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Strategic initiatives to drive long-term growth

CRIN’s FY22 Annual Report highlights the company’s strategic and transformational initiatives, its performance, and significant trends in the industry. Key highlights below:

* The management has taken various strategic initiatives such as strengthening the supply-chain on the back of significant backward integration and strategic procurement. Such initiatives will help create a moat in the long run.

* CRIN is improving its R&D capabilities with the help of advanced tools such as ‘ARM’ and ‘Minitab’ to conduct trials and analyze research data. It is digitizing its processes by adopting a dashboard for materials management and ascertaining the status of batches to improve its operating efficiency.

* It is aligning itself with key trends in the industry by expanding its product portfolio to address the growing demand for high-performance complex Agri input solutions. It is venturing into drone spraying services to address the need for highly efficient delivery mechanisms.

* CRIN has improved its operating margin on the back of backward integration and improvement in sourcing in FY22, with EBITDA/MT for manufactured fertilizers (DAP and NPK) increasing by 12% YoY to INR4,588/MT.

Long-term strategic initiatives to create a moat in the long run

* Strengthening the supply-chain: CRIN has strengthened its back-end supply-chain across businesses with significant backward integration, in addition to ramping up its manufacturing capacities through sustained de-bottlenecking efforts. Such backward integrations and strategic procurement initiatives for key input materials helped the business partially tackle the critical issue on the raw material front.

* The company pursued a strategic investment in a Senegal rock phosphate mine in FY22. The Senegal mine is expected to provide up to one-third of CRIN’s rock phosphate requirements in due course of time. CRIN is also initiating a new sulfuric acid plant and debottlenecking its existing phosphoric acid plants. The new sulfuric acid plant is expected to come on stream in FY24 and will help CRIN augment its sulfuric acid capacity at Visakhapatnam to 3,300MTPD from 1,800 MTPD, while its phosphoric acid capacity will rise to ~1,300tpd from ~1,000tpd.

* Improving R&D: CRIN’s R&D team is using an agriculture research field trial tool (ARM) to enhance the impact of its trials. The tool saves time on designing the trials and developing reports. It also improves accuracy and the quality of the results of such trials. It is using ‘Minitab’, an advanced tool for analyzing research data and conducting hypothesis testing and regression analysis.

* Digitizing processes: CRIN is looking to overhaul its IT infrastructure and is ramping up its digital and analytics capabilities. Under its digital transformation program, it has provided its units with a dashboard for materials management, tracking customer escalations, and ascertaining the status of different batches.

* Tapping into the emerging growth opportunity: The management is setting up a dedicated office in Chennai to embark upon growth opportunities in adjacent areas that can complement its existing businesses. It has set up a separate structure for looking at investments in new startups and agritech ventures.

* Organizational realignment: The management is seeking to re-align its organizational structure to provide greater control, responsibility, and independent decision-making ability at the strategic business unit level.

Aligning with industry trends to improve its business performance

* The management has identified and outlined some megatrends in agriculture in its FY21 annual report which still hold good. It is continuing to keep a tab on them and is accordingly aligning its internal strategies. Some of the key trends going forward are as follows: 1. Growing demand for high-performance complex Agri input solutions to meet the demands of a growing population and spike in healthy, high-calorie diets. 2. The need for precision farming techniques, coupled with improvised, highly efficient delivery mechanisms. 3. Increasing trend of contract farming and shared supply-chain infrastructure. 4. Rural innovation, including access to high-speed internet, Agri-focused credit products, availability of affordable digital tools for soil health measurement, pest advisory, weather information, demand forecasting, and livestock management. 5. Biotech and advanced breeding techniques.

* In line with the current trend, CRIN has developed a diverse product portfolio, including biological and organic products. It launched nine products in FY22 (three/six fertilizers/Crop Protection products, refer Exhibit 4).

* Aligning itself with the Government of India’s intent to promote drone usage in agriculture, CRIN has initiated drone spraying on various crops. It has procured five drones and has trained 20 pilots for the same. It is in the process of active collaboration with technology companies and universities for improving its drone spraying services.

