Coromandel International Ltd.
23-06-2023

Fertilizers and Crop Protection industry:

The global crop protection chemicals market is projected to register a CAGR of 11.9% during the period 2022-2027. With the impact of COVID-19, there have been increased trends toward sustainability and environmental solutions such as biologics. The Indian fertilizers market is estimated to record a CAGR of 6% during the forecast period (2021-2027). The Indian fertilizer market reached a value of $18 Billion in 2021 (McKinsey).

In the present scenario, the Niti Aayog states that 56 large plants produce nitrogenous, phosphatic and complex fertilisers and 72 medium and small fertilizer production units under the Indian fertilizer industry, which have single super Phosphate (SSP). The main products manufactured by the fertilizer industry in India are phosphate-based fertilizers, nitrogenous fertilizers, and complex fertilizers. With its rapid growth, the fertilizer industry in India is all set to make a long-lasting global impression.

Over long term, growing population, declining arable land, food security, and the need for augmented agricultural productivity are the significant factors driving the demand for higher agricultural output, thus boosting the growth of the crop protection industry globally.

About Coromandel International Ltd (CIL):

CIL, a flagship company of the Murugappa Group, operates in two segments: Crop protection (CPC) and Nutraceuticals and allied business (NAB). The NAB segment comprises i) phosphatic fertilisers (di-ammonium phosphate, complexes, single super phosphate, muriate of potash), ii) specialty nutrients and organic fertilisers (G sulphur, water soluble fertilisers, organic manure) and iii) the retail business that provides agri inputs and agri services. The CPC segment comprises technicals, formulations and biopesticides. Its facilities are spread across India, but are largely concentrated in south India.

The company has the capacity to manufacture over 3.5 million tonnes per annum of NPK (nitrogen, phosphorus & potassium)fertilisers and pesticides, and 1 million tonnes per annum of single super phosphate (SSP). The subsidised products are phosphatic fertilisers, while all the other businesses form non-subsidised products. It also has a capacity of ~80,000 TPA of crop protection compounds from 6 plant locations.

Financials of the company

Gross margins started improving from FY 2017, reason being smart outsourcing of raw materials and investments in strategic ventures like Tunisian Indian Fertilisers S.A., Tunisia (TIFERT). FY21 saw all time high input prices which put pressure on the margins which the company expects to normalise going further.

Source: Company Data, MoneyWorks4me.

CIL used to maintain a consistent ROE in the range of 21-24% till FY2017 which is seen improving to 25-28% primarily driven by consistent asset turnover. Coromandel has been consistently reducing its debt from internal accruals and is debt free now.

Key Financial Parameters:

Business of the company:

The company's business is divided among 2 main segments i.e. nutrient and other allied products (~85% of revenues) and crop protection (~15% of revenues).

Under the CPC business, the company sells a wide range of crop protection products under its 60+ brands based portfolio. It is 3rd largest manufacturer of mancozeb globally and exports accounts for ~37% of revenues of the business.

The company has a rich product pipeline with research on compounds from plant extracts and microbial bio-pesticides. It is a leading manufacturer of azadirachtin in the world with ~65% export share. It exports to USA, Canada and Europe. The company operates ~750 retail centers where it sells own manufactured and labelled products such as Nutrients, crop pesticides, seeds, vet feed, farm implements, etc. It has significant presence in Andhra Pradesh, Telangana and Karnataka.

                 Source: Coromandel Investor Presentation

Key Managerial Person:

Mr. A Vellayan, Chairman
Mr. Vellayan holds a Bachelor’s Degree in Commerce from Shri Ram College of Commerce, New Delhi, Diploma in Industrial Administration from Aston University, UK and Masters in Business Studies from University of Warwick Business School, UK. 

Mr. Sameer Goel, Managing Director
Mr. Goel holds a Post Graduate Diploma in Management from IIM, Ahmedabad, and a Bachelor’s Degree in Economics from St. Stephens College, New Delhi. Under his leadership, Coromandel has shown all round growth in performance and employee engagement. The Company has become debt free and it has been rewarding to all stakeholders. He is on the board of International Fertilizer Association, representing South Asia, and on the board of Fertiliser Association of India.

Positives

1. Diversified business mix:CIL is a complete farm solutions provider with presence across fertilisers; specialty nutrients; crop protection chemicals (CPC); bio-pesticides; water-soluble fertilisers, and other allied businesses, which it manages by its strong retail presence with over 750 Gromor-branded retail stores across India.
2. Crop Protection Opportunity is large:India is underpenetrated in terms of crop protection which provides ample growth opportunity to catch up with global peers.

