Coromandel Fertiliser

Coromandel Fertiliser’s valuations appear cheap in view of its stable prospects and improved industry outlook
COROMANDEL Fertilisers appears attractively valued compared to its peers in view of the improved outlook for the fertiliser industry, the company's steady growth prospects and lucrative dividend yield. Long term investors may consider it as a value buy.

Business:

Coromandel Fertilisers (CFL) is India’s leading phosphatic fertiliser manufacturer producing di-ammonium phosphate (DAP), monoammonium phosphate (MAP) and complex fertilisers. The Murugappa group company’s nameplate capacity stands at 23.1 lakh tonne per annum (TPA) of complex fertilisers, 8.15 lakh TPA of DAP and 1.32 lakh TPA of single super phosphate.

The company has also established itself in the agrochemicals industry, with 8 manufacturing / formulating units set up in North, West and Southern part of the country. It also produces watersoluble fertilisers and is planning to set up units manufacturing micronutrients.

Growth Drivers:

The government's policy change in fertiliser subsidy calculations, which linked subsidies to import parity prices, benefited CFL during FY09 and will continue to do so. The fall in commodity prices over the past 9-10 months will reduce CFL's need for working capital as well as its dependence on government subsidies, which will bring down its short-term borrowings and interest burden.

CFL has been taking strategic steps to improve its dependence on non-subsidized sectors. It recently commissioned two plants in Kakinada to manufacture water-soluble fertilisers. CFL is focusing on brand building and will expand the retail network to 400 centres under its 'Mana Gromor Centres' initiative during FY 09 from just 20 last year. These retail centres focus on rural marketing and offer agri as well as non-agri inputs.

The company has set up a subsidiary in Brazil to market its agrochemical products. Similarly, it has tied up with a Chilean company SQM for setting up a micronutrients plant at Kakinada. It has also picked up 15% stake in a Tunisian joint venture TIFERT to produce phosphoric acid - a key input for phosphatic fertilisers - which is expected to commence operations by end 2010. The company invested Rs 62 crore in this venture during FY 09. Financials: The government's decision to pay a part of subsidies by way of special bonds is a major concern. The company wrote off Rs 104.5 crore in the quarter ended March 2009 towards mark-to-market losses, thereby incurring net losses for the quarter.

Over the past 5 years, from FY 05 to FY 09, the company's revenues have risen at a cumulative annual growth rate (CAGR) of 49.9%, thanks to acquisition and subsequent amalgamation of Godavari Fertilisers with effect from 1st April 2007. The net profit during the same period has jumped at a CAGR of 63% and dividend paid by the company has increased at a CAGR of 53.3%.

Valuation:

The company ended FY09 with per share earnings of Rs 35.5. On the current market price of Rs 143, the scrip is trading at P/E of 4.0. Other comparable fertiliser companies such as RCF, Chambal Fertilisers and National Fertilisers are trading at P/E above 10, while Zuari Industries and Deepak Fertilisers are trading at a P/E between 4 and 6. CFL paid Rs 6 per share as interim dividend and has proposed an additional Rs 4 as final dividend for FY 2009, which together translate in an attractive dividend yield of 7%.

Deepak Fertilisers

Deepak Fertilisers is generating healthy cash flows. This together with attractive dividend yield and better business prospects makes for a good long term investment

DEEPAK Fertilisers and Petrochemicals (DFPCL) is a Pune-based company with an annual turnover of Rs 1,400 crore and a market capitalisation of Rs 475 crore. The company derives over 72% of its revenues from chemicals and 25% from fertilisers. The company is generating healthy cash flows and is likely to emerge a key beneficiary of increased availability of natural gas in India over next few months. The company is placed attractively with little downside risk, healthy dividend yield and with promising growth prospects over next 12 months.

Business:

DFPCL manufactures various basic chemicals occupying high market share in most of them in India. It enjoys nearly 45% market share in nitric acid, 35% market share in ammonium nitrate, 16% in methanol and is the only producer of isopropyl alcohol (IPA) in India. However, availability of natural gas remains an ongoing concern due to which the company is forced to operate its methanol and nitrophosphate fertilisers units at lower than full-capacity.

Also the company has diversified into real estate. It has built a shopping mall Ishanya with 5.5 lakh sq feet leasable area. With around 50 stores, a little over half of total area is operational. Last year DFPCL entered into a joint venture with Yara International, a Norwegian manufacturer, to sell its specialty fertilisers in India.

GROWTH DRIVERS:

The company recently increased the capacity of its nitric acid plant by one third to 400,000 tonne per annum (TPA). It has built up ammonia storage tanks of 15,000 tonne capacity at JNPT. Once these become operational from April 2009 the company will be able to import ammonia and save natural gas, which can be diverted to increase production of other products.

The company is now firmly connected to the national natural gas grid and has access to natural gas produced anywhere in the country. With RIL commencing natural gas production, DFPCL’s chances to secure a long-term supply of natural gas at reasonable price appear bright.

The company is setting up a 140,000 TPA nitric acid plant by end of 2009 and 300,000 TPA ammonium nitrate plant near its existing plant in Taloja at a cost of Rs 650 crore in first half of FY 11.

FINANCIALS:

The net sales of DFPCL have grown at a CAGR of 21.7% over last five years while the net profits grew at 9.5%. Its debt-to-equity ratio stood at 48.6% for the year ended March 2008 with the return on capital at 17.2%.

The company posted 8.5% fall in profits during the quarter ended December 2008. However, the poor performance was due to crash in commodity prices and also due to 2-month closure of its nitric acid plant for expansion. Hence, if we look at the 12-month period ending December 2008, the company has expanded its profits by 45% to Rs 140 crore with 51% jump in net sales to Rs 1,396 crore. In the past the company has distributed almost one-third of its annual profits by way of dividends with Rs 3.5 per share in FY08.

VALUATIONS:

For FY09, we expect the company to report net profit of Rs 145 crore, which translates in a P/E of 3.2 on current market price of Rs 52.8. If the company maintains its divided payout ratio around 30% of its net profit, the dividend per share will go above Rs 4 this year. At current market price this translates in a dividend yield of 7.5%. The low P/E and attractive dividend yield limit the downside in the scrip with definite growth prospects over next 12 months
Beta 0.76
Institutional Holding 18.01%
Dividend Yield 6.5%
P/E 3.3
M Cap Rs 465.7 Cr