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Near-term challenges on higher RM

In this note we have analyzed the volume performance for CRIN in 3QFY22, the trend in its key RMs, Rabi sowing in its key markets, and capacity expansion in sulfuric acid. The key insights are highlighted below:

Manufacturing volumes offtake remains higher on a low base of last year

* As per the Ministry of Fertilizer, CRIN’s overall volumes in Oct-Nov’21 declined by 20% YoY due to a 78% fall in trading volumes, whereas manufacturing volumes grew 12%. Growth in manufacturing volumes is aided by a favorable base in FY21, whereas volumes declined by 7% YoY in OctNov’20 and 3% in 3QFY21.

* Total phosphatic fertilizer volumes grew 6% YoY in Oct-Nov’21 (on the back of a 6% YoY growth in Oct-Nov’20 and 8% YoY growth in the base quarter). The growth in phosphatic fertilizer volumes was on the back of 40% YoY growth in DAP volumes and 1% YoY growth in NPK volumes. NPK manufacturing volumes rose 7% YoY in Oct-Nov’21 (on the back of a 0.7% decline in Oct-Nov’20).

* Urea volumes declined by 92% YoY, whereas the same for SSP grew 14% in Oct-Nov’21.

Margin pressure is here to stay 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 3QFY22 increased by 93% YoY and 15% QoQ to USD1,330/MT (average price in FY21 stood at USD679/MT). Prices have remained flat over Apr’21 and stood at USD998/MT in Jun’21. Phosphoric acid prices rose 67% over Mar’21 and stood at USD1,330/MT in Dec’21.

* In 3QFY22, the average price of Middle East ammonia (comprising 12-15% of raw material cost) increased 221% YoY and 38% QoQ to USD900/MT (average price stood at USD259/MT in FY21). Prices have increased by 109% over Mar’21 and stood at USD900/MT in Dec’21.

* In light of the above increase in RM prices, the Cabinet approved the proposal of the Department of Fertilizers for fixation of nutrient-based subsidy (NBS) rates of P&K fertilizers for Rabi 2021-22 (Oct’21 to Mar’22). The subsidy rate per kg has been carried forward from the Kharif season citing increased RM prices.

* The government announced a special one-time package in Oct’21: i) for DAP at an additional cost of INR57b, and ii) for additional subsidy in the three most consumed NPK grades – NPK 10-26-26, NPK 20-20-0-13, and NPK 12-32- 16 – at a cost of INR8b.

* Despite an increase in government subsidy, we expect CRIN’s EBITDA margin to remain under pressure as the industry has not taken adequate price hikes due to government restrictions to adequately cover the increase in commodity cost.

Announced new sulfuric acid plant at Visakhapatnam at a capex of INR4b

* CRIN has announced setting up of a new 1,650MT/day design capacity sulfuric acid plant at its fertilizer complex in Visakhapatnam at a cost of INR4b. This would result in annual cost savings of INR500-600m. The plant will be operational by 2QFY24.

* CRIN has also signed technology partnership agreements with MECS (Monsanto Enviro-Chem Systems) and TKIS (thyssenKrupp Industrial Solutions).

* India is a net importer of sulfuric acid and the third largest importer globally, accounting for close to 2MMT of imports.

* The new sulfuric acid plant will increase annual production capacity by 0.5MMT from the current level of 0.6MMT, thereby taking total combined capacity to 1.1MMT. The total annual requirement of sulfuric acid for CRIN is 1.7MMT. After capacity expansion, 35% of the requirement will be imported.

* New plant at Visakhapatnam will reduce import dependence considerably and ensure sustainable production of phosphoric acid, one of the key raw materials for phosphatic fertilizer manufacturing.

Rabi sowing update

* Pan India Rabi sowing is currently up 2% YoY to 51.3m hectares (as of 10th Dec'21). The same for wheat, rice, pulses, coarse cereals, maize, and oilseeds stood at -2.4%, +5%, +0.4% , -4.5%, +1%, and +22.7% YoY, respectively.

* 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 in FY21.

* As of 10th Dec’21, Rabi sowing in CRIN's key markets (six states) are up 0.7% over FY21 sowing levels. Sowing in Telangana, Karnataka, and Maharashtra is up 66%, 4.7%, and 2.4% over previous year. Rice sowing in Andhra Pradesh fell 47% YoY, whereas the same in Telangana is up 300% in the current Rabi season. Pulse sowing in Andhra Pradesh, Karnataka, Maharashtra, and Odisha stood at - 3%, +1%, +12%, and -28% YoY, respectively. Wheat sowing in Maharashtra is up 18% YoY. Jowar sowing in Maharashtra fell 17% YoY, whereas the same is up 6% in Karnataka.

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 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.

* We expect revenue/EBITDA/PAT CAGR of 8%/8%/10% over FY21-24E. We value CRIN at 17x FY24E EPS to arrive at our TP of INR1,035. We maintain our Buy rating.

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