Coromandel International - a Structural Re-rating opportunity in indian agri space !

Coromandel International Ltd - A Big beneficiary of the need to improve Agriculture Productivity

Content Index
• Coromandel International – Investment Snapshot :- Slide #3
• Our Research Desk’s views on the Stock :- Slide #4
• Fertilizer Industry Overview :- Slide #14
• Coromandel International – Company Overview :- Slide #24
• Coromandel International – Financials:- Slide #49
• Concerns & Reasoning :- Slide #51
• Conclusion :- Slide #53
“ Specialists in discovering Multibagger stocks “

Coromandel International – Investment Snapshot (as on Jun 29, 2014)
Recommendation :- BUY
Maximum Portfolio Allocation :- 3%
Investment Phases & Buying Strategy
1st Phase (Now) of Accumulation :- 60%
Current Accumulation Range :- 250 to 260Rs
2nd Phase (in case of Monsoon failure) :- 40%
Coromandel can be bought in a 2-phased manner depending on the Monsoon rains. Any deep correction in the stock should be used as an opportunity to accumulate.
Core Investment Thesis :
The company is the second largest player in the phosphate fertilizer industry and is the certainly largest private sector player in the entire Fertilizer space. The company’s current business is Government decontrolled, enabling it to price its products appropriately. The structural shift in the business mix towards more non-subsidized products and Asset light businesses would help the company have quality growth going forward.
Current Market Price – Rs. 259
Current Dividend Yield – 1.74%
Bloomberg / Reuters Code –CRIN. IN/ CORF.BO
BSE / NSE Code – 506395/ COROMANDEL
Market Cap (INR BN / USD Mn) – 73.74 /1237.65 [1 USD – Rs. 59.60]
Total Equity Shares [Mn]– 283.1
Face Value – Rs. 1
52 Week High / Low – Rs.280 / Rs.162.4
Promoter’s Holding – 63.80%
FII - 6.80%
DII - 5.65%
Other Holdings - 23.75%

Dear Members, As we had mentioned a few months earlier, Stock Picking is increasingly getting difficult with very few non-linear return opportunities. In such scenarios, it’s always better to bet on steady businesses that are available at reasonable valuations rather than chasing highly valued fast growing businesses (or) buying bad businesses that may optically look cheap. Our Investment bet is one such Steady business (Consistent 20%+ ROE) run by a good Management team (Venerable Murugappas) and available at an attractive valuation (8.5X FY-16 Cash EPS). The underlying structural growth story, Product mix changes, Inorganic growth track record and Integrated business model are added advantages to the Investment. An important and interesting aspect about this stock bet is the BIG Trigger in the form of Subsidy Reforms that can create huge tailwinds for the business and Re-rate the stock in a big way due to higher growth rates and better Return ratios. The stock for the month of June is Coromandel International, a company that straddles across the Agro-Value chain. The only Agriculture related stock that we had recommended previously and still continue to be bullish is Dhanuka Agritech. While Dhanuka and Coromandel International are not comparable considering different business models and Growth potentials, both stocks look attractive under the broader theme. Coromandel has been going through some temporary issues (Inventory Pile up, Currency Fluctuations, demand Growth) over the last 2 years and those issues are getting sorted out slowly. The company has a lot of Margin drivers (Higher Capacity Utilization, Product mix changes, Conversion realizations improvement) that could provide a significant boost of its Bottom line. We believe that the current valuations doesn’t reflect the true earnings power of Coromandel International, implying a significant returns potential. We have been tracking this stock for a long time now and the stock definitely looks relatively attractive under current Market conditions. The 5 Core reasons for our bullishness stems from the following reasons,
• Highly Efficient Core Business with Durable Moats, Industry leading metrics and Stable Growth.
• Reform triggers on Urea over the next 5 years can lead to substantial improvement in Business dynamics.
• Good Inorganic growth & Capital Allocation track record by a rational Management team.
• Structural Improvement in Business quality with product mix changes. Big Opportunity Size for growth.
• Attractive valuations for a Stable business with a high probability of a strong Re-rating.
Our Research Desk’s views on the Stock Idea

