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Institutional Equities

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Reuters: CORF.NS; Bloomberg: CRIN IN

Coromandel International

On Fertile Ground For Growth Coromandel International (CRIN) is the largest privately-owned phosphatic fertiliser company in India. On all-India basis, it has a 16% market share while in its home markets of Andhra Pradesh, Telangana and other adjacent states it holds nearly 65% share. The phosphatic fertiliser category has two sub-divisions viz. NPK or complex (nitrogen, phosphorus and potassium) and DAP (di-ammonium phosphate). Urea comes under a separate nitrogenous fertiliser category. The fertiliser sector is not loved by many investors because of high government intervention (a fair reason considering the fate of many fertiliser companies in the past). However, we like to point out that CRIN has strategically kept itself safe from the ‘urea trap’, focusing on relatively low volume phosphatic fertilisers and made a fortune. Since the past several years, CRIN commanded industry-best margin, FCF generation, working capital, RoA, RoE and RoCE. Currently, CRIN accounts for nearly 45% of complex fertiliser production in the private sector in India. CRIN is nearly 4x the size of its nearest private sector peer. It is second in the overall pecking order of the phosphatic fertiliser sector. Market leader is Indian Farmers Fertiliser Cooperative Limited (IFFCO), a cooperative body. Over FY18-FY21E, we expect its overall revenues and EBITDA CAGR at 13.1% and 13.5%, respectively. EBITDA margin should bottom out in FY19 and improve thereafter. CRIN is expected to deliver EBITDA margin of 11.3% in FY21E vs. 10.7% likely in FY19E and 11.2% reported in FY18, in our view. While our estimates are in line with Bloomberg consensus estimates, we believe they are conservative given the recent inflation in raw material prices, and uncertain political environment as well as weather conditions. Leadership position and a prudent management team make CRIN a long-term structural story as the government is making a lot of efforts to improve farm economics. We initiate coverage on CRIN with a Buy rating and a target price of Rs600, up 35% from the CMP.

Phosphatic fertiliser volume CAGR of 9%: For the period FY18-FY21E, we expect CRIN’s total fertiliser volume to increase 6%, including 9% CAGR in phosphatic volume and some decline in other traded fertilisers. In the past five years, CRIN has increased its volume at 7% CAGR as compared to industry growth of a mere 1.7%, indicating solid market share gain. We expect the phosphatic fertiliser volume growth to accelerate because of higher subsidy allocation, soil health card linking, better subsidy transmission and increased welfare spending on the farm sector. Also, in four out of past five years CRIN’s largest markets faced a severe drought which led to large-scale irrigation projects. These projects are now complete and should benefit crop cultivation.

Faster subsidy payment: As of December-end 2018, CRIN’s total capital blocked was Rs23.7bn (Rs20.2bn subsidy and Rs3.5bn Goods and Services Tax or GST refund receivable). This declined 20.5% from Rs29.8bn as of end-March 2018. Post smoothening out the refund problem, both on the Direct Benefit Transfer (DBT) and GST side, we expect total capital block of Rs13bn-Rs14bn. This suggests that if the cost of financing working capital is 10%, then CRIN could potentially witness an uptick in its earnings by Rs1,000mn over the next couple of years. This earnings uptick is equal to 13% of the past three year’s average PBT and will add 0.9% margin on FY18 reported revenues.

BUY

Sector: Fertiliser/ Agrichemical

CMP: Rs445

Target Price: Rs600

Upside: 35%

Mohit Khanna Research Analyst [email protected] +91-22-6273 8089

Key Data

Current Shares O/S (mn) 292.4

Mkt Cap (Rsbn/US$bn) 131/1.8

52 Wk H / L (Rs) 579/339

Daily Vol. (3M NSE Avg.) 124,876

Share holding (%) 3QFY19 2QFY19 1QFY19

Promoter 61.8 61.8 61.8

Institutions 17.2 16.6 16.5

Non-Institutions 21.1 21.6 21.7

One Year Indexed Stock Performance

80

90

100

110

120

130

140

Feb-17 Mar-17 May-17 Jul-17 Sep-17 Oct-17 Dec-17 Feb-18

COROMANDEL INTERNATIONAL Nifty 50

Price Performance (%)

1-M 6-M 1-Yr

Coromandel International (2.9) 6.6 (14.9)

