Availability of raw material to improve in H2: Coromandel

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Coromandel International announced on Tuesday a drop of 19.82% in consolidated net profit to Rs 2.82 billion for the quarter ended Sep. 30, 2011 as compared to Rs 3.52 billion for the corresponding quarter in the previous year. However, considering the shortage of materials they company was facing, they have posted impressive results.

In an exclusive interview to CNBC-TV18, chairman A Vellayan says that he expects the raw material situation to improve in the coming quarters. "But we will be challenged by the rupee rate which will take up the net cost of raw materials," he adds.

Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.

Q: Can you take us through how things are going to pan out from here on? The market was prepared for the kind of volume fall that would come in the second quarter and inspite of it, your results were impressive. What will be the volume performance in the third and the fourth quarters as well as the realizations performance?

A: I think in the second quarter we managed to flex our product mix despite the shortage of raw materials and that enabled us to come out with reasonably good performance. In the third and fourth quarter, I think the raw material availability situation will improve. This is largely on the back of Tunisia coming back into the market after their social unrest.

However, the industry as a whole will be challenged by the rupee rate which will average in the third and fourth quarter around Rs 48-49.50 or just below Rs 50. So the challenge is that the net cost of raw materials as of now takes into consideration up to that level. If there is any further increase, there will be some resistance in terms of demand.

But as far as we are concerned, I think we are seeing fairly robust demand at the current levels which is adjusted up to the current levels of rupee depreciation. We don't see any further increase required in the third and fourth quarter.

Q: So what should we work with in terms of volume growth as well as EBITDA margins since as you correctly pointed out there will be some pressure on margins because of both the rupee and price resistance?

A: The volume levels will probably be on the increase because of easier availability of raw materials. We will also start to see some important products coming in during the third quarter. As far as EBITDA margins are concerned, I think the industry in consultation with the government has made adjustments, so these will stand protected.

Q: There was some amount of one offs this time around. Can you just take us through the one offs which we saw in this quarter and would that be reoccurring? Could we extrapolate that for the remaining FY12 as well?

A: Actually if you look at it compared to last year, the previous year's subsidy income was much higher in the last year and that's why the second quarter this year in actual numbers was lower than the previous year.

The write back on the bonds which we had was a fairly small amount and that is finished and over. But I think what will happen is that the volume drop which we have had this year will start to improve in the third quarter and into the fourth quarter.

Q: You have also announced entering into a single super phosphate and we heard from one of your peers yesterday about setting up some amount of capex with regards to single super phosphate. Just take us through how lucrative an opportunity you see it to be going forward and what sort of capex could you deploy and where would the funding come from?

A: I think with the announcement of the NBS Policy, single super phosphate as a product became attractive. World over and in developing countries like Brazil single super phosphate is a major product. At a time when international DAP prices are rising, this is a right product for India.

We have chosen to set up a plant in Bhatinda in the heartland of Punjab and Haryana to cater to that market because we have a wide range of other products like micro-nutrients, pesticides, organic maneuver, etc also into those markets. Our capex will be about Rs 116 crore. The project will take about 18 months for implementation. We have a tie up with refinery which is there which is HPCL and Mittal Refinery in Bhatinda from where we will get our Sulphur. So it makes logistic sense because Sulphur is available locally and the market is entirely local.

Q: You don't have any more fertilizer bonds left because the government has announced they are willing to buy back what's left.

A: We sold everything. The government scheme said there is a 50% compensation of loss. We have filed our claim for that and hopefully in the next few weeks or months we will get that money. We are thankful to the government for accepting our plea that liquidity is critical at a time when raw materials are short.

Q: What exactly is the amount of loss because of the sale at discount?

A: The total loss was something in the region of about Rs 60-70 crore and it has already been provided for in the earlier quarters.

Q: Just one quick word on the Sabero acquisition. How exactly is the integration panning out and what is the guidance on that front?

A: We are waiting for the SEBI to give us clearance on the public offer. There have been some procedural issues which have been sorted out which I think in the next week to 10 days will get over. So by end of this month we should be able to go ahead with the public offer subject to SEBI clearing it.

In the integration process, we have started already interacting with them in terms of discussing. What I hear is that their affluent control capacities have taken up to 50% of their installed capacities. They are starting to do better from this quarter itself.

Q: Can you just tell us what the impact on the P&L is because of the bonus debentures? What will be the outflow of cash and the inflow of money for the current year?

A: The process of actualizing this debenture will probably take five-six months. The total outflow over a four period for the company will be in the region of about Rs 489 crore. This is a golden jubilee year and we felt that this Rs 15 debenture with a coupon of 9%. So we will have a phased outflow starting from this year. This year's outflow will probably come in March and the larger outflows will come in the subsequent years. So overall the outflow will be about Rs 495 crore over a four year period.