1.) Highly Efficient Core Business with Durable Moats, Industry leading metrics and Stable Growth : The Indian Agro Chemicals market is broadly divided as Nitrogen Fertilizers (Urea), Phosphate Fertilizers (DAP, Complex fertilizers, SSP, MOP etc), Generic Exporters (Technicals & Formulations), Crop Protection (Pesticides, Fungicides, Herbicides) and others (Water Soluble, Organic, Specialty Nutrients etc). Within this universe - Urea & Phosphate fertilizers are the primary agriculture Inputs and form Big % of the overall agriculture chain, but are mature segments and have lower growth rates compared to Crop protection and Other sub-segments. Urea is still heavily regulated and Government controlled but Phosphate Fertilizers have been de-controlled and regulated under the NBS Scheme with pricing freedom. Coromandel International is India’s second largest manufacturer of Phosphate related Fertilizers and has a good presence across Generic Exports, Crop Protection and Others. It does not have any meaningful presence (Only small% traded) in the controlled Urea sector. India is woefully short of capacities in both these segments as Government control has inhibited fresh investments, thereby leading to large scale Imports. While demand growth for Fertilizers is fastest in India, the supply growth is still limited. Coromandel International is easily the most efficient and lowest cost producer of Phosphate fertilizers in India which gives it a competitive advantage. The company is one of the few back ward Integrated manufacturers with strong Global sourcing capabilities built out of strategic partnerships/ tie-ups (Slide – 33). Company’s cost leadership is boosted by well located Manufacturing plants which have high efficiency. Company access to low cost electricity (Strategic Investments), Lower freight costs and Integrated business model (Front end retail stores) gives it a durable Moat that will enable it to perform consistently better in a highly cyclical Industry. The conversion costs for DAP manufacturers is highly cyclical and is based on the price movements of underlying commodities (Ammonia, Rock Phosphate, Phosphoric Acid, Sulphur etc). The company’s margins though volatile, continues to be better than peers. The company is able manage bad cycle better, because of the competitive advantages mentioned above. It’s always good to “BUY the lowest cost producer in a Cyclical Commodity business”. Almost 85% of the company’s revenues come from Phosphate fertilizer segment and hence the Policy changes here do have a big impact on the business. The company’s biggest trigger came in 2010 when Government changed

subsidy policy from an Import parity model to Nutrient based Subsidy scheme. This was a historic decision which freed the end user prices as for the first time Subsidy pricing shifted from a variable to a fixed model (Slide – 35). This decontrol has helped the Government to cut down on its subsidies gradually and provided a more favorable Market price/ Subsidy mix for companies, improving their business economics. This improvements enabled the company to Invest on additional capacities (Slide-28). The backward linkages for this increased capacities is in place. This along with the Inorganic capacity expansions has led to lot of spare capacity that can drive growth going forward. We believe that the company’s Core phosphate related business is a stable business that can grow at around 10-15% CAGR for the next 5 years and earn a decent 8% EBIDTA margin and Conversion Margins of around 45-55 $/ MT going forward. 2.) Reform triggers on Urea in next 5 years can lead to healthy improvement in Business dynamics : The NBS scheme though well intentioned has created problems for the Phosphate fertilizer industry over the past 2 years. The scheme was supposed to achieve two broader goals : Subsidy reduction & Soil nutrition balance (improving intake of Complex fertilized, SND etc). While the Government has been able to achieve the goal of subsidy reduction (Slide – 37), the soil nutrition balance has only become worse after the scheme’s implementation. The reason for this is the Price differential movement between Urea and NBS fertilizers. After the price de-regulation of NBS fertilizers, retail price soared in line with Market prices and became costlier by about 120% to the Pre-NBS price. Whereas price of Urea which is Government controlled was not increased as input costs rose and this has resulted in huge subsidy burden on the Government. The huge pricing differential between the Nitrogen Fertilizer (Urea) and Phosphate fertilizers has led to a skewed nutritional balance. The ideal nutritional balance is supposed to be in the ratio of N : P : K = 4 : 2 : 1, whereas the current ratio is about N : P : K = 8 : 3.5 : 1 denoting the low usage of Phosphate fertilizers. The over usage of Urea and this Skewed nutritional balance is a big issue as it pulls down the Yields on farm lands and causes long term damage to Agriculture productivity. For a country which needs to improve agriculture productivity at a rapid rate to feed its ever increasing population, this scenario is untenable. Reform on Urea side

Is inevitable in our view. The current Urea price is subsidized by around 80%. This misdirected subsidy is creating huge inefficiencies. Urea prices in India is less than 100$/ MT, whereas international prices are around 500-550 $’s, this differential is causing at least 15-20% (5-6 MT) of Urea being smuggled out or used for Non-Farm purposes. The Urea subsidy accounts for almost 400 Bn rupees and the impending Gas price hike can add another 120 Bn rupees to the bill. India’s current balance sheet certainly can’t take such a big bill and we believe that a Urea reform policy is inevitable and is on the anvil. While timing the decision is impossible, there is a high probability of some kind of reform happening in the next 5 years. We believe that Urea prices would be increased in small doses as Diesel price hikes, even if not a big bang price reform. This would bring some balance to the soil nutrition. The current Complex fertilizer subsidy is around 50% of retail MRP against the over 80% of retail MRP in Urea. As the Retail MRP price divergence slowly narrows, the demand for Phosphate fertilizers can really take off. To give an overview, the demand for Urea has continued to grow at over 8% in the last 4 years, the demand for DAP/ Complex Fertilizers has dropped sharply. India’s DAP/ Complex fertilizer consumption has dropped by a massive 30-40% since 2011. In addition to this skewed policy structure, post NBS excitement brought in a lot of traders who build up high inventory levels across the system. The demand collapse coincided with the sharp rises in Input prices of DAP in 2012 & 2013 and thereby liquidation of this high cost Inventory became a long drawn affair process that affected all fertilizer companies over the last 2 years. Coromandel’s relative good performance during these extremely tough years gives us strong confidence on the Management ability. The company’s ROE was around 17.5% even during the toughest periods, indicating the strength of the company. The phosphate fertilizers despite the massive price differential (>4X) with Urea are still viable as it improves the cost economics for farmers. We believe that with a better Urea pricing policy, the Phosphate space would become very healthy. We also believe that India’s DAP import bill can be reduced substantially, if Indian companies such as Coromandel International are incentivized to invest through better policy. Currently, traders make up a big part of the overall Phosphate fertilizer market. Improvement in Gas demand can reduce Phosphate fertilizer costs and boost demand in a big way. Thus, we believe that Coromandel can be a prime beneficiary of improvement in policy making in Delhi with the new Modi Government coming in.

