solution for farmer
SSP fertiliser has been gaining ground over the last couple of years as it has emerged as a
cost-effective solution for the farmer due to windfall increase in prices of DAP & other
complex fertilizers. Since SSP is cost effective & provides phosphorous and sulphur
content at lower cost, small and marginal farmers have resorted to usage of this fertiliser
due to its easy affordability. Further, govt.’s increased focus to promote SSP in order to
reduce its subsidy burden & at the same time prevent soil from over-use of urea is likely to
support SSP consumption going forward. While Brazil’s consumption of SSP is 30% of the
total phosphatics basket, India’s consumption is relatively lower at 7-8%.
ConCall Key Takeways
§ Q3FY13 witnessed challenging conditions which led to disappointing
performance- Q3FY13 results were disappointing due to challenging conditions
witnessed during the quarter. Complex fertiliser demand remained subdued due to
higher prices, oversupply in the system which led to industrywide volume decline of
28% yoy. Rabi acreages were also impacted in certain southern pockets which
impacted demand.
§ Margins were impacted due to higher ammonia, warehousing, power costs-
Coromandel’s EBITDA margins dipped to 5.3% (-390bps yoy & qoq) during
Q3FY13. Management attributed the decline in margins to increased costs burden
in the form of ammonia, power, warehousing costs.
Ammonia prices continued to rule at high levels though they have recently softened
to $650/mt from $720/mt. Power costs went up due to usage of diesel generating sets.
Warehousing costs went up due to high inventory carrying costs. Further, increased
discounts offered & higher credit days extended led to pressure on margins & working
capital.
§ Crop protection/retail business fared well- Management indicated that crop
protection fared well during the quarter as formulations sales remained strong while
Sabero performance also improved. Retail business witnessed growth of ~30% in
non-fertiliser business however fertiliser business was affected.
§ Kakinada commercial production to start soon- Kakinada new train
commissioning has been completed however regulatory clearances are awaited.
Management expects to start commercial production soon.
§ TIFERT shipments to start soon- Management indicated that TIFERT production
is expected to start soon.
§ Though farmer economics remains favorable, he is reluctant to use complex
fertiliser at high prices- Though farmer economics remains favorable for most
crops, he is reluctant to use complex fertiliser as there prices have seen sharp
increase. Farmers have stopped to stock up inventory at his end as system is
flushed with high inventory.
§ Complex fertiliser inventory remains high in system- Complex fertiliser
inventory remains high in the system at 3.5-4.0 mn mt compared to normal
inventory of 2.0-2.5 mn mt. Additionally, companies are carrying 1.5-2.0 mn mt of
inventory (normal level of 1 mn mt).
§ FY14 subsidies likely to be reduced- Management indicated that FY14 subsidies
are likely to be reduced as global fertiliser prices have cooled off from their highs.
Further, govt.’s efforts to reduce fiscal deficit are likely to result in subsidy reduction
this year.
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