Date: Nov 11, 2019 - ValuePickr Forum...2019/11/11 · Coromandel International is a flagship...

Date: Nov 11, 2019

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Equity Research Pick of the Week – PCG Research

Strong Position in the Industry

Favourable Government Policies

Good Rainfall Gives Strong Rabi Outlook

COROMANDEL INTERNATIONAL

INDUSTRY

CMP

RECOMMENDATION ed

ADD ON DIPS TO

TARGET

TIME HORIZON ed

Fertilizers

Rs. 466.5

Buy at CMP and add on declines

Rs. 470 - 440

Rs. 560 Rs. 390

4 quarters

Backward Integration to Help Improve Margins

Growth Opportunities in Crop Protection Business

Mana Gromor –A one-step retail solution

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Shareholding Pattern % (Sep 30, 2019)

Promoters 61.72

Institutions 21.94

Non Institutions 16.34

Total 100.00

HDFC Scrip Code CORINT

BSE Code 506395

NSE Code COROMANDEL

Bloomberg CRIN

CMP Nov 8 2019 466.5

Equity Capital (cr) 29.24

Face Value (Rs) 1

Eq- Share O/S(cr) 29.24

Market Cap (Rs cr) 13,647.9

Book Value (Rs) 115

Avg.52 Wk Volume 173269

52 Week High 519.9

52 Week Low 336.5

Red Flag Price Level 390

PCG Risk Rating * Yellow

Make Hay while sun shines!

Encouraging Government policies, new product launches, good monsoon and gains from backward

integration are factors working in favour of Coromandel international. Government’s subsidy receivable are

declining and as the processes of DBT stabilises we expect working capital requirements for the fertiliser

companies to improve substantially going forward. New products in crop protection business is likely help

maintain growth momentum. Monsoon rains in India are 10% above average in 2019 and the highest in 25

years as seasonal rainfall. As backward integration plans starts baring fruits, we expect company to improve

its margins and post robust growth in profits. We believe company will exhibit better results in second half

and that momentum to carry forward in next year as well. It is the right time to invest in Coromandel

International.

Company Profile:

Coromandel International is a flagship company of the Murugappa Group and is a subsidiary of E.I.D Parry

(India) limited which holds 60.6% of the equity share capital in the Company. The Company operates

through two major segments: Nutrients & other allied business and Crop Protection, offering farming

solutions comprising of Fertilisers, Crop Protection, Specialty Nutrients and Organic compost. Coromandel

International is India's 2nd largest Phosphatic fertilizer player and 5th largest Crop Protection Chemical player.

The Company also operates a network of around 800 rural retail outlets under its retail business across

Andhra Pradesh, Telangana, Karnataka and Maharashtra.

The Company has 16 manufacturing facilities. The Company’s products are marketed all over the country

through an extensive network of dealers and its own retail centres. The crop protection products are exported

to various countries.

Investment Rationale: Strong Position in the Industry

Favourable Government Policies Has Changed Dynamics of Industry Good Rainfall Gives Strong Rabi Outlook



Mana Gromor –A one-step solution

View and valuation: New product launches, Favourable Government policies, good monsoon and backward integration are key

positives for the company. We have estimated revenue to grow around 4% and net profit at 20% CAGR over

FY19-21E on the back of margin improvement and lower tax expenses under new tax regime.

The stock is trading at 13x of FY21E EPS, we recommend a BUY for Coromandel International at CMP of Rs.

466.5 and add on decline of Rs. 440 for the Target of Rs. 560 for next 4 Quarters.

FUNDAMENTAL ANALYST

Nisha Sankhala [email protected]

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Financial Summary:

Year Ending March (Rs cr) FY18 FY19 FY20E FY21E

Sales 10947 13225 13026 14329

EBITDA 1285 1480 1510 1717

Net Profit 664 743 873 1038

EPS (Rs) 22.7 24.6 29.9 35.5

P/E 20.5 18.9 15.6 13.1

EV/EBITDA 12.8 11.1 10.9 9.6

Sales 10947 13225 13026 14329

Key Highlights

Coromandel International Ltd, one of India’s largest integrated Agri solutions providers is a flagship company of Murugappa Group.