3.) Good Inorganic growth & Capital Allocation track record by a rational Management team :
One of the biggest attractions for Investors to Coromandel International is its Promoter background. Coromandel is the flagship company of the highly respected Murugappa group, contributing to almost 40% of the group’s profits. Hence, we believe that there would continue to be strong promoter focus on this company. Murugappa group has a strong history of value creation for minority shareholders with the highest possible ethics. The best part about Murugappa’s is their insistence on high efficiency and leadership in all the businesses they are into. Group may have missed the boom in the Service oriented businesses, but certainly have a strong hold in Manufacturing sector.
The group has a new found aggression (aiming to grow 3X India’s GDP) under its Chairman – A. Vellayan. It’s only a positive that the group’s chairman cut his teeth in Coromandel International and took most of the crucial decisions in the past such as the acquisition of Godawari fertilizers in 2008. The group has never shied away from acquisitions. The group’s stated mantra is to grow through capitalizing on opportunities in Adjacencies, Backward Integration and Inorganic growth. All group companies such as Tubes Inda, Carborundum, EID Parry and Coromandel have been intelligent players in the M&A market.
The track record of the group in buying inefficient businesses and turning them around is phenomenal. To understand the reasons for this strength, we need to understand some history. During the license raj, Murugappa’s were not good at the game of using politicians to secure licenses. Out of the 17 licenses they had applied for, they were able to secure only one. So in order to grow, the group focused its energies on buying sick companies and turning them around. That tradition continues till now.
Coromandel’s has had a successful acquisition track record over the last many years (Slide – 44). The company’s recent acquisitions of Sabero Organics and Liberty Phosphates are a good indicator of the company’s abilities. Sabero’s EBIDTA has almost doubled and Liberty can improve margins substantially going forward. While Sabero gave the company a good opening in the Corp protection business, Liberty gave the company a strong foothold in the SSP market along with securing domestic supplies for Phosphoric acid and opening up new geographies such as Uttar Pradesh. We believe that both these acquisitions would be value creators considering lower acquisition price.

The group also has a strongly focus on Cash generation. The company’s Working capital cycle is certainly the best in the industry. It has been able to manage the subsidy related part of the Working capital better. We see improvement in this over the next 3 years. The group’s conservativeness has also ensured that the Debt: Equity is minimal. The current Net Debt stands around 1200 Cr and the company is continuing to retiring debt from its Internal accruals as seen from their latest balance sheet. We believe that the balance sheet has enough strength to help the company to grow inorganically going forward too. Coromandel International pays almost 30% of its profits as dividends and we believe that such dividends would continue to provide a decent floor to the share price.
4.) Structural Improvement in Business quality & Large Opportunity Size for growth :
The biggest Delta to the stock is the structural improvement in the company’s business even without the Urea reforms. The company attractive segments of Specialty nutrients, Organic fertilizers, Crop Protection and Retail business are its real growth drivers, growing anywhere between 25-30% over the last few years. These Non-Subsidy businesses can continue to grow at such fast pace for a long period of time. This segment of the company’s businesses has very high Margins and ROCE’s of about 30%. Currently, they contribute about 20% to the company’s overall revenues and 36% to the company’s EBIDTA. We believe that this contribution will increase to about 50% in the next 3 years.
With the Non-Subsidized business contributing to more than half of the company’s profits, the quality of the business improves manifold. Most of these businesses are non cyclical, fast growing and asset light, thereby leading to better Valuations. This structural re-rating opportunity can be a big boost to the stock. Anyways the company’s remaining business is also decontrolled and has the pricing freedom to grow and manage counter cyclical pressures. This decontrol has enabled the company to differentiate itself in the market place. For example, in DAP, Coromandel has started selling fortified DAP with Iron, Zinc etc. Product differentiations along with its unique delivery model through its last mile Gromor stores should help volume strength, even in tough conditions.
The biggest opportunity in this stock is the company’s capacity to build a really large end-to-end Agriculture inputs company that can capitalize on the huge opportunity that is emerging in India. We believe that the company has the right foundations to achieve it. The breadth of services continues to expand at a rapid pace. Recently the company has tied up with Japanese majors to provide Farm mechanization services to farmers. This along with