Source: Coromandel Investor Presentation

CIL has presence in the CPC segment with it’s network of 10,000+ dealers, 60+ brands sold across ~80 countries. CIL is investing in R&D, JV’s with global players for manufacturing, sourcing and development. 39% of its CPC sales are from exports which is expected to grow at 9% CAGR

Source: Coromandel Investor Presentation

1. Strong Distribution:The company distributes its products through a network of ~20,000 dealers and 2,000+ strong market development team. The company has a presence across ~81 countries worldwide.
2. Backward Integration:Partial backward integration to produce phosphoric acid (PA) and the capability to handle various grades of rock phosphates, thus largely shielding it from fluctuation in raw material prices.It also has strategic investment for Phosphoric acid sourcing in South Africa and Tunisia. During fiscal 2023, the company has further integrated its operations through investing in a rock phosphate mining company.
3. Import Substitution Play: India is a net importer of sulphuric acid (a key raw material used to produce phosphoric acid from rock phosphate). India imports around 2 mn T of sulphuric acid every year. CIL is increasing its sulphuric acid capacity from existing 600,000 tonnes per annum to 1,100,000 Tonne p.a.
4. Consistent Debt reduction:CIL does not have any long-term debt and the utilisation of short-term borrowings and the interest expenses have reduced. The company became net debt negative in FY21 and is expected to remain the same in the near-to-medium term. Key point to note is the reduction in debt was completely done from internal cash flows without any dilution

Risks:

1. Proposed Ban on Few Pesticides/Molecules; Finalisation to have Marginal Impact on CPC Segment: The Ministry of Agriculture and Farmers' Welfare issued a draft order in May 2020 proposing to ban the manufacture and sale of 27 pesticides, including three molecules manufactured by CIL. The latter form a sizeable share of CPC segment’s revenues and profitability. We believe that impact on the operating profit would be limited, given that the NAB is the major contributor to the revenue and profit, and the company continues to work on introducing newer products/molecules in the CPC segment.
2. Highly regulated industry: Impact on the operating profit and credit metrics would be limited, given that the NAB is the major contributor to the revenue and profit, and the company continues to work on introducing newer products/molecules in the CPC segment. CIL’s limited exposure to subsidy based fertilisers partially negates the overall regulatory impact.
3. High dependence on imported raw materials: In the case of phosphatic fertilisers, the degree of import dependence is high with most raw materials such as phosphoric acid, rock phosphate, muriate of potash, sulphur and ammonia being imported. This increases the inherent business risks in the event of supply shortage and a depreciating rupee environment. However, backward integration and efficient sourcing  efforts by CIL can reduce the impact of raw material price volatility and supply side challenges

1. El Nino: India is likely to be impacted by El-Nino this year, El Nino results in suppressed rainfall during the monsoon season. Poor rainfall can hamper demand and growth prospects for fertilizer and crop protection players.
2. Delay in Subsidies from government: Any delay in subsidies disbursement can affect cashflows. However, while reading the conference call transcripts we understand that, the government is prompt in subsidy disbursal. CIL’s products have good demand so minimal inventory is stuck on the books and subsidies are received quickly.
3. Russia-Ukraine War disrupting raw material supplies: India is a major importer of fertilisers from Russia. India depends heavily on imports for meeting its fertiliser raw materials (natural gas, sulphur and rock phosphate), intermediates (ammonia and sulphuric and phosphoric acids), and finished products (diammonium phosphate, potash and complex fertilisers) requirements. On an average, five million tonnes of phosphatic fertilisers are imported to India mostly from China, Morocco, Saudi Arabia, Russia and Jordan. 

Recent Developments

CIL recently announced a substantial investment of 1,000 crores in new multipurpose plants and diversifying into adjacencies such as CDMO (Contract Development and Manufacturing Organization) and Specialty Chemicals. The company intends to fund this capital expenditure program of 2,000 crores internally, utilizing its existing resources. Notably, 1,000 crores have already been invested in the chemicals business, including land acquisition and the establishment of three multipurpose plants.

The company's Nutrient and Allied business segment witnessed a significant revenue growth of 33% during the Q4 and 63% throughout the year. The market share including NPK and DAP, stood at 13.5% in Q4 and 15.4% for the full year. CIL aims to complete its CDMO and specialty chemical investments within 18-24 months, generating revenue of 2,000 to 3,000 crores with EBITDA margins of 16% to 18% for new molecules.