The fertiliser and nutrient segment saw a healthy 2.4 percent uptick in the margins.
Amid rising cost, Coromandel international (CORO) reported a healthy YoY growth in Q3FY18 on the back on a strong volume uptick in the fertiliser segment. Revenues at Rs 2694 crores grew 19 percent YoY with EBITDA up 34 percent and net profits up a substantial 54 percent YoY. The company saw an improvement in operating margins by 13 percent. CORO also managed to significantly reduce the interest cost by 20 percent during the quarter.
Fertiliser segment volumes surge
The fertiliser and nutrient segment saw a healthy 2.4 percent uptick in the margins. Owing to the by-annual contracts for phos acid, the segment remained largely protected from the increase in the phos acid prices during the quarter. However, post the expiry of the contract in December 17, the impact of cost increase is expected to flow-in during Q4. Existing channel inventory along with plans of limiting production along with upward revision of product prices might help CORO in minimising the impact.
Crop Protection Business witnessed cost pressure
While profits increased YoY, the margins in the crop protection segment declined 2.4 percent owing to cost pressure arising from the firmness of raw material prices post the close down of Chinese factories and overall tight raw material import situation. Lower realisation in Brazil due to piled up channel inventory resulted in lower pass-through of increased costs and added to the margin pressure.
Impact from weather
The company saw a difficult Q3 with a below normal and erratic north east monsoon in key operating geographies like Tamil Nadu, Karnataka and Rayalaseema. This led to a delay and decrease in the sowing season, the spill over impact of which would be witnessed in Q4. Healthy reservoir levels helped to maintain volumes.
DBT rollout to help reduce working capital requirement
The roll out of the DBT subsidy reimbursement system holds some promise with a potential to reduce working capital requirements for CORO. Moreover, the management believes that the implementation during the non-peak season also stands in favor of the company as this would help in normalisation of the system before the peak season kicks in.
Budgetary allotments work in favor
With a weighty exposure to the non-urea NPK segment and approximately Rs 2200 crore of outstanding subsidy, the budget was extremely positive for the company. The 24 percent increase in the subsidy allocation for the NPK fertilizer segment, announcement of building a special banking arrangement and assurance towards clearing up pending subsidies prior to full DBT implementation are key positives for CORO in the coming year.
Coromandel International has seen a price uptick of 60 percent in the last twelve months and 3 percent in the volatile last week, post which it is trading at a 2019E PE of 19.3x and EV/EBITDA of 12x. The company is positioned for a 2017 – 2019E earning growth CAGR of 32 percent. Given the conducive environment for agri companies, plans for a modified business mix, commissioning of new phos acid plant in Q2FY19 and rising share of the non-subsidy business, we see Coromandel as a long term quality play, well positioned to grow. In the current volatile markets we recommend to keep Coromandel on the radar and accumulate on dips.
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