Its other initiatives such as Retail stores is giving it an unprecedented farmer connect that’s difficult for any standalone company to replicate. The company’s retail stores is reaching the 1000 mark and is slated to expand further from there. The store is one point solution for all farmer needs. It stores us third-party products in addition to Coromandel’s products. This would certainly help the company with its broad based growth going forward. In fact more than 30% of its volumes in its largest market Andhra Pradesh is sold through its own retail stores on a cash & carry basis. As this proportion improves, there can be a significant improvement in the company’s working capital cycle. The company’s management would also use the acquisition mode to plug all the product gaps it has. The fully integrated business model is no small edge for adding new products/ services under its umbrella. For example, in case of Sabero – the company has left alone the Generic exports division to operate under the sabero brand to tap the big business there, but used the Coromandel brand to grow its domestic Pesticide, Fungicide business. Sabero’s generic business is facing a strong growth potential with several big drugs going off- patent over the next few years. The company is ready to tap spaces such as Mancozeb (500 Million $), Propineb (150 Million $) etc. Company’s new Dahej plant can also manufacture synthetic pyrethroids which has a potential of about 600-700 Million $’s. Company has subsidiaries in Australia, Brazil, Argentina etc to capitalize on the global agrochemical markets. Sabero currently has over 296 registrations on 16 products in over 54 countries (183 Unique products). We believe that Coromandel has several growth cylinders firing up for it in the medium term. The domestic Sabero unit has tied up with companies such as Syngenta, Bayer etc in the formulations business. The company similar to Dhanuka is also working with Innovator companies to launch their products in India. Coromandel’s strong farmer connect, deep geographical penetration, strong distribution network (Slide – 41), financial strength etc make it an ideal partner for such global companies. All in all, we believe that the company has the potential to emerge as a strong Multi-product player in the Indian agriculture space with a dominant market share in south India. Incremental new growth would be of higher quality and less capital intense. This along with improvements in its core Phosphate business can certainly help the company to post strong financial numbers for the next many years.

5.) Attractive valuations for a good business with a high probability of a strong Re-rating : Coromandel’s immediate past numbers are not an indication of the company’s real earnings power. The temporary issues of Inventory overhang have depressed the recent numbers. Our channel checks and Management commentary clearly indicates that Inventory situation has normalized and Margins have improved in the business. Oversupply from Traders has decreased to very minimal levels and unless there is some shock in terms of the current years Monsoon, we believe that Margins would be restored to 2500 Rs/ MT over the next few quarters. We will continue to value the company’s core Phosphate business as an operation with a Mid-cycle margin of about 50$/ MT. While the cycle can move up and down, we believe that the Mid-Cycle margins are a fair assumption after taking into account the global peers cost economics. The current Margins is definitely at the low end of the cycle with high probability of improvement over the next 2 years. With relatively conservative estimates, we believe that the company should be able to do an EPS of around 25.4 Rs in FY-16. Hence, the current price is just around 10X its future earnings. This in itself looks attractive for a stable business. We must be mindful of the multiple Margin levers for the company. The current Capacity utilization is just around 65-70%. We believe that this increasing to 90% in the next 2 years can give a bigger kicker than what accounted for in our numbers. Company’s track record of ROE generation should be kept in mind. It’s a business that has been generating consistently 35%+ ROE’s in its up cycle. So, we are no way building in optimistic estimates. There are very few businesses that can generate such sustainably high ROE numbers in a relatively commoditized business, indicating Moats & Management efficiency. The big kicker for the stock is the positives in terms of possible Big Reform measures (as discussed) or Inorganic growth opportunities. We believe that the stock with a 5 year view also has positives in the form of structural changes in the quality of the business as written before. This along with the high ROE nature of its incremental business can certainly lead to a sharp valuation Re-rating. We are looking at the Urea reform only as a Add-On bonus that can certainly improve the business operations sharply. While that is the big Multibagger trigger, even without such an event – the stock can compound at decent rates.

With a solid Balance sheet, healthy Cash flow from operations, credible Management and strong return ratios, the stock has several things going for it. The big picture looks good in terms of growth potential and possible trigger. The current valuations are especially un-demanding in a buoyant market. The forward EV/ EBIDTA multiple of 7 X, Cash EPS multiple of 8.5X is attractive for Investors. All said and done, the current Market conditions call for conservative Investments as most quality stocks are trading at stretched valuations. While Investors can start accumulating the stock at current prices, the big trigger for buying strongly would be a sharp correction in case of a failed Monsoon. Such an event is sure to send these stocks spiraling downward and hence as an Investor with a 5 year view, we should take advantage of the situation and BUY into this quality business at bargain prices.
Regards,
Gokul Raj . P,
Director & Chief Investment Officer (CIO).

