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%.

Rashtriya Chemicals & Fertilisers

With more natural gas becoming available, Rashtriya Chemicals & Fertilisers has short-term as well as long-term triggers for profit growth

RASHTRIYA Chemicals & Fertilisers (RCF) could emerge as a key beneficiary of the rising availability of natural gas in India. As additional capacities become available, dependence on subsidies will decrease. All this, along with positive policy changes, make RCF an attractive bet for a long-term investor.

Business:

Mumbai-based RCF is one of India’s largest producers of fertilisers and industrial chemicals. It has two operating locations, one at Trombay near Mumbai and the other at Thal in Raigarh district, and is India’s third-largest fertiliser producer. It makes urea and complex fertilisers and has a combined capacity of 25.1 lakh tonnes per annum (TPA). It also produces chemicals such as methanol, methylamines, nitric acid and ammonium bicarbonate. RCF also imports and sells urea, muriate of potash (MoP) and diammonium phosphate to support its product portfolio.

Growth Drivers:

RCF is set to receive an immediate boost from increased availability of natural gas — it is to get 3.05 million cubic metres per day (mcmd) of gas from Reliance Industries, which will enable it to restart its 3.3-lakh-TPA urea plant at Trombay by this month-end and cut down naphtha consumption at its Thal plant.

By September, it will also restart its 3.2-lakh-TPA complex fertiliser plant at Trombay, which was closed due to an accident. RCF’s Rapidwall project to produce low-cost pre-fabricated walling systems from gypsum produced at Trombay will start operations by end-April and the company is also revamping its methanol plant to add more capacity and cut energy consumption.

All these initiatives will raise output, raising turnover and boosting bottomline. Lower costs will bring down its subsidy bill. The lower dependence on government payments, typically made two to three months after actual production, will help cut RCF’s short-term borrowings and interest costs. In the long run too, RCF has various expansion projects planned to drive growth. It has set up a joint venture with Rajasthan State Mines & Minerals (RSMML) to set up a 3-lakh-TPA di-ammonium phosphate (DAP) fertiliser plant in Rajasthan at a total estimated cost of Rs 900 crore. This project involves a 2:1 debtequity ratio. The company is also de-bottlenecking its Thal plant to scale up urea manufacturing capacity to 20 lakh TPA by mid-2010 from 17 lakh TPA now. At Thal, it is also considering a 1.2-million-TPA brownfield urea expansion. RCF has also entered into a joint venture with Gail for a coal-bed-methane project and with National Fertilisers and KRIBHCO for revival of a defunct fertiliser plant.

Financials:
RCF’s net sales have risen at a cumulative annualised growth rate (CAGR) of 20.5% between 2004 and 2008. In the same period, its annual profit stagnated at around Rs 150 crore. However, the company seems to be back on the growth path and posted a 61% rise in net profit at Rs 172 crore for the ninemonth period ended December ‘08.

For FY08, the company’s debt-to-equity ratio jumped to 0.75, as it had to borrow nearly Rs 900 crore more towards working capital because of rising dependence on government subsidy payouts. For the year to end-March ‘09, the company may report an increase in the debt-to-equity ratio as it has been unable to sell nearly Rs 700 crore of bonds. However, the situation is likely to improve in the current year.

The company has booked a forex loss of Rs 122 crore for the ninemonth period ended December 31, ‘08 due to currency fluctuations. Since the company doesn’t carry any foreign currency debts, this mainly represents the import obligations.

Valuation:

RCF’s stock is now trading at 10.9 times earnings for the last 12 months. We expect the company to post a net profit of Rs 327 crore in FY10, which translates to a forward P/E of 7.5 at the current market price. Other major urea manufacturers such as National Fertilisers and Chambal Fertilisers are trading at P/E of 13.2 and 11.1 respectively.

Risk Factors:

The company may have to write off mark-to-market loss on the bonds, which it is unable to sell due to their illiquid nature.