Nifty Index (0.0) (4.9) 2.4

Source: Bloomberg

Y/E March (Rsmn) consolidated FY17 FY18 FY19E FY20E FY21E

Net sales 100,308 109,467 135,086 146,653 158,324 EBITDA 9,827 12,265 14,418 16,457 17,951 EBIT 8,820 11,290 13,352 14,918 16,324 Adj. net profit 4,777 6,638 7,453 8,350 9,286 Adj. EPS (Rs) 16.38 22.72 25.46 28.46 31.59 EPS growth (%) 43 39 12 12 11 EBITDA margin (%) 9.8 11.2 10.7 11.2 11.3 EBIT margin (%) 8.8 10.3 9.9 10.2 10.3 P/E (x) 19.04 23.12 17.91 16.02 14.44 FCF/sales (%) 8.3 1.2 (0.9) 5.3 4.2 Net debt/equity (%) 53.2 56.6 56.8 35.6 21.6 Pre-tax RoIC (%) 19.5 24.2 25.0 25.7 27.4 RoE (%) 17.3 22.0 21.9 20.9 20.0

Source: Company, Nirmal Bang Institutional Equities Research

15 February 2019


Coromandel International 2

Investment Rationale

Rising backward integration

CRIN continues to make progress in achieving a higher degree of backward integration. As internally produced raw materials take a higher share in the overall cost structure, margin and production visibility improves considerably. Historically, phosphatic fertiliser manufacturers in India have faced an acute shortage of inputs and have to resort to expensive imports (which have become dearer in an Indian rupee or INR weakening scenario). Currently, CRIN has 0.25mt of phosphoric acid production capacity internally which will expand to 0.35mt (+40%) by FY20E. This expansion will increase the degree of backward integration (with respect to phosphoric acid) from 24% currently to 33% at 100% utilisation level.

Exhibit 1: Degree of backward integration

Degree of backward integration FY18 FY20E

Phos.acid @ 100% utilisation 24% 33%

Phos. acid @ 90% utilisation 26% 37%

Phos. acid @ 80% utilisation 30% 42%

Source: Nirmal Bang Institutional Equities Research

Exhibit 2: Our assumptions

To manufacture Inputs required

1tn of complex fertiliser 0.3tn of phosphoric acid

1 tn of DAP 1.5tn to 2tn of rock phosphate

0.4tn of sulphuric acid

0.2 tn of ammonia

Source: Nirmal Bang Institutional Equities Research

The ongoing phosphoric acid capacity expansion is being undertaken at the company’s Vizag fertiliser unit, which will become self-sufficient in its acid requirement after this expansion. CRIN also has a captive 0.05mt phosphoric acid plant at its Ennore fertiliser unit which covers almost 60% requirement of that plant. The remaining requirement is either sourced under long-term contracts with various global suppliers or bought from spot market.

Persistent imbalance in phosphatic fertiliser demand and supply presents an opportunity

India manufactures less phosphatic fertilisers than it consumes. It is the world’s largest DAP importer. India’s soil imbalance has increased over time because of the excessive use of urea. This has resulted in a decline in crop yield which has in turn increased the awareness about optimum soil health. On the other hand, the government continues to battle the rising trade imbalance (higher imports) and wants to promote manufacturing in India. While there are many underlying problems, economics suggests that in-house manufacturing is cheaper than imports in the long run (keeping aside the aberration of inverted GST duty – which now has been resolved). As India’s annual food requirement continues to increase at 1% CAGR, the current demand-supply gap would only increase if new capacities are not added. CRIN is ahead of the curve in this regard and as compared to any other competitor is in a better position - both quantitatively (leverage, FCF, margins, RoA, etc) and qualitatively (experience, backward integration, etc.).



Exhibit 3: Imbalance in the usage of nutrients

Source: Company Reports, Fertilizer Association of India, Nirmal Bang Institutional Equities Research

Exhibit 4: Fertiliser demand-supply balance

Source: Company Reports, Department of Fertilizer, Nirmal Bang Institutional Equities Research

Captive production of phosphoric acid should increase EBITDA margin by 0.6%

Our channel checks suggest that, CRIN’s cost of phosphoric acid production is down by nearly US$110/tn as compared to imports. This is nearly 14% cheaper than prevailing prices of US$768/tn (India CFR spot). Thus, for the current phosphoric acid capacity expansion of 0.1mt, CRIN would save Rs792mn at Rs72 INR/USD exchange rate. This is equivalent to nearly 7% of CRIN’s EBITDA in FY18 and should add 0.6% to the company’s EBITDA margin on our FY19E revenue estimate of Rs135,086mn.