Industry Section

Indian Fertilizer sector
• Fertilizer Industry plays a vital role in the development of Indian agriculture which accounted for 13.7% of GDP and 11% of exports in 2012-13 .
• Agriculture sector covers economic activity which sustains two thirds of nations population apart from being a source of raw material for a large number of industries.
• In order to meet the rising food demand, balanced use of nitrogen(N),Phosphorous(P) or Potassium (K) fertilizer application is required.
• Despite 17% of the global population and 15% of livestock dependent on Indian agriculture the use of fertilizer per hector is the lowest compared to many developed and developing countries which offers enormous potential for Agricultural inputs to grow.

Indian Fertilizer – Key drivers
• India’s population has doubled to about 1 Billion in the past 29 years and is expected t reach 1.3 Bn by 2018 which is likely to result in huge spending on Fertilizer thereby providing a fillip to the sector.
• Rising income levels and higher living standards leads to increase in higher protein intake and demand for improved foods for which fertilizer and agro-chemicals are an important factor.
• The declining availability of arable land has resulted in pressure on farmers to increase yields which has resulted in enhancement in fertilizer usage.
• The effective implementation of the minimum support price has helped in improving production and productivity of crops through improved use of fertilizers.

Fertilizer Imports
• Since India imports a significant part of its fertilizer requirement for domestic consumption, fertilizer cost in local currency terms increases even if international fertilizer and input prices remain stable.
• The extent of INR depreciation is likely to be much lower given recovery in rupee thus resulting in lower subsidy burden. Unlike urea, it is possible to recover part of adverse forex movement from the DAP and MOP consumers through price hikes.
• NBS is linked to benchmark exchange rates and the government could absorb the financial impact of large forex movements by revising NBS rates in middle of a financial year.

Deficit Urea Capacity
• The Deficit in India’s urea capacity will continue in the medium term despite GoI’s announcement of a revised urea investment policy.
• There is a deficit of 8mmt as a result of no large capex in urea during the past 11 years (2002-2012) whereas the demand for urea has grown at a steady pace.
• Planning Commission estimates that demand for urea will increase to 33.7mmt by FY17 from 28.3mmt in FY11. To meet the entire 33.7mt of urea demand through domestic production, the present installed capacity will need to be increased by 10mmt by FY17.
• The lack of investments in urea was due to the absence of an attractive investment policy for fresh capex which is likely to reverse on proper reform measures implemented for the sector.

NBS Scheme for DAP/ Complex Fertilizers

Subsidy Trend
• The fertilizer subsidy burden has been rising steadily in the absence of bold policy decisions regarding urea prices and moving of urea under the nutrient-based subsidy (NBS) scheme. The rise in subsidy is the result of an increase in the quantity of fertilizers consumed, only a marginal increase in urea retail prices, an increase in prices of imported fertilizers and in the price of key inputs like rock phosphate, ammonia and phosphoric acid over the last few years.
• Urea price of INR5,360/MT in FY13 is much below both the domestic cost of production (about Rs.11,500/MT), which benefits from the provision of cheap domestic gas, and import parity prices (INR22,000/MT). The retail price of urea is lower than the import parity price by 80% and this difference is borne by GoI by way of subsidy.
• After introduction of NBS, the industry expects the GoI to move urea under NBS like rest of the fertilizers which is likely to result in lower subsidy outgo apart from better mix of NPK ratio.

NBS Impact on Prices
• In case of de-controlled fertilizers, part of the increase in input prices is largely passed on to farmers through higher retail prices. The Government of India has reduced the per kg subsidy pay-out under NBS for FY13, backed by a softening in input prices in the international market.
• Despite implementation of NBS policy and decontrolling of non-nitrogenous fertilizers the subsidy burden increased from Rs.41 Bn in FY08 to Rs.77 Bn in FY12.
• The decontrolling of non nitrogenous fertilizers led to significant increase in price differential. Fertilizers like DAP,MOP and NPK have become costlier compared to urea leading to excessive use of nitrogenous fertilizers thereby affecting soil nutrient reserves. This is likely to reverse as farmers would have to revert to non nitrogenous fertilizers to preserve soil nutrients.

Increasing Price Differential distorting demand
• The DAP prices, which are de-controlled, have risen sharply over the past three years to INR22,000/MT whereas urea retail prices, controlled by the government, have moved up marginally despite the increasing international prices
• Part of the high differential between urea and DAP prices is explained by high dependence on imported inputs for DAP, whereas GoI has allocated cheap domestic natural gas on a priority basis for the manufacture of urea.
• Phosphorus-based fertilizer manufacturers who have the option of increasing retail prices had exercised that option to a large extent in 2011 and 2012 and now some consumer resistance to price increases in decontrolled fertilizers has emerged.

