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Strong showing despite higher RM price concerns

Sustainability of GM – key to watch out for

* CRIN reported a strong operating performance in 1QFY22 on the back of gross margin expansion, due to diversified sourcing, backward integration, cost efficiency, and inventory gain. Sustainability of gross margin and volume growth remains a key monitorable going forward.

* Factoring better-than-expected earnings, we have increased our FY22E/FY23E PAT estimate by 5%/1%. We maintain our Buy rating.

EBITDA/PAT above our estimate

* CRIN reported an overall revenue of INR36.6b (est. INR39.4b) in 1QFY22, up 14% YoY. Fertilizer volumes fell 2% YoY on the back of a 53% decline in trading volume, whereas manufacturing grew 6% in 1QFY22.

* The Crop Protection segment grew 50% YoY to INR6.3b. The Nutrient and Other Allied business segment grew 9% YoY to INR30.7b. The EBIT margin in Nutrient and Other Allied business contracted by 20bp YoY to 13%, but expanded 10bp to 13% in the Crop Protection business.

* EBITDA margin expanded by 30bp YoY to 13.2% (est. 10.1%). EBITDA rose 17% YoY to INR4.8b (est. INR4b). Adjusted PAT grew 35% YoY to INR3.4b (est. INR2.7b).

* CRIN has contracted phosphoric acid at USD1,160/mt in 2Q (v/s USD998/mt in 1QFY22).

* As per our calculations, EBITDA/mt for manufacturing Fertilizers (assuming EBITDA/mt of INR420 for traded Fertilizers) stood at INR4,029/mt (+3% YoY; +72% QoQ). The share of unique grade stood at 30% in 1QFY22 (26% in 1QFY21).

Highlights from the management commentary

* Subsidy outstanding stood at INR11.5b as on Jun’21 (v/s INR25.9b in Jun’20). It includes INR3.6b relating to channel stock pending post acknowledgement.

* In 1QFY22, subsidy received from the government stood at INR4.9b (v/s INR5.1b in 1QFY21).

* CRIN is currently incurring a capex for: i) 10th evaporator in Visakhapatnam, ii) a liquid Fertilizer plant, and iii) de-bottlenecking capex. It is currently evaluating capex projects, which includes: i) backward integration, ii) purchase of land for capacity expansion, iii) setting up of an MPP, and iv) an inorganic acquisition.

* For FY22, CRIN has guided at an EBITDA/MT of INR4,000-4,200 in the Fertilizers segment.

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 for: i) normalized working capital cycle in FY22E, ii) capex plan, iii) impact on volume growth due to a rise in MRP of NPK.

* We expect revenue/EBITDA/PAT CAGR of 10%/10%/13% over FY21-23E. We value CRIN at 18x FY23E EPS to arrive at our TP of INR1,050. We maintain our Buy rating.

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