EBITDA margin to expand to 11.3% in FY21E vs. 10.7% in FY19E

We expect the company to expand its EBITDA margin to 11.3% by FY21 as the rise in share of in-house production and import of raw material plus finished product declines. CRIN should also benefit from higher capacity utilisation at its plants which will result in better fixed-cost absorption. Additionally, we expect realisation in the fertiliser business to improve after taking a hit in FY19.

Exhibit 5: CRIN’s EBITDA margin

10.6

13.2

14.8

11.3

9.18.5

7.9

6.7

9.8

11.2

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Source: Company reports, Nirmal Bang Institutional Equities Research

Fertiliser realisation/tn to post a 6% CAGR over FY18-FY21E

Higher raw material prices have prompted farmers to replace DAP (di-ammonium phosphate) fertiliser with complex or NPK (nitrogen, phosphorus, potassium) fertilisers. NPK is priced lower as it has lower phosphorus content and can be manufactured in higher volume as compared to DAP for any given quantity of phosphoric acid. Interestingly, as NPK becomes attractive, it can also cannibalise sales of SSP (single super phosphate) fertilisers which are considered to be of a lower grade. As the volume contribution from NPK and unique grade fertilisers increases, it will also result in higher realisation for CRIN. We expect realisation/tn to improve from Rs21,853 in FY18 to Rs26,270 in FY21E. The growth in realisation is also driven by price hikes done in the recent past.

Exhibit 6: Coromandel’s Fertiliser Business Overview

Fertiliser/tn FY17 FY18 FY19E FY20E FY21E

Fertiliser (revenues/tn) 22,085 21,853 25,437 25,662 26,270

Fertiliser (EBIT/tn) 1,810 2,309 2,565 2,677 2,768

EBIT margin/tn (%) 8.2 10.6 10.1 10.4 10.5




Exhibit 7: Segment-wise financials

Segment-wise financials FY17 FY18 FY19E FY20E FY21E

Crop protection 14,082 16,622 18,784 21,225 22,720

YoY (%) - 18.0 13.0 13.0 7.0

Nutrient & Others 89,134 96,024 117,282 126,461 136,720

YoY (%) - 7.7 22.1 7.8 8.1

Less: Inter-segment (1,265) (1,334) (979) (1,034) (1,116)

Net sales & other income 101,951 111,312 135,086 146,653 158,324

YoY (%) - 9.2 21.4 8.6 8.0

Crop protection 2,615 2,957 3,002 3,439 3,624

Margin (%) 18.6 17.8 16.0 16.2 15.9

Nutrient & others 7,305 10,144 11,826 13,190 14,403

Margin (%) 8.2 10.6 10.1 10.4 10.5

Corporate expenses (1,101) (1,477) (1,476) (1,712) (1,699)

% of revenues 1.1 1.3 1.1 1.2 1.1

Total EBIT 8,820 11,624 13,353 14,917 16,328

YoY (%) - 31.8 14.9 11.7 9.5

Margin (%) 8.7 10.4 9.9 10.2 10.3

Source: Company Reports, Nirmal Bang Institutional Equities Research

Why did the price of phosphoric acid shoot up in 2018?

China’s new environmental regulations – starting 2019

Closure of Vedanta’s copper smelter at Tuticorin, Tamil Naidu

US tariff on Chinese gypsum product imports

Increase in captive consumption by major exporting companies

Fall in the INR – negatively impacted import prices of raw materials

To overcome soil pollution problem, China introduced its first ever comprehensive Soil Pollution Prevention and Control Law starting January 2019 (under planning since 2016 and gathered steam in September 2018). This new law affects phosphoric acid production as the process generates gypsum (pollutant) as a by-product. To produce 1tn of phosphoric acid, 4.5tn of gypsum is produced which was largely disposed of via wet land fill or disposal into the sea. As the captive supply of phosphoric acid became tight, China started importing a major quantity for its fertiliser industries leading to high prices.

Gypsum is also used in manufacturing cement and boards for the construction industry. China is the largest supplier of these products to the US. Under the ongoing US-China trade war, the US government imposed a 10% tariff on gypsum products imported into its country from China. This lowered the demand for gypsum which further de-motivated chemical companies from producing phosphoric acid.