Government Fertilizer subsidy Trend (Rs.per tonne)

Company Section

Coromandel International – A Snapshot
• COIL, with a production capacity of 36.25 Lakh tons of DAP and complex fertilizers, is the leading private sector player in phosphatic fertilizers in India.
• With the acquisition of the Liberty group of companies, the Company has accelerated its planned entry into the north/ western SSP sector and currently has the capacity to manufacture over 10 lakh tons of SSP.
• COIL has a complete range of products to offer including Urea as it has bagged government contracts for handling Urea at Kakinada and Karaikal ports.

Coromandel Business Mix

Coromandel International – Key Strengths

Leading domestic player
• Coromandel holds a leading market share in overall NPK(22%) and SSP(16%) consumption in India. Coromandel is the third largest producer of decontrolled fertilizer in the country dominating 12.1% of the total consumption after IFFCO and Indian potash.
• Coromandel has a strong distribution network across South, West and North India. Further, the acquisition of Liberty Phosphate further strengthened its distribution in the northern and eastern part of India.
• Coromandel is likely to benefit from demand up cycle being the leading producer of decontrolled fertilizer.

Strong capacity expansion & utilization
• COIL’s production capacity expanded three folds in the past seven years with revenues growing at about 36% during the past 5 years which is far above the industry growth rate.
• Despite COIL increasing capacity by 7x its capacity utilization has been around 70% till FY12.In FY13 their capacity utilization dipped to 63% on account of unfavorable climatic conditions. However, considering the industry scenario this is an exemplary performance.
• A favorable monsoon in key markets of AP, Maharashtra, Karnataka and Tamilnadu will help the company to have capacity utilization of 70%+ which will enhance its revenues.
• Coromandel has been consistently making acquisitions which might also increase its capacity as done in the acquisition of Godavari Fertilizers and chemicals which helped the company to increase capacity from 13.1 Lakh MT to 32.6 Lakh MT.

Cost Leadership

State of the art manufacturing facilities

Strategic Alliances & Tie ups
• COIL has also tied up with Mitsui, Japan to supply 0.30 mn tons of sulphur and 0.60 mn tons of ammonia. Apart from this COIL has also tied up with Conpotex, Canada to supply 0.50 mn tons of potash.
• COIL has tied up with 0.90 mn tons of rock phosphate with Togo Algeria ,Israel with all these tie ups increasing visibility for uninterrupted raw material supply.
• In order to ensure continuous supply of raw materials COIL has formed JV and strategic relationship with global raw material suppliers. COIL has about 14% stake in Foskar and entered into a JV with TIFERT and supply agreement with ICL,GCT(Tunisia) and Proschem apart from captive production of 0.23 mn MT taking the combined capacity to 1.23 mn tons.

Global Backward Alliances

Strong Marketing Network in South India

Subsidy Evolution
• India decontrolled phosphatic fertilizer with effect from April1,2010 under NBS policy which applies to P&K fertilizers and not urea. Subsidy is fixed based on the import prices of various nutrients adjusted for the MRP. “P” based on DAP , “N” based on Urea and “K” based on Potash and “S” based on Sulphur.
• In India The aim of the government is to ensure availability of food at an affordable price. Therefore, the fertilizer sector is highly regulated. Over the past ten years, there was no significant increase in the farm gate price of urea and the difference between cost of production and farm gate price was paid as subsidy to the farmers (e.g. Cost of producing one tonne of urea using natural gas is ~` 10,500-12,000/tonne, compared to farm gate price of ` 5,130/ tonne).
• Under the NBS Policy MRP/Farm gate prices has been decontrolled - Companies are free to set the price. The subsidy is announced for the year and any increase / decrease in cost of inputs will have to be addressed by companies through change in farm gate prices – Fixed subsidy & variable farm gate prices.

Structural shift towards Lower Subsidy

Historical MRP of P&K Fertilizer

Non-Subsidized Business
• COIL is India’s first company to manufacture an market Sulphur fertilizer under the brand name G-Sulphur and holds about 60% market share. COIL’s G-Sulphur recorded a 14% YoY growth an continues to maintain its leadership position.
• COIL also holds 20% share in water soluble fertilizer and the company expects this segment to record about 20% CAGR growth in the medium term. COIL has also introduced organic fertilizer with new variants and set up a new plant in captive sugar units of EID.

Agri Retail Business
• In order to reduce dependence on distributors COIL is consistently expanding its agri retail chain apart from enabling the company to have a direct communication with the end customer thereby enabling the company to understand the needs of the end customer.
• COIL has also planned to increase its franchise in Karnataka, Maharashtra, Orissa, West Bengal, UP, MP, Tamilnadu, and Chhattisgarh thereby taking the total franchise outlets to about 1000 over the next 3 years from the current 610.
• COIL’s decision t increase its franchise would also enable it to push Agri-input sales business like water soluble fertilizer and crop protection chemicals.
• In retail SBU non fertilizers have grown by about 26% YoY and distributed roughly about 20% of fertilizer volume through this channel in FY13.

