Coromandel International - Gaining ground - Edelweiss

We recently met with the senior management of Coromandel International (Coromandel) and visited the Managromor retail outlet. The company indicated that excessive channel inventory will be liquidated by September and is currently experiencing good off-take from dealers/farmers. The company's plants are currently operating at full throttle and likely to continue till December. This is expected to result in 35% YoY volume growth during FY14. The company is confident of achieving EBITDA margin of INR2000/MT in manufactured fertilisers despite the sharp rupee depreciation as softening raw material prices have offset the impact. Non-subsidy business continued to perform well. We believe that the stock is valued at current subdued earnings, which is at a steep discount to real earning power. Maintain 'BUY'.

Subsidy business: concerns receding, INR/USD, the key

India's non-urea fertiliser inventory eased to 4mnMT in July (Apr 2013 -7mnMT). The current phosphoric acid (P2O5) prices of USD715/MT are based on DAP prices of USD480/MT. The company expects further softening of P2O5 price as global DAP has corrected to USD420/MT recently. It has received fertiliser subsidy till June 2013. This coupled with realisation of trade receivables resulted in a significant improvement in balance sheet. Power cost during FY14 is expected to be lower due to strategic investment AP Gas Power Corporation.

Non-subsidy business: Gaining momentum

Sabero Organics is operating at over 70% capacity utilisation. The INR depreciation augurs well as the company primarily depends on exports. Strong growth continues in organic manure and specialty nutrient businesses.

Outlook and valuations: Positive; maintain 'BUY'

We are positive on Coromandel owing to its expanded capacity, Sabero's turnaround and strong growth in non-subsidy business. However, exchange rates remain a key risk. We maintain 'BUY', with the target price of INR251/share based on DCF.

Source : Equity Bulls

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