FM underplays subsidy for low fiscal deficit: Coromandel

A Vellayan, chairman of Coromandel International , in an exclusive interview with Reema Tendulkar and Gautam Broker, shares his views on the budget 2011 and its impact on the fertilizer space. He believes the government underplays the initial allocation to the fertilizer sector in order to show lower fiscal deficit, every year. “However, in the first and second supplementary the government brings up the balance that is required,” he says.

Below is verbatim transcript of A Vellayan interview with Reema Tendulkar and Gautam Broker Also watch the accompanying video.

Q: Are you anticipating any kind of policy action from them in terms of decontrol?

A: This is a common feature every year. The FM underplays the initial allocation to the fertilizer sector in order to show lower fiscal deficit, however, in the first and second supplementary the government brings up the balance that is required

Q: How much do you think is a realistic subsidy burden which will be required by fertilizer space?

A: I think about Rs 80,000 for the year 2011-2012, given the current trend of raw material prices.

Q: Coromandel International has seen an upgrade from Bank of America, Merrill Lynch; they are expecting a 40% upside. The thesis is that they have a strong balance sheet and improving revenue mix and margin resilience. On that margin point you will definitely be facing some raw material cost pressures at this point. Where do you think margins will stabilize? Would you see about 100 to 150 basis points cut from the margins that you were making a quarter ago?

A: Given the range of our products, depending upon raw material price increase, subsidy rates and MRP increases, there is a lot of flexibility in terms of how we can change our mix. So we are confident that we can maintain our margins overall.

Q: By changing the product mix, you will definitely be able to maintain the margins?

A: Yes we will be able to. Part of our strategy is by gradually shifting into non-subsidy products – we have water soluble, pesticides, organic manure, and are now getting into farm mechanization. So, now nearly more than 25% of our revenues or income is coming from subsidy products.

Q: Just a few points which came out of the budget, one of them is going to be the NBS roll out for Urea. The government said that it is under active consideration but no timeline was given. When do you expect in terms of timeline that we might hear something?

A: We don’t have a clear answer on it.

Q: What’s the kind of benefit you see on account of the infrastructure status which is granted to you all?

A: On the fiscal side, we are expanding capacity by about 20-25% in Kakinada and the entire investment will be subject to lower customs duty, as well as the fiscal benefit of tax right off on 100% basis. We also see a benefit from the dividends tax from out joint ventures abroad in South Africa, Malaysia and Central Asia.

Q: On account of this, do you see any kind of financial impact, in terms of EPS that will accrue to you all in the coming years?

A: We don’t make projections but we are confident about growing, going forward.

Q: The point you made about your non subsidy business. Reports indicate that about 24% of your EBITDA could come from sell side of the business in FY11. Do you expect it to improve by about 10% to 15% in the coming fiscal, in FY12?

A: We are in the initial stage, so there is some brand building involved. There is some groundwork involved, however, our greater emphasize is in increasing this percentage to 30% to 40% over the next few years, as MRPs increase and non-subsidy products come  play.