Vedanta’s copper smelter at Tuticorin, Tamil Naidu, was shut down in May 2018 by the state government after a public protest over pollution. Recent media reports quoted its copper division’s CEO Mr. P. Ramnath highlighting the importance of the copper plant (and its by-products) for regional fertiliser units. The plant produced 1.2mt of sulphuric acid per year of which 0.6mt is sold in the market, which constitutes a large portion of India’s total demand. Thus, the closure of the plant has led to a sharp increase in the prices of sulphuric acid. During 1HCY18, sulphuric acid was being sold close to Rs4,000/tn, which increased to Rs9,000/tn in October 2018, Rs12,000/tn in December 2018 and further to Rs15,000/tn in January 2019. Phosphoric acid prices have also followed this trend.



Exhibit 8: Phosphoric Acid: India Cfr Spot Price (long term)

0

500

1,000

1,500

2,000

2,500

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Jan/03 Jan/07 Jan/11 Jan/15 Jan/19

(USD/tn)(Rs/tn)

Price (Rs/ton) Price ($/ton)

Source: Bloomberg

Exhibit 9: Phosphoric Acid: India Cfr Spot Price (near term)

500

550

600

650

700

750

800

30,000

35,000

40,000

45,000

50,000

55,000

60,000

Jan

-16

Ma

y-1

6

Se

p-1

6

Jan

-17

Ma

y-1

7

Se

p-1

7

Jan

-18

Ma

y-1

8

Se

p-1

8

Jan

-19

(USD/ton)(Rs/ton)

Price (Rs/ton) Price ($/ton)

Source: Bloomberg

Exhibit 10: India Fertilizer Input Wholesale Price Index (5 Years) Base = 100

60

80

100

120

140

160

180

200

De

c/1

3

Ap

r/1

4

Au

g/1

4

De

c/1

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Ap

r/1

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Au

g/1

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Au

g/1

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g/1

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c/1

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Ap

r/1

8

Au

g/1

8

De

c/1

8

Phosphoric acid Sulphuric Acid

Source: Office of Economic Advisor, Bloomberg, Nirmal Bang Institutional Equities Research



Exhibit 11: India Fertilizer Input Wholesale Price Index (2 Years) Base = 100

78

80

82

84

86

88

90

92

94

96

98

0

20

40

60

80

100

120

140

160

180

200

Dec/16 Apr/17 Aug/17 Dec/17 Apr/18 Aug/18 Dec/18

Phosphoric AcidSulphuric Acid

Sulphuric Acid Phosphoric acid


Exhibit 12: India Fertilizer Input Wholesale Price Index Base = 100

0

20

40

60

80

100

120

115

120

125

130

135

140

145

150

155

160

Dec/16 Apr/17 Aug/17 Dec/17 Apr/18 Aug/18 Dec/18

NapthaPhosphorite

Phosphorite (Rock Phosphate) Naphtha (Ammonia)


Recent price hikes to mitigate input inflation

In line with the industry, CRIN went for multiple price hikes last year to mitigate the inflation in raw material prices. Such regular price hikes help in mitigating margin pressure and are possible in phosphatic fertilisers (unlike urea) as their retail prices are de-controlled. Increased pricing negatively affects the demand for highly-priced DAP fertilisers. But in that scenario, CRIN benefits by selling a larger portion of unique grade complex or NPK fertilisers which command higher margins. As on January-end 2019, Indian retail price for NPK-I (10:26:26) is Rs27,300/tn, NPK-II (12:32:16) is Rs27,500/tn, DAP at Rs29,000/tn and urea at Rs5,922/tn. These prices (except of urea) have been in force since the last hike on 15 October 2018.



Exhibit 13: India Fertilizer Wholesale Price Index Base = 100

120

125

130

135

140

145

150

155

160

Jan

/16

Jun

/16

No

v/1

6

Ap

r/1

7

Se

p/1

7

Fe

b/1

8

Jul/1

8

De

c/1

8

DAP SSP & Complex


Exhibit 14: DAP Price (Rs/tn) - India & China

28,982

28,334

20,000

22,000

24,000

26,000

28,000

30,000

32,000

Jan

/16

Ma

y/1

6

Se

p/1

6

Jan

/17

Ma

y/1

7

Se

p/1

7

Jan

/18

Ma

y/1

8

Se

p/1

8

Jan

/19

India DAP Cfr Price (Rs/ton) China DAP Factory Price (Rs/ton)

(Rs/ton)

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 15: India Urea Cfr Spot Price (Rs/ton)

21,078

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

Jan

/16

Ma

y/1

6

Se

p/1

6

Jan

/17

Ma

y/1

7

Se

p/1

7

Jan

/18

Ma

y/1

8

Se

p/1

8

Jan

/19




Exhibit 16: China NPK Price (Rs/tn)