Favourable Government policies and especially DBT Roll out are all set to positively change the dynamics of industry and being a market leader, CIL has huge opportunities lying ahead.

India witnessed highest rain fall in 25 years this season, reservoirs level are also above 10 year’s avg. This will help farmers expand areas under winter-sown crops. This in turn will bring demand for fertilizers and crop protection products.

China’s new environmental policies has caused price increase in key raw materials of the company. But now the margin will start to improve as prices has stabilized and management has started focusing on backward integration.

We have estimated revenue to grow around 4% and net profit at 20% CAGR over FY19-21E.

The stock is trading at 13x of FY21E EPS, we recommend a BUY for Coromandel International at CMP of Rs. 466.5 and add on decline of Rs. 440 for the Target of Rs. 560 for next 4 Quarters.

Investment Rationale:

Strong Position in the Industry

Coromandel International has diversified portfolio of products and services ensures presence across the

entire value chain of agricultural activities – from ‘Seed to Harvest’ cycle. Company’s retail stores and

agronomists ensure the last mile advisory and delivery of superior crop management solutions.

Company is amongst the pioneers and market leaders in Organic Fertiliser, Specialty Nutrients,

Phosphatic fertilisers in India. It operates through two major segments: Nutrients & other allied business

and Crop Protection, offering farming solutions comprising of Fertilisers, Crop Protection, Specialty

Nutrients and Organic compost. CIL is India's 2nd largest Phosphatic fertilizer player and 5th largest Crop

Protection Chemical player. CIL’s share in the Indian phosphatic fertilizer market rose to 16.3% in FY19

from 14.6% in FY17. Company has significant presence and brand equity in high agricultural inputs

consuming South, West and East India markets.

The Company has 16 manufacturing facilities. Its products are marketed all over the country through an

extensive network of dealers and its own retail centres. The crop protection products are exported to

various countries.

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Product segments & offerings:

Source: Company, HDFC sec Research

Nutrient and

other allied

businesses

Phosphatic

Fertilisers & SSP

Specialty

Nutrients &

Organic Fertiliser

Retail

Crop

Protection

Technical &

Formulation

Favourable Government Policies Has Changed Dynamics of Industry Government continued its initiatives targeting doubling of farmer’s income by 2022, spanning in the areas of crop insurance, soil health and

balanced nutrition, income security, market and credit access and infrastructure development. Key efforts made are MSP > Cost of Production,

Institutional credit at US$ 17bn, Increased allocation under crop insurance, National Agriculture Market (e-NAM), PM-KISAN Yojana, Upgrade

existing 22,000 rural haats into Gramin Agricultural Markets (GrAMs) etc.

The Government, in Mar-18, decided to implement the direct benefit transfer (DBT) for fertiliser subsidy payments across India, seeking to prevent

diversion of fertilisers for commercial use and generate data on the usage of the nutrients to help farmers. DBT would entail 100% payment to

fertiliser companies on the sale of fertilisers to farmers at subsidised rates.

Companies have had teething issues like the inability to generate DBT bills due to system failures, software glitches, poor power and internet

connectivity in the rural areas, maintenance of POS machines, etc. These issues are expected to be resolved in the near future, post which the

subsidy payments are likely to be quicker and smoother. This would free up working capital requirements and also reduce their interest expenses,

thereby leading to higher profitability in the coming quarters.

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Good Rainfall Gives Strong Rabi Outlook

Monsoon rains in India were 10% above average in 2019 and the highest in 25 years as seasonal rainfall. Water levels in India’s main 120

reservoirs are at 90% of their storage capacity as on Oct. 31 against 68% a year earlier. The average for the past 10 years is 70%.

This will help farmers expand areas under winter-sown crops. This will improve earning potential of farmers and bring demand for fertilizers and

crop protection products. Management has also guided for good H2FY20 performance.

