Coromandel International - Near-term challenges persist; trim expectations - Prabhudas Lilladher

Coromandel results disappointed once again despite the fact that expectations were already muted on the earnings front. Consolidated EBITDA margins dipped to multi-year lows of 5.6%. Though offtake has improved post arrival of monsoons, we remain cautious in the near-term. Excess inventory is likely to limit incremental volume growth for another couple of quarters. Further, the recent increase in prices can delay the volume recovery in the near term. Fertiliser EBITDA margins continue to remain under pressure due to increase in costs as well as excess inventory. We have trimmed estimates by 23%/19% to Rs13.8/18.2 for FY14E/15E, respectively, to reflect margin pressures in the fertiliser business. Resultant, target price is cut to Rs170 (previous Rs220). However, we maintain 'Accumulate' due to limited downside from the current levels.

Revenues significantly ahead of estimates; however, margins play spoilsport: Coromandel reported consolidated sales of Rs18.6bn, flat YoY, driven by higher volumes. Overall complex fertiliser volumes stood at 395,444mt (PLe: 300,000mt). However, margins dipped to 5.6% which was significantly lower than an estimate of 10.0%. Our analysis suggests that fertiliser EBITDA/mt was ~Rs1,500/mt during Q1FY14 which resulted in margin dip. Interest cost for the quarter stood at Rs701m, 30% YoY (higher than est of Rs520m) due to delay in subsidy receivables. Adjusted PAT stood at Rs 171m, -85% YoY (PLe: Rs 371m).

Though fertiliser consumption has picked up; however, we remain cautious in the near-term: Though complex fertiliser offtake has picked up substantially with the timely arrival of rains; however, we remain cautious in the near term. Complex fertiliser inventory in the system currently stands high at 5m mt (7m mt at end of FY13) and is likely to limit incremental volume growth for another couple of quarters. Further, the recent increase in prices is likely to delay the volume recovery in the near term. Management maintained its guidance of 70-80% capacity utilization in the manufacturing business. However, we remain skeptical and have modeled for capacity utilization of 60%.

Margins likely to remain under pressure in the near term: Management guided for EBITDA/mt of Rs2,000/mt over the medium term in manufactured complex fertiliser business. We believe margins are likely to remain under pressure in the near term. Though company has raised prices on DAP by Rs1,500/mt, however, any further rupee depreciation or any reversal in global raw materials prices can disturb the momentum. We believe further increase in prices would be a difficult alternative as demand would take a setback at such high prices.

Source : Equity Bulls

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