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Margin to remain under pressure in the near term

In this note we have analyzed acreages across key states for CRIN, its volume performance in 1QFY22, and the trend in key raw materials. Key insights are highlighted below:

Acreages across key states for CRIN have declined

* CRIN’s key markets are Andhra Pradesh, Telangana, Maharashtra, Karnataka, West Bengal, and Odisha. These six states account for 94% of its NPK/DAP volumes and 84% of overall volumes (as of FY21).

* All India sowing is currently down 10% to 50m hectares (as of 9 th Jul’21), whereas is up ~1% as compared to the normal area in the corresponding week. The YoY decline in acreages is on the back of a 9%/7%/11%/18% YoY fall in rice/maize/soybean/cotton acreage, whereas the same for sugarcane grew 2% YoY.

* Andhra Pradesh posted a significant (57% YoY) drop in sowing. Major crops that contributed to this drop include rice/cotton/groundnut (down 43%/60%/76% YoY).

* In Telangana, acreages fell 21% YoY due to a 24%/22% drop in acreage under rice/cotton.

* Among the key states for CRIN, Karnataka is the only state to witness a 11% YoY growth in acreages. This was led by a 25%/22%/14% YoY growth in maize/arhar/soybean acreage. The same was offset by a decline in ragi/cotton/rice acreage by 35%/5%/4% YoY.

* Maharashtra witnessed a 12% YoY fall in acreages on the back of a 19%/46%/47% YoY decline in cotton/maize/bajra acreage.

* In West Bengal, acreages declined by a mere 3% on the back of a 9% YoY decline in rice acreage.

* In Odisha, acreages fell steeply (27%) on the back of a 34% YoY decline in rice acreage.

Volumes remain flat on a high base of last year

* As per the Ministry of Fertilizer, CRIN’s volumes in 1QFY22 remained flat YoY (off a strong 54% YoY growth in the base quarter) due to a 51% decline in trading volumes, whereas manufacturing volumes grew by 8%.

* Total Phosphatic Fertilizer volumes fell 4% YoY (on the back of a 77% YoY growth in the base quarter). The volume decline was on account of a 52% YoY decline in DAP volumes, but was supported by a 11% YoY growth in NPK volumes during 1QFY22, despite strong volume growth of 80% in the base quarter.

* During 1QFY22, MOP/urea volumes declined by 51%/13% YoY. Only SSP witnessed a volume growth of 46% during 1QFY22.

Margin pressure to persist despite an increase in subsidy

* Phosphoric acid accounts for 38-40% of CRIN’s total raw material cost. The average price of phosphoric acid in 1QFY22 rose 66% YoY and 31% QoQ to USD998/MT (average price in FY21 stood at USD674/MT). In 1QFY22, the average price of ammonia (comprising 12-13% of raw material cost) in India increased by 148% YoY and 89% QoQ to USD605/MT (average price in FY21 stood at USD289/MT). Ammonia prices rose 109% over Mar’21 and stood at USD670/MT in Jun’21.

* In light of the above increase in raw material prices, the government on 20th May’21 raised the subsidy rate on phosphorus by 204% YoY to INR45.3/kg. However, we expect margin pressure in the Fertilizer business to persist in 1HFY22 on volatility in raw material prices.

* Volumes have remained flat owing to a higher base in 1QFY21 (volumes grew 54%) due to better rainfall and forward buying by dealers in the base quarter due to anticipation of a lockdown last year. We expect sales volumes in 1QFY22E to remain flat YoY and EBITDA to decline 4% YoY on margin pressures in fertilizer business. We expect EBITDA/MT of overall/manufactured Fertiliser to decline by 7%/11% YoY to INR3,274/INR3,500. We expect revenue/adjusted PAT to grow by 23%/9% YoY in 1QFY22E.

* We expect sales volume in 1HFY22E to grow by 2% due to the above mentioned reasons. In 1HFY22E, we expect 12% manufacturing volume growth, leading to revenue/adjusted PAT growth of 24%/4%, with a 2% decline in EBITDA. We expect EBITDA/MT of overall/manufactured fertilizer to decline by 7%/8% YoY to INR3,616/INR 4,190.

Valuation and view

* The key levers that would drive growth going forward include: i) CRIN’s focus on increasing penetration in existing markets, ii) debottlenecking to increase capacity, iii) efforts to lower the cost of raw material – while maintaining the same level of quality – and establish an alternative sourcing destination (which would aid in cost savings), iv) launch of 3-4 molecules in the Crop Protection segment, v) inorganic growth, and vi) focus on profitable growth in the Retail business by reorganizing stores depending on consumption patterns.

* The structural story remains intact with regard to increasing awareness among farmers about having balanced nutrients in crops. This is likely to aid the shift to complex Fertilizers from urea, of which CRIN would be a key beneficiary.

* Key things to watch out for: i) normalized working capital cycle in FY22E, ii) capex plan, iii) price rise in complex Fertilizers; and iv) impact of the increase in the price of phosphoric acid on near term margin.

* We expect a revenue/EBITDA/PAT CAGR of 9%/9%/12% over FY21-23E. We value CRIN at 18x FY23E EPS to arrive at our TP of INR1,040. We maintain our Buy rating.

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