REGION WISE RAINFALL POSITION

Source: IMD, HDFC sec Research

REGION WISE STORAGE POSITION

Source: CWC, HDFC sec Research

Regions

Actual Rainfall

(mm)

Normal Rainfall

(mm)

% Departure from

LPA

Country as a whole 968.3 880.6 10%

Northwest India 586 599.5 -2%

Central India 1262.8 976.6 29%

South Peninsula 840.9 726.2 16%

East & northeast India 1240.7 1410.4 -12%

19

.2

19

.4

34

.8

44

.1

52

.2

16

.5

17

.2

33

.0

39

.8

46

.8

16

.0

13

.9

19

.6

31

.9 34

.2

14

.6

14

.4

23

.3

31

.5 35

.2

NORTHERN EASTERN WESTERN CENTRAL SOUTHERN

DESIGNED CAPACITY CURRENT STORAGE

LAST YEAR'S STORAGE 10 YRS AVG. STORAGE

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China’s new environmental policies has caused price increase in key raw materials of the company. But now the heat will be reduced and margin

will improve as company has started focusing on backward integration.

Company along with its wholly owned subsidiary CFL Mauritius, holds 14% equity stake in Foskor Pty Limited, South Africa, and 15% equity

stake in TIFERT, strategic investments of the Company to secure supply of Phosphoric acid. CIL’s strategic investment in both this companies

is aimed at securing uninterrupted supply of phosphoric acid for its operations at Kakinada and Visakhapatnam. This investments will reduce the

costs and price uncertainty for a key raw material for CIL. Moreover, company has also started capex at Vizag fertiliser unit. This will be self-

sufficient in its acid requirement after this expansion.


By 2022, around 26 Crop Protection molecules are going off patent. This provides a tremendous opportunity to generic manufacturers, who can

now introduce new products and boost their revenue. Apart from this, CIL has a very strong position in the market with very few competition

as nearly one-third of the domestic sales is derived from unique products. It has a huge network of retail centres in the south and west markets

through which it services around 3 million farmers. CIL also has a much diversified product portfolio with the non-subsidy businesses contributing

significantly to the company’s share of profitability. This means, CIL is not over exposed to the risk of changing government policies and

subsidies.

Mana Gromor –A one-step solution Mana Gromor is a one stop solution for the farmers. It provides an entire range of Multi-Brand Farming Solution.

Coromandel Retail operates around 800 stores in Andhra Pradesh, Telangana, Karnataka and Maharashtra, offers the entire range of agri-input

products and services to around 3 million farmers with a customer value proposition of ‘Quality, Trust and Farm Advice’. The Retail centres are

called ‘Mana Gromor Center’ in Andhra Pradesh & Telangana, ‘Namma Gromor Center’ in Karnataka and ‘Aapla Gromor Center’ in Maharashtra.

Mana Gromor not only saves distributor’s margin but also gives business insights from the ground level.

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RISK & CONCERNS:

Normal monsoon and favourable Government polices provided lifeline to the agriculture industry. Any Change in these two can will cause a

major problem to the company.

Higher Raw material prices may affect margins

Delay in subsidy payment

View & Valuation:

The regular launch of new products and differentiated molecules should help maintain growth momentum. Favourable Government policies and

especially DBT Roll out are all set to positively change the dynamics of industry and being a market leader, CIL has huge opportunities lying

ahead. India witnessed highest rain fall in 25 years this season, reservoirs level are also above 10 year’s average. This will help farmers expand

areas under winter-sown crops. This in turn will bring demand for fertilizers and crop protection products. China’s new environmental policies

has caused price increase in key raw materials of the company. But now the margin will start to improve as prices has stabilized and management

has started focusing on backward integration.

We have estimated revenue to grow around 4% and net profit at 20% CAGR over FY19-21E on the back of margin improvement and lower tax

expenses under new tax regime.

The stock is trading at 13x of FY21E EPS, we recommend a BUY for Coromandel International at CMP of Rs. 466.5 and add on decline of Rs. 440

for the Target of Rs. 560 for next 4 Quarters.