20,000

20,500

21,000

21,500

22,000

22,500

23,000

23,500

24,000

24,500

Jan

/16

Ma

y/1

6

Se

p/1

6

Jan

/17

Ma

y/1

7

Se

p/1

7

Jan

/18

Ma

y/1

8

Se

p/1

8

Jan

/19

(Rs/ton)


DBT hiccups over: Faster subsidy & backlog payment

India’s Ministry of Agriculture and Farmers’ Welfare completed the pan-India installation of Point of Sales (PoS) machines at retail points by March 2018. These PoS machines were installed to facilitate the Direct Benefit Transfer (DBT) scheme. Under this scheme, fertiliser subsidy would be paid to the manufacturers after a week of sales recorded through the installed PoS machines. The quantum of subsidy would be decided under the Nutrient-based Subsidy (NBS) mechanism.

Initially the system suffered hardware, connectivity and manpower training-related problems which delayed sale transactions and hence subsidy payment. However, most of these problems have been ironed out and progress is in the right direction. The government has already installed more than 200,000 PoS machines across the country.

At the end of March 2018, total subsidy outstanding for the industry was close to Rs362bn,down 36% Rs233bn (including Rs73bn on account of DBT transactions) by December 2018. Similarly, CRIN’s subsidy outstanding also declined 23% to Rs20.2bn in the same period. At the end of December 2018, the government had balance funds close to Rs131bn from the total budgetary allocation of Rs734bn for FY19.

The progress in backlog clearance has been slower than previously anticipated, but considering the government’s past track record, we are not unhappy. Subsidy calculation is based on volume sold and the subsidy rates as per the NBS system. Thus, comparing last year’s subsidy outstanding amount may not be entirely correct, but it does give a good directional sense. DBT system has now stabilised and the government is clearing subsidy within two to three weeks of sales.



Exhibit 17: Fertiliser subsidy and backlog

0%

10%

20%

30%

40%

50%

60%

70%

-

200

400

600

800

1,000

1,200

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Total Fertilizer Subsidy (Rs bn) Subsidy Backlog Backlog as % of Total Subsidy

(Rsbn)

Source: Ministry of Agriculture & Farmers’ Welfare, Nirmal Bang Institutional Equities Research

Exhibit 18: Direct Benefit Transfer


Inverted GST rate structure matter resolved; working capital to improve

Inverted GST rate structure is a situation where the GST rate on the final product is lower as compared to its raw material. At the start of the GST regime in July 2017, GST rate on fertilisers was pegged at 5% (1% lower than the pre-GST rate) while that on inputs was 18%. This situation continued for seven months which resulted in input tax credit or outstanding refund with the government. Thus, fertiliser companies suffered working capital pressure. At the end of FY18, CRIN’s total GST credit was close to Rs5bn, out of which Rs3.5bn was attributed to cash refunds. This pending cash refund was more than 11% of CRIN’s equity.

However, since then the government has reduced GST rates on phosphoric acid and sulphur (major inputs), thereby easing pressure on further accumulation of tax credit, especially for complex fertiliser companies like CRIN.

During the analyst call on 22 January 2019, CFO Jayashree Satagopan stated that the company has already filed refund claims till November 2018amounting to Rs3.12bn. The company expects the amount to be received in the next two months.



Exhibit 19: GST on Inputs (Raw materials)

GST on Inputs (Raw materials) Jul-17 Jan-18 From Jul-18 onwards

Phosphoric acid 18% 12% 5%

Sulphur 18% 5% 5%

Ammonia 18% 18% 18%

GST on fertilizers (all kinds) 5% 5% 5%

Pre-GST Tax on fertilizers 6% - -

GST on Bio-pesticides 18% 12% 12%

Source: GST Council, Nirmal Bang Institutional Equities Research

Scarce raw material & size of incumbent players – barriers to entry

CRIN has established a solid raw material sourcing network along with rising captive production. This has helped the company to establish cost leadership in a commodity business. This sourcing network has been a catalyst to expand fertiliser production as raw material availability is a major overhang for industry players. As a result, CRIN now accounts for nearly 45% of complex fertiliser production by the private sector in India. It is nearly 4x the size of nearest a private sector company. In FY18, CRIN produced 2.3mt complex fertilisers as compared to 0.6mt by Paradeep Phosphates (PPL), 0.6mt by Deepak Fertilizers and Petrochemicals (DFPCL) and 0.5mt by Zuari Agrochemicals (ZACL). CRIN’s major competition comes from IFFCO, a cooperative mammoth that has a major market share.



