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Lower Fertilizer margin drags down overall performance

Below expected earnings

* Coromandel International (CRIN) reported a weak performance on the back of margin contraction in Fertilizer segment due to higher RM cost, lower volumes, and maintenance shutdowns. Price rise in complex Fertilizer, on rising phosphoric acid prices (prices have increased by 64% YoY and 26% QoQ in 1QFY22), remains a key monitorable going forward. On the back of margin pressures in the Fertilizer segment on higher RM prices, we have reduced our FY22E/FY23E earnings estimates by 10%/4%. Maintain Buy.

Higher RM prices to weigh on near-term performance

* CRIN reported a revenue of INR28.6b in 4QFY21 (flat YoY; v/s our estimate of INR26.2b). Fertilizer volumes declined 6% YoY on lower NPK manufacturing volumes (-12% YoY). However, the same was offset by a 64% increase in SSP (Single Superphosphate) volumes.

* The Crop Protection segment grew 17% YoY to INR5.2b, while the Nutrient and Other Allied Business segment fell 3% to INR23.7b. EBIT margin contracted 430bp/100bp to 8.5%/12.5% in the Nutrient and Other Allied Business/Crop Protection.

* EBITDA margin contracted 450bp to 9.1% (v/s our estimate of 13.3%) due to a decline in gross margin. EBITDA fell 33% YoY to INR2.6b (v/s our expectation of INR3.5b). Adjusted PAT declined 33% YoY to INR1.6b (v/s our estimate of INR2.2b).

* CRIN has contracted phosphoric acid capacity of USD998/mt in 1QFY22 (v/s USD795/mt in 4QFY21).

* According to our calculations, EBITDA/mt for manufacturing Fertilizers (assuming EBITDA/mt of INR616 for traded Fertilizers) stood at INR2,338/mt (-37% YoY; -40% QoQ). The share of unique grade stood at 52% in 4QFY21 (37% in Q4FY20).

* Revenue/EBITDA/adjusted PAT grew 8%/16%/25% in FY21. CRIN generated CFO of INR41.5b (v/s INR18.6b last year). Higher cash generation was primarily attributable to the government releasing subsidies and lower trade receivables.

Highlights from the management commentary

* Subsidy outstanding as on Mar’21 stood at INR5.9b (v/s INR23.2b in Mar’20). Subsidy outstanding includes INR3.3b relating to channel stock pending post acknowledgement.

* In 4QFY21, subsidy received from the government stood at INR29.4b (v/s INR1b in 4QFY20). Subsidy received in FY21 stood at INR50.4b (v/s INR24.2b in FY20).

* Crop Protection: CRIN increased focus on the domestic market in 4QFY21 with the launch of new products. Domestic margin is robust. However, it faced margin pressure on the global front, leading to slight margin contraction in 4QFY21. Also, higher freight cost and lower availability of containers added to expenses.

* Capex: CRIN plans to spend INR5-6b in FY22. Several projects from FY21 have been postponed to FY22. Also, maintenance capex is pegged at INR1-1.2b. Currently, the management intends to focus on backward integration of its sulphuric acid plant.

Valuation and view

* CRIN reported subdued operating performance in 4QFY21 due to margin contraction in the Fertilizer segment on higher RM cost, lower volume, and maintenance shutdown. Rising raw material prices, particularly phosphoric acid (contracted price in 1QFY22 is up 64%/26% YoY/QoQ) and Middle East ammonia (increased 54% over Feb-Apr’21), will put pressure on margin in the short term. On the back of margin pressure in the Fertilizer segment on higher RM prices, we have reduced our FY22E/FY23E earnings estimate by 10%/4%.

* The key levers, which would drive growth for CRIN going forward, include: i) a focus on increasing penetration in CRIN's existing markets, ii) debottlenecking to increase capacity, iii) efforts to lower cost of raw material (rock) – while maintaining the same level of quality – and establish an alternative sourcing destination (which would aid in cost savings), iv) launches 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 the consumption pattern.

* 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 from urea to complex Fertilizers, of which, CRIN would be a key beneficiary.

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

* We expect revenue/EBITDA/PAT CAGR of 8%/9%/13% over FY21-23E. We value CRIN at 17x FY23E EPS to arrive at our TP of INR983. Maintain Buy.

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