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Segment-wise revenue mix


10% 13% 14% 13% 15% 15%

90% 87% 86% 87% 85% 85%

FY16 FY17 FY18 FY19 FY20E FY21E

Crop Protection Nutrient & Other Allied Business

Revenue Growth


2

-13

9

21

-2

10

-15

-10

-5

0

5

10

15

20

25

0

2000

4000

6000

8000

10000

12000

14000

16000


%

Rs.

Cr

Revenue Growth

EBITDA & EBITDA Margin


7

10

12

11 1212

3

6

9

12

15

0

500

1000

1500

2000


%

Rs

Cr

EBIDTA EBIDTA Margin

Earning Per Share (EPS)


12

16

2325

30

35


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Balance Sheet(Consolidated)

As at March FY18 FY19 FY20E FY21E

SOURCE OF FUNDS

Share Capital 29.2 29.3 29.2 29.3

Reserves 3097 3329 3960 4757

Shareholders' Funds 3125.9 3358.4 3989.7 4786.3

Long Term Debt 0.0 0.0 300.0 310.0

Net Deferred Taxes 129.0 112.3 100.0 90.0

Long Term Provisions & Others 25.4 24.7 24.0 25.0

Minority Interest 0.0 0.0 0.0 0.0

Total Source of Funds 3280 3495 4414 5211

APPLICATION OF FUNDS

Net Block 1351 1500 1791 1916

Long Term Loans & Advances 311.2 320.7 268.3 220.0

Total Non Current Assets 1662 1821 2059 2136

Current Investments 0.1 0.1 0.0 0.0

Inventories 2227.1 3241.4 2462.5 2669.5

Trade Receivables 1523.4 1824.4 1748.7 1923.6

Short term Loans & Advances 3241.9 3113.4 3580.4 3938.5

Cash & Equivalents 550.8 159.3 147.1 102.5

Other Current Assets 521.6 414.2 434.9 452.3

Total Current Assets 8065 8753 8374 9086

Short-Term Borrowings 2728.4 2954.5 2215.9 1894.6

Trade Payables 3359.0 3762.5 3453.8 3778.5

Other Current Liab & Provisions 328.6 305.1 289.9 275.4

Short-Term Provisions 31.0 56.4 59.3 62.2

Total Current Liabilities 6447.0 7078.5 6018.8 6010.7

Net Current Assets 1618.0 1674.4 2354.9 3075.7

Total Application of Funds 3280 3495 4414 5211 Source: Company, HDFC sec Research

Income Statement (Consolidated) (Rs Cr) FY18 FY19 FY20E FY21E

Net Revenue 10947 13225 13026 14329

Other Income 57.8 37.1 42.0 45.0

Total Income 11004 13262 13068 14374

Growth (%) 9.1 20.5 -1.5 10.0

Operating Expenses 9719.8 11781.5 11558.2 12656.8

EBITDA 1284.7 1480.1 1510.0 1717.0

Growth (%) 23.9 15.2 2.0 13.7

EBITDA Margin (%) 11.7 11.2 11.6 12.0

Depreciation 97.6 113.8 129.8 144.9

EBIT 1187 1366 1380 1572

Interest 178.3 250.7 213.3 184.1

PBT 1009 1116 1167 1388

Tax 345.2 372.1 294.1 349.8

RPAT 664 743 873 1038

Growth (%) 39.1 8.4 21.3 18.9

EPS 22.7 24.6 29.9 35.5


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Cash Flow Statement(Consolidated) (Rs Cr) FY18 FY19 FY20E FY21E

