Kapil Mehan, MD, Coromandel International, says that the fertilizer company is going through structural change and realistic prices of fertilizer has led to moderate demand. The company has recently acquired Liberty Phosphates which the company feels is a move to derisk their portfolio. The deal will be funded from internal accruals.
Below is the edited transcript of his interview to CNBC-TV18.
Q: What is the rationale of buying a controlling stake in Liberty Phosphates and how will you fund this transaction?
A: The funding will be done through internal accruals. We have a good long-term debt to equity ratio. We always keep it below 0.75 percent but currently it is at about 0.37 percent to 1. The rational for acquiring single super phosphate (SSP) is that this is one fertilizer which can be made through indigenous raw materials also.
So, almost 50 percent of the production of Liberty is through rock phosphate which they source from Rajasthan mines. The entire sulfuric acid which is required is also sourced internally. So the currency impact is less because most of the other P205 fertilizers are imported. So there is a degree of stability and derisk in this particular segment.
It is a very versatile fertilizer specifically for some crops as well as affordability for farmers. A bag of SSP would sell for about Rs 350 against Rs 1250 a bag for di-ammonium phosphate (DAP). This product completes our entire range so that we are able to address almost every segment of the farmers and the crops, the requirement of phosphate fertilizers.
Q: When will this acquisition be EPS accretive and how will it add to the revenue and profit profile of Coromandel?
A: Liberty is a profit making and well performing companies in the segment. We believe that in first year itself it will be EPS accretive.
Q: You have reported fairly ordinary numbers by your standards with sharp erosion in margins. Do you see this kind of painful performance continuing for a few more quarters?
A: We have to see it in right perspective because one quarter performance for any agriculture business is not an indicator of what the fundamentals of the business are. The industry is going through a structural change where after a long time the prices to farmers are becoming realistic and coming to the levels of the global prices with subsidies being reduced under the nutrient based subsidies.
Five years ago we used to collect around 15 percent from the farmer and 85 percent from the government. Today, we collect only 33-34 percent from the government and balance percent from the farmers. So prices to farmers have gone up
The seasonal factors have not been very good so some demand erosion has taken place. And on the other hand urea – a nitrogenous fertilizer, continues to be highly subsidized and that causes a bit of distortion and motivation for the farmers to apply more urea than phosphate fertilizers but this is a transitive phase. We are very bullish on agriculture and food industry and that this will continue to drive our long-term vision.
Q: You said you will fund this acquisition through internal accruals, what is the exact cash on books that the company has currently and how much market share do you think the combined entity will have post the acquisition?
A: In the SSP segment, we will have around 17-18 percent market share and that will make us market leader in this segment. We always have about Rs 600-700 crore of cash in our balance sheet.