Crop Protection SBU
• Crop protection SBU plans to leverage its presence in Brazil, which is the biggest and fast growing market for global agrochemicals industry, to export more of products from combined range of COIL and Sabero portfolios.
• Domestic formulations business was able to overcome the impact of variable monsoon in critical states and achieved a growth of nearly 10% over previous year. Sales through Company's retail outlets in AP and Karnataka continue to grow well with increased range of products. The SBU also introduce dnew specialty fungicides through its strategic tie-ups with few MNCs.
• With its increased range of captive technicals, strategic partnerships to source new products, strong pipeline of off-patent products and presence in growing geographies and segments the SBU is set to grow at a faster pace with a vision to be a global player in the agro chemicals industry.

Strong Distribution Set-Up
• The width of distribution and farmer engagement is key for industry players to be able to differentiate their offerings given the generic nature of the Indian crop protection market and the lack of exclusivity from retailers and dealers .
• While breadth of reach through third-party retail channels is important, there is sustainable advantage to be achieved through direct farmer outreach programs. Here is where Gromor stores help a lot.
• According to some field surveys done it was found out that the demonstration of product strength through field trials has proved to be the most successful method when launching a new product in most of the markets and companies that have stronger farmer engagement programs are better placed vs. their peers and such programs can be instrumental in establishing brand equity.
• COIL offers services like Farmer helpline, transparent pricing and sale price disclosures , Advice on best and optimum pesticide usages apart from Comprehensive farm solutions under one roof which has a good reputation among farmers for the products.

Strong growth in key states
• COIL’s primary markets are growing at above industry average with significant market share in Andhra Pradesh, Maharashtra, Karnataka, West Bengal, Tamil Nadu, Madhya Pradesh and Orissa. COIL saw improvement in its market share in Andhra Pradesh improve from about 39% to 46% in Q2FY13.
• COIL’s key states are high phosphatic fertilizer consuming areas and account for 51% of the total phosphatic fertilizer in the country. Andhra Pradesh, Maharashtra and Karnataka accounted for 40% of the total phosphatic and potassic fertilizers and have grown above industry average of about 15.7% mainly due to better irrigation.

Conversion Margins

Inorganic Growth

Liberty Acquisition
• COIL acquired controlling stake in Liberty Phosphate Ltd at about Rs.3.5Bn apart from acquiring 100% stake in Liberty Urvarak and Tungabhadra fertilizer and chemicals
• The liberty group has six existing plants located in Baroda, Udaipur, Pali, Kota, Nirmani and Hospet and is expected to close the FY13 with combined capacity of 0.96MT and combined licensed capacity of 0.81m MT. LPL is setting up a 0.13m MT Greenfield SSP plant at Rae Bareli.
• The acquisition of Liberty will make COIL amongst India’s leading SSP manufacturer with a total capacity (COIL plus Liberty group) of over 1m MT.
• The acquisition of Liberty provides a pan India presence apart from bringing cross selling opportunity on augmented distribution network. Further post acquisition COIL has been able to grow the company much faster due to its vast experience in agriculture though FY13 EBITDA dropped due to bad market conditions.

Sabero Organics Acquisition
• COIL acquired Sabero organics and had successfully turned around the company by improving its product mix and capitalizing on the opening up of product level opportunities.
• Another major positive development has been the share of 'off – patent' molecules going up and it now stands at 77% of the total global Agro-chemicals business. 'Generics 'constitute as much as 51% of the Industry size. As a result of the falling levels of R & D spends in Agro-chemicals, the share of 'off – patent' generics in the total business is set to go up further which will result in huge opportunities for sabero organics.
• The fungicides sales, a key segment of Sabero business, had outpaced the growth of the Industry and this trend of higher growth of fungicides is to continue in the coming years.

Strong Working Capital Management
Inventory Days by company Payable Days by company
• COIL has been able to enjoy higher credit days of 96 days , which has helped the company to keep its working capital cycle under control.
• COIL’s working capital cycle has increased from about 28 days in FY12 to about 36 days in FY13 which is far better than its industry peers .
• COIL’s receivable days increased from 35 days in FY12 to about 73 days in FY13 in line with the industry trend. Receivables were affected due to high inventories in the system largely with distributors.
• COIL’s cash conversion cycle is expected to improve going forward on the back of reduction in debtor and inventory days.

