Buy Coromandel Fert with a target price or Rs 100; Angel

Angel Broking report on Coromandel Fertilisers:

Performance Highlights:

• 21.5% YoY decline in turnover: Coromandel Fertilisers Limited (CFL), a Murugappa Group Company reported a 21.5% YoY drop in turnover for the quarter ended March 2007 at Rs 436.5cr (Rs 556.1cr). For the Financial Year 2006-07, the Net Sales stood at Rs 2065.5cr, a jump of 11.8% as compared to Rs 1846.9cr in FY2005-06. In FY2006, the fourth quarter had contributed 30.1% to the annual Income from Operations, whereas Net Sales for Q4FY2007 constitutes only 21.1% of the annual turnover, which is below our expectations.
• EBIDTA falls for the quarter, shows growth annually: The total expenditure for Q4FY2007 declined by 21.6% at Rs 409.3cr (Rs 521.9cr) and the operating margin remained almost steady at 6.2%. This was despite the fact that staff cost and goods purchased for resale rose by 14% and 322% at Rs 16.4cr and 28.7cr respectively. However there was a fall in cost of raw materials and inventory of 19% and 272% respectively. On an annual basis though, CFL reported a 34.1% growth in operating profit at Rs 199.4cr for FY2007 (Rs 148.7cr) and OPM showed an improvement of 170bps at 9.7%.
• PAT up by 5.2% YoY: The Net Profit of the company increased by 5.2% YoY at Rs 16.8cr for Q4FY2007 vis-à-vis Rs 15.9cr for Q4FY2006. Although the interest cost witnessed a strong jump of 36.5% to Rs 9.5cr, there was a write-off of provision for taxes of Rs 2.8cr for Q4FY2007. The Net margin improved by 98bps YoY at 3.8% for Q4FY2007. For FY2007, CFL reported a PAT of Rs 100.7cr, a growth of 20.6% YoY (Rs 83.5cr) and a marginal increase of 35 bps in the Net margin at 4.9%.

CFL's business operations span phosphatic and complex fertilisers, insecticides, fungicides and herbicides. As one of the largest manufacturers of phosphatic/complex fertilisers with an extensive distribution network in the South and the East, CFL is well-positioned to capitalise on the persisting deficit for phosphatic/complex fertilisers in the domestic market. The company's strategic moves to secure raw material supplies through long-term supply arrangements with global suppliers, such as Foskor and Groupe Chimique Tunisien, are also a source of competitive advantage in an industry where players enjoy limited pricing power. With effect from April 2007, the domestic phosphatic fertiliser industry is likely to move to a system of import parity pricing. CFL will be a key beneficiary of the new policy regime, given its scale advantages, high cost-efficiencies and access to scarce raw materials at globally competitive prices.

Valuation:

At the CMP, the stock trades at 7.1xFY2007E and 5.4xFY2008E Earnings. We maintain Buy on the stock with a Target Price of Rs 100.