The country’s leading complex fertiliser producer Coromandel International’s stock has corrected over 32 per cent in the last six months, even as Nifty gained 11 per cent during the same period. Slack fertiliser demand due to steep rise in farm gate prices, high inventory with the distributors and a weak monsoon impacted the company’s performance in FY13.
With the softening of key input prices and expectation of normal monsoon this year, volumes may rebound in 2013-14. At the current price of Rs 187, the stock trades at nine times 2013-14 earnings, making it a good investment opportunity.
The demand for complex fertilisers declined by over 25 per cent to nearly 16 million tonnes in 2012-13 thanks to steep rise in farm gate prices and adverse weather conditions. But the demand was much higher than the domestic production of around 12.5 million tonnes. As a result, a significant portion of the requirement was met through imports.
Despite favourable demand-supply economics, higher imports in anticipation of a strong demand led to excess supply in 2012-13. Also, sales push by fertiliser companies in the fourth quarter of 2011-12 fiscal led to pile up at the retailer end. However, the inventory at the dealer end is expected to moderate by the first half of the current fiscal. A nominal growth in demand may translate into healthy volumes for the company in 2013-14. The total inventory in Coromandel’s books declined from Rs 2,725 crore in September last year to Rs 1,478 crore by March this year.
The company has commissioned an additional complex fertiliser manufacturing unit at Kakinda in March. This will augment its capacity by 15 per cent to 36.35 lakh tonnes. It targets a gradual increase and expects to scale peak utilisation levels on the expanded capacity by 2014-15.
However, in order to de-risk the business and reduce dependency on government subsidies, the company has consciously scaled up its non-subsidy businesses. Coromandel’s acquisition of Sabero Organics and investment in single super phosphate fertiliser maker Liberty Phosphates (56 per cent stake) is a move in this direction. Liberty now commands 14 per cent share in the market. Coromandel also intends to acquire additional 26 per cent stake in Liberty through an open offer.
A visible improvement in the performance of its pesticide subsidiary Sabero Organics will benefit Coromandel’s performance beginning this fiscal. Sabero’s revenues grew at an impressive 32 per cent during the March quarter. Sabero posted Rs 3 crore profit last quarter, compared to a loss of Rs 11 crore during the same period last year.
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