Robust Financials

Financials

Earnings Projection – P&L Account
• COIL’s revenues are expected to grow by 27% and 14% in FY15 & FY16 driven by volume growth and reforms in the fertilizer sector which will increase demand for phosphatic fertilizers.
• COIL is likely to report operating profit of Rs.1172.62and Rs.1402.07 in FY15 and FY16 respectively with EBITDA margins of about 9% and 9.5% in FY15 and FY16 respectively.
• COIL is likely to report PAT of Rs.578.85Cr in FY15 and Rs.719.94Cr in FY16 with an EPS of Rs.20.44 and Rs.25.42 in FY15 and FY16 respectively.
• COIL is likely to incur about Rs.238.6 Cr and Rs.2721.95Cr in FY15 and FY16 respectively as Interest charges.
• COIL’s depreciation in FY14 was at Rs.82.03Cr in FY14 and is likely to be at Rs.107.02 Cr and Rs.115.18Cr in FY15 and FY16 respectively.
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DESCRIPTION
Mar-13
Mar-14
Mar-15E
Mar-16E
Net Sales
8520.59
9338.69
11890.75
13550.7
Other operating income
39.65
41.83
43
47
Net Sales & Other Operating Income
8560.24
9380.52
11933.75
13597.7
Total Expenditure
7825.73
8641.91
10820.58
12263.38
PBIDT (Excl OI)
734.51
738.61
1113.168
1334.32
Other Income
67.03
61.37
59.45
67.75
Operating Profit
801.54
799.98
1172.621
1402.07
Interest
176.67
210.96
238.68
258.36
PBDT
624.87
576.41
933.95
1143.71
Depreciation
58.54
82.03
107.02
115.18
PBT
566.33
494.38
826.93
1028.53
Tax
122.34
149.53
248.08
308.56
Profit After Tax
443.99
344.85
578.85
719.97
EPS
15.7
12.05
20.44
25.42

Concerns & Reasoning
1.) Irregular monsoon season :
Irregular or delay in monsoon could impact fertilizer demand and may lead to inventory pile up in distribution channel. This will have significant impact on COIL’s capacity utilization, profitability and liquidity position.
2.) Subsidy disbursement delays :
COIL has about Rs.12.6 Bn as subsidy outstanding and any delay in subsidy disbursements from hereon could put significant pressure on its liquidity position. Further, this will put pressure on its working capital requirements of the company.
3.) Genetically modified seeds :
The increasing production of more and more genetically modified(GM) seeds could reduce application of fertilizers by about two third without impacting the yield of crop.
4.) Delay in capacity Expansion :
Any execution delay in capacity expansion at the Kakinada plant will lead to an opportunity loss for the company and downside risks to our estimates.
5) Too much dependence on imports for raw materials :
Though COIL has tied up for phosphoric acid and rock phosphates, any issue on the suppliers’ front may pose a hazard.

Price Chart
• Coromandel International’s share price has been beaten down strongly over the last 3 years on account of poor Financial performance.
• The volumes in the counter are large enough for any large Investor to enter and exit with minimal Impact cost.
• While the stock has recently rallied, it is still not been able to cross its 2010 highs. It needs to rally another 40% to take out its previous peak of 361 Rs/ Share.
Share Holding %
Mar
Dec
Sep
Jun
2014
2013
2013
2013
Promoters
63.79
63.79
63.80
63.82
FII
6.80
7.50
6.57
6.27
DII
5.64
6.02
7.00
7.22
Others
23.77
22.69
22.63
22.69

Conclusion
While we have always preferred high growth businesses with Asset light businesses models such as Dhanuka Agritech for our Multibagger Ideas, Coromandel International is an old-school styled value investment. We are buying a well run capital intensive business that is trying to transform itself from a efficient commodity manufacturer to a full scale Agro-Chemical player that is at the forefront of boosting Agricultural productivity in India. We believe that the company’s inherent strengths along with its visionary management would help this transformation to be successful. Our analysis clearly shows that the company has a big positive Delta to almost every Government reform that we are speaking about (CAD control, Subsidy Rationalization, Interest rate deduction, Shorter Government payment cycle, Agriculture productivity boost etc). Hence, we believe that Coromandel International is a good stock to play the theme of Narendra Modi’s big Economic agenda. The inherent potential of Coromandel International is much higher than its present value and we believe that as the Government control in this sector slowly recedes and Market forces start dominating the sector, Coromandel would be able to realize its true potential. We believe that the impending fears about a bad monsoon this year would allow us to BUY a quality business at attractive prices. We are looking at this stock as a stable stock that can compound at mid-teens with a big trigger for generating Multibagger returns, in case there is reform on the inevitable Urea subsidy. Coromandel International is currently available at around 6.7X FY-16 EV/ EBIDTA, 10X EPS, 8.5X Cash EPS for a company that is expected to generate about 25% ROE in that year. We believe that such reasonable valuations are very rare in current market conditions. More importantly, the long term structural story can ensure that Earnings growth and ROE improvement gets accelerated from thereon. This would ensure that the stock gets a much higher Valuation, leading to strong Investor returns.

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Coromandel International - a Structural Re-rating opportunity in indian agri space !

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