Reported PBT 1,009 1,092 1,167 1,388

Non-operating & EO items -328 -339 -42 -45

Interest Expenses 178 251 213 184

Depreciation 98 114 130 145

Working Capital Change 23 -448 -693 -765

Tax Paid -345 -372 -294 -350

OPERATING CASH FLOW ( a ) 634 297 481 557

Capex -64 -253 -420 -270

Free Cash Flow 570 44 61 287

Investments 148 -10 52 48

Non-operating income 58 37 42 45

INVESTING CASH FLOW ( b ) 142 -225 -326 -177

Debt Issuance / (Repaid) -21 -17 287 1

Interest Expenses -178 -251 -213 -184

FCFE 371 -224 135 104

Share Capital Issuance 0 0 0 0

Dividend -224 -224 -242 -242

FINANCING CASH FLOW ( c ) -423 -492 -168 -425

NET CASH FLOW (a+b+c) 353 -421 -12 -45

Closing Cash 521 130 147 102


Key Ratios (Rs Cr) FY18 FY19 FY20E FY21E

PROFITABLITY

EBITDA Margin 11.7 11.2 11.6 12.0

EBIT Margin 10.8 10.3 10.6 11.0

APAT Margin 6.1 5.4 6.7 7.2

RoE 22.1 22.2 23.8 23.7

RoCE 36.2 39.1 31.3 30.2

Solvency Ratio

Net Debt/EBITDA (x) 1.7 1.9 1.6 1.2

D/E 0.9 0.9 0.6 0.5

Interest Coverage 6.7 5.4 6.5 8.5

PER SHARE DATA

EPS 22.7 24.6 29.9 35.5

CEPS 26.0 28.5 34.3 40.4

BV 106.9 114.8 136.4 163.6

Dividend 6.5 6.5 7.0 7.0

Turnover Ratios (days)

Debtor days 51 50 49 49

Inventory days 66 75 69 68

Creditors days 128 113 113 113

VALUATION

P/E 20.5 18.9 15.6 13.1

P/BV 4.4 4.1 3.4 2.8

EV/EBITDA 12.8 11.1 10.9 9.6

EV / Revenues 1.5 1.2 1.3 1.1

Dividend Yield (%) 1.4 1.4 1.5 1.5


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Ratings Chart

R E T U R N

HIGH

MEDIUM

LOW

LOW MEDIUM HIGH

RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

BLUE LOW RISK - LOW RETURN STOCKS

IF RISKS MANIFEST PRICE CAN FALL 20%

OR MORE

IF RISKS MANIFEST PRICE CAN FALL 15% &

IF INVESTMENT RATIONALE FRUCTFIES PRICE CAN RISE BY 15%

IF INVESTMENT RATIONALE FRUCTFIES

PRICE CAN RISE BY 20% OR MORE

YELLOW MEDIUM RISK - HIGH RETURN STOCKS


OR MORE





RED HIGH RISK - HIGH RETURN STOCKS


OR MORE





# Explanation of Red-flag Price level: If stock prices starts sustaining below red-flag level, the premise of the investment needs to be reviewed. Risk averse

investors should exit the stock and preserve capital. The downside of following red-flag level is that if the price decline turns out to be temporary and if

it recovers subsequently, one won’t be able to participate in the gains.

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300

350

400

450

500

550

09

-No

v-1

8

30

-No

v-1

8

21

-De

c-1

8

11

-Jan

-19

01

-Fe

b-1

9

22

-Fe

b-1

9

15

-Mar

-19

05

-Ap

r-1

9

26

-Ap

r-1

9

17

-May

-19

07

-Ju

n-1

9

28

-Ju

n-1

9

19

-Ju

l-1

9

09

-Au

g-1

9

30

-Au

g-1

9

20

-Se

p-1

9

11

-Oct

-19

01

-No

v-1

9

Close Price

Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.

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Disclosure: I, Nisha Sankhala, MBA, author and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently sent or has reached any person in such country, especially, United States of America, the same should be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published in whole or in part, directly or indirectly, for any purposes or in any manner. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE, BSE, MSEI, MCX: INZ000186937; AMFI Reg. No. ARN: 13549; PFRDA Reg. No. POP: 11092018; IRDA Corporate Agent License No.: CA0062; SEBI Research Analyst Reg. No.: INH000002475; SEBI Investment Adviser Reg. 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Date: Nov 11, 2019 - ValuePickr Forum...2019/11/11 · Coromandel International is a flagship...

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