>COROMANDEL FERTILISER (EMKAY)

Valuations not yet stretched

We recently met with the management of Coromandel fertilisers (CFL) and were enthused by their growth prospects. Efficient inventory management (by not getting into any long term contracts) and strong negotiating power with raw material suppliers remains their success mantra in the complex fertiliser business. Moreover, the non subsidy based business (water soluble fertiliser, micro nutrients, crop protection and rural retail etc), where margins are almost 2.5-3x higher than fertiliser
business, is likely to drive growth in the near future. We expect the company to transform itself from a mere fertiliser company to a complete farm inputs company. With contribution of the non-subsidy based business to the bottomline increasing, there is strong case for re-rating of the stock. Despite the recent upsurge in the stock price by ~100%, we continue to remain positive on the stock and maintain BUY with a price target of Rs 263. Valuations are yet not stretched, since at our target price, the stock is valued at 8x FY11E EPS, EV/EBITDA of 4.1x and P/BV of 1.9x. Considering
the high returns (RoE of 24-25%), we believe that high P/BV is justified.

More details about the company’s foray into rural retail, possibility of FOSKAR listing and any acquisition, any opportunity to set up an ammonia plant outside India for backward integration can be potential triggers, going forward. However, lower availability of raw material due to volatile price scenario, higher working capital requirement for rural retail are few key concerns for the stock.

■ Efficient inventory management and RM sourcing is their success mantra
CFL has managed to report attractive performance in a volatile scenario, despite IPP linked subsidies. Efficient inventory management, monthly revision of price contracts and strong bargaining power with key raw material suppliers like FOSKAR have helped the company manage the disparity in finished products (DAP) and raw material (Phos acid) prices.

■ Production dependent on availability of raw material, not on capex
CFL has capacity of ~3.3 mn mt of complex fertiliser. However, FY09 production was about 2 mn mt. Key determinant for production is not demand and capacity, but raw material availability. With increasing number of tie-ups and TIFERT production scheduled from Dec’10, we expect a sharp ramp up in production.

■ Non subsidy base business to drive future growth
We expect the company’s non-subsidy based business (which includes water soluble fertiliser, crop protection speciality fertiliser etc) to grow at 30% pa. With margins of 25-30%, we expect this business to contribute about 30% to CFL’s profit by FY11.

■ Valuations are not stretched yet; Maintain BUY
We continue to remain positive on the stock and maintain BUY with a price target of Rs 263. Valuations are not yet stretched, since at our target price, the stock is valued at 8x FY11E EPS, EV/EBITDA of 4.1x and P / BV of 1.9x. Considering the high returns (RoE of 24-25%), we believe that high P/BV is justified.

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