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Published on 14/09/2020 12:43:16 PM | Source: HDFC Securities Ltd

Buy Coromandel International Ltd For Target Rs.886 - HDFC Securities

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Buy Coromandel International Ltd For Target Rs.886 HDFC Securities

 

Our Take:

In Q1FY21, Coromandel International reported robust performance, led by higher manufacturing volumes, strong growth in crop protection business (off a lower base), and operating leverage. PAT more than quadrupled on higher EBITDA (2.1x YoY), lower tax rate, and lower interest cost. We believe traction in the fertiliser space is likely to sustain through Q2FY21 given continued demand for agri-inputs. Crop protection segment reported strong ~55% yoy growth led by good demand across domestic and international markets. Despite production loss in April, the company has been able to witness growth across product verticals.

Normal southwest monsoon predictions for the current year have augured well for the consumption of fertilizers and agrochemicals, thus providing a good start to FY21.

On Jun-15, 2020, we had issued a buy on Coromandel (https://www.hdfcsec.com/hsl.research.pdf/Coromandel-International-InitiatingCoverage-15062020.pdf) at Rs 673 for bull case Target of Rs 803. The stock hit a high of Rs 831 and our target got achieved on July 21. The company had recorded robust performance in Q4FY20 and Q1FY21 and the second quarter result is expected to be strong too. We have revised upwards our revenue estimates by 1%/2% and PAT estimates by 8%/6% for FY21/FY22. Given strong outlook for agriculture sector and robust numbers for Q1FY21, we have increased our bull case target price for the stock.

 

View & Valuation:

We estimate ~9% revenue CAGR led by 15% growth from Crop Protection segment over FY20-22E. We project 120bps expansion in OPM to 14.4% in FY22E. Healthy revenues, strong EBITDA and lower finance costs could lead to 16% PAT CAGR over FY20-22E. Decline in key raw material cost, a higher manufacturing volume mix and better product mix aided in achieving higher EBITDA/Ton in FY20. This is likely to see further improvement given the buoyant demand on account of the expectation of normal rainfall. The newly commenced operations at the phosphoric acid plant (in Oct’19) would provide cost savings as it will be operational through FY21. Its asset-light business model permits strong return ratios and valuations remain reasonable. The stock trades at 15.2x FY22E earnings, based upon ~16.5x and ~18x FY22E EPS, we arrive at a base case fair value of Rs. 812 and Bull case fair value at Rs 886 over the next 2 quarters. Investors can buy the stock at LTP and add on dips to Rs.638-642 band (13x FY22E EPS).

 

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