* The management is also focusing on the key strategic levers such as deepening its understanding of the consumer, building power brands, investing in R&D and data analytics, becoming a player of scale, creating new markets, and strengthening its efficiency and quality across the value chain.

Sustainable operating margin on account of better sourcing and backward integration

* Revenue grew 35% YoY to INR191b in FY22 on the back of higher realization growth in both the Nutrient and Crop Protection business.

* The Nutrient and Allied business segment grew 36% YoY, with its share in consolidated revenue improving marginally to 87% in FY22 from 86% in FY21. In volume terms, manufactured fertilizer grew 3.8% YoY to 3.7MMT on the back of strong traction in DAP/SSP (up 10.2%/12.8% YoY to 2.2MMT/7.6MMT) and a 1.1% growth in NPK to 27.7MMT. However, volumes for traded fertilizer fell 22% YoY to 0.96 MMT. Revenue from the Crop Protection segment grew 20% YoY to INR25.1b in FY22.

* Margin: EBITDA/adjusted PAT grew 8.3%/15% YoY to INR21.5b/INR15.3b. As per our calculations, EBITDA/MT for manufactured fertilizers (including SSP, assuming an EBITDA/MT of INR1,300) stood at INR3,925/MT (up 10% YoY). The same for manufactured NPK and DAP stood at INR4,588/MT (up 12% YoY). EBITDA for the Crop Protection segment stood at INR4.3b (up 18% YoY), with margin at 17.9% (down 50bp YoY).

* Operating performance: CRIN’s fertilizer plants operated at 84% capacity and produced 2.9MMT of DAP and complex fertilizers. Its consumption market share improved to 16.7% (up 100bp YoY). The SSP product segment within fertilizer grew 55% and maintained its leadership position, with a market share of 16.1% in FY22 v/s 12.8% in FY21.

* Working capital cycle: In FY22, its overall working capital days fell to 42 days from 56 days, led by a decrease in trade/government subsidy receivable days to five/six days (v/s 14/15 days in FY21). CRIN’s reduced its trade and subsidy receivables by over 50% as collection improved on the back of higher consumption, while subsidy disbursements by the government improved.

* Cash flow analysis: CFO fell 50% YoY to INR20.7b in FY22. The CFO/EBITDA ratio stood at 97% in FY22 (v/s 209% in FY21). The decline was primarily due to extraordinarily high cash flow in the base year (FY21) as the government released pending subsidy to aid fertilizer companies.

* Capex: Total capex stood at INR2.8b in FY22 (v/s INR1.9b in FY21). In FY22, CRIN began setting up a sulfuric acid plant in Vishakhapatnam and commissioned a state-of-the-art liquid fertilizer plant. Other major projects included expansion of capacity for granulated SSP and Bio pesticides, phosphoric acid evaporator, structural stability, and other maintenance initiatives.

* RoCE/RoE stood at 27.5%/26.6% in FY22 v/s 25.3%/28.1% in FY21. The fall in RoE was due to lower net profit margin (8% in FY22 v/s 9.4% in FY21) and higher asset turnover (3x in FY22 v/s 2.7x in FY21), while the equity multiplier remained at 1x in FY21 and FY22.

* Debt: CRIN repaid short-term debt of INR16m in FY22 and is debt free.

Valuation and view

* The management has taken various strategic initiatives such as strengthening its back-end supply chain, improving its R&D capabilities, and digitizing its processes. It is aligning itself with key industry trends by expanding its product portfolio to address the growing demand for high-performance complex Agri input solutions. All such initiatives will help it to create a moat and drive growth in the long run.

* Going forward, the key growth levers include: i) the management’s focus on increasing penetration in existing markets, ii) debottlenecking to raise capacity and strengthening its back-end supply chain, iii) efforts to lower the cost of raw material, while maintaining the same level of quality, and establishing an alternative sourcing destination (which will aid cost savings), iv) launch of three-to-four molecules in the Crop Protection segment, v) inorganic growth, and vi) its focus on profitable growth in the Retail business by reorganizing stores based on consumption patterns.

* We expect revenue/EBITDA/PAT CAGR of 12.7%/9.6%/10% over FY22-24. We value CRIN at 18x FY24E EPS to arrive at our TP of INR1,160. We maintain our Buy rating.

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