Ruchi AgrawalMoneycontrol Research
Coromandel International posted strong Q2 numbers with a robust margin expansion led by both internal efficiencies and an overall favorable macro environment. EBITDA expanded a whopping 47 percent YoY at Rs 567 crore. Net profit, at Rs 342 crore, was up 57 percent YoY and 183 percent sequentially. Revenue came in at Rs 3646 crore, down 2 percent YoY mostly due to flat revenue growth in the fertilizer business (around 79 percent share).
What benefitted margins?
Coromandel consistently enjoyed strong margins in Q2. However, Q2 saw above average profitability in the fertilizer business and improved margin expansion in the non-subsidy business, excluding crop protection.
This was majorly on account of 1) a near 30 percent YoY fall in the interest costs which the management expects to continue in the coming quarters; 2) a normal monsoon in the southern peninsula which augmented demand 3) higher phosphoric acid production due to adequate availability of phosphoric acid raw material 4) higher operating leverage with better capacity utilization at its plant facilities (near 100 percent utilization) 5) planned reduction in channel inventory leading to lower working capital requirements and balance sheet receivables 6) increase in cotton and sugarcane crop acreage which are major crops for Coromandel 7) strong uptick in export volumes especially in non-subsidy business 8) commissioning and stabilization of the Mancozeb facility at Dahej (47 percent YoY growth in sales volumes) 9) strong sales volume growth for high margin specialty nutrient products.
DBT implementation outlook
The implementation of the Direct Benefit Transfer Scheme (DBT) is a key development to watch out for in the coming months. It has been planned in a phased manner by the government. Most south Indian states where Coromandel has maximum exposure will go live in January next year. Given the fact that DBT is being implemented in Q4, which is typically a slack quarter, coming as it does towards the end of Rabi season, it will shield Coromandel from hiccups, if any, that arise from the live rollout.
The 2017 monsoon was erratic, unevenly distributed and a tad below normal at 94 percent, especially in North and central India. However, the southern peninsula where Coromandel has maximum exposure received near normal monsoons which helped Q2 volumes and sales.
The late withdrawal of the southwest monsoon has improved the reservoir levels at the southern reservoirs (around 65 percent in October) and has led to an improvement in the soil moisture levels which would benefit Rabi sowing and demand for the company’s products.
IMD has predicted a normal north east winter monsoon which is important for southern peninsula that receives 30 percent annual rains from the winter monsoon. This would help in augmenting sales in the upcoming Rabi season.
The prices of ammonia and sulphur have seen a sharp upswing lately which would lead to higher phosphoric acid production costs in the second half. The company has already signed raw material contracts up to December 2017, after which there might be a surge in costs. Nonetheless, the management is confident of achieving FY18 EBITDA per tonne of around Rs 2500 for the fertilizers business given benefits from operating leverage and new products.
The management highlighted that the company is facing challenges in the export of some molecules, which has partly negated the growth of Mancozeb sales, and dragged down growth of the overall crop protection business.
The management also indicated an increased focus on specialty nutrition and introduction of new products which would help in further enhancing volumes in the coming quarters.
The stock currently trades at a PE of 20x FY18 earnings and 17x FY19 earnings and a EV/EBITDA of 12x (FY19). This falls majorly in line with competition. With growing share of the non-subsidy business, margin expansion in the fertilizer business, greater operating leverage and visibility of growth in crop protection business, we expect a healthy topline growth in the coming quarters.
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