Government schemes for farmers’ welfare

The government’s efforts to improve village-level economics remain a debatable subject. But we still cannot ignore the potential such schemes would have. In Union Budget 2019-20, estimated agricultural subsidy stood at Rs981bn (fertiliser subsidy Rs701bn, crop insurance Rs130bn and interest subsidy Rs150bn). There are estimated 146mn farmers in the country, according to the census (2015-16), which means that central government’s spending per farmer stands at Rs6,719 per year on an average. Under the grand ambition of doubling farm income by 2022, the Modi government has launched/repackaged various schemes which largely focus on increasing output, realisation, reducing costs and covering risk. While the success of these schemes remains to be seen, any increase in farm income should also result in higher spending on fertilisers and crop protection. This remains a fundamental catalyst for demand. A few notable central government schemes are:

PM-KISAN – Launched in 2019.

Soil Health Cards – launched in 2015.

National Agriculture Market (e-NAM).

Neem-coated urea launched to slow down the release of fertilisers, thereby making it cost- efficient for the farmer and not fit for use by industries (stop pilferage).

Pradhan Mantri Krishi Sinchai Yojana (PMKSY) – launched in 2015 to provide end-to-end solution in irrigation.

Paramparagat Krishi Vikas Yojana (PKVY) – launched to promote organic farming.

Pradhan Mantri Fasal Bima Yojana (PMFBY) – launched to promote prompt claim settlement.

Micro Irrigation Fund (MIF) – Initial corpus of Rs20bn for FY19 & Rs30bn for FY20.

Agriculture Contingency Plan.

National Mission for Sustainable Agriculture (NMSA) – An umbrella scheme that houses nine different projects relating to rain-fed area development, agro-forestry, organic farming, etc.

Apart from these schemes, state governments also run various schemes in their respective jurisdiction. We have highlighted a few notable schemes run by state governments of Telangana and Andhra Pradesh (CRIN’s biggest markets).

Telangana

Rythu Bandhu – The popular scheme was launched in May 2018 with a budgetary allocation of Rs120bn for FY19. It is an investment support scheme for agriculture and horticulture by way of cash grant of Rs4,000/acre per farmer each season (Rs8,000/acre per farmer each year). The scheme has helped farmers greatly in buying seeds, fertilisers, pesticides, labour, and other investments for crop cultivation. There have been rumours of the central government launching a similar scheme at the national level. If implemented, this will provide a quick boost to farmers’ purchasing power.

Rythu Bima - Farmers Group Life Insurance Scheme (cover Rs500,000 per farmer) was launched in August 2008 and it is the first of its kind as it is implemented based on farmer-wise online land database. The main objective is to provide financial relief and social security to the family members/ dependents, in case of loss of farmer’s life due to any reason. Premium would be paid to the Life Insurance Corporation of India or LIC by the state government on behalf of farmers. Costs are pegged at Rs10bn.

Andhra Pradesh

Vaddi leni runalu – Interest-free loans to farmers.

Pavala Vaddi – Reimbursement of interest above 3% for a period of five years.



Exhibit 20: Prospects of farm income growth from various sources

Source: Company reports, Niti Aayog, Nirmal Bang Institutional Equities Research

PM-KISAN puts cash in farmer’s account

In its last budget (interim budget), the Modi government announced PM-KISAN scheme which is very similar to Telangana’s Rythu Bandhu scheme. Under this flagship project, central government will give Rs6,000 cash per year directly to the farmer to meet his needs. The basic criterion is to support small and marginal farmers owning land up to two hectares. The cash disbursement would take place in three installments of Rs2,000 each and the first installment is expected to be paid in March 2019.

While the amount per farmer looks small, it should be noted that this amount is over and above all other subsidies being provided to the farmer both at the state and central government level. According to media reports, there are 125mn farmers in the country and 86% of them own land less than two hectares. The highest number of such farmers is in Uttar Pradesh totaling 22.1mn. Implementation of the scheme in CRIN’s biggest markets i.e. Telangana, Andhara Pradesh, Karnataka and Maharashtra would be easier and quick as land records and Aadhar-linking of bank account are relatively complete. While the real impact of the scheme remains to be seen, it should definitely act as a demand generator for fertilisers, in our view.

Soil health cards to propel NPK consumption

Against the ideal NPK (nitrogen: phosphorus: potassium) nutrient application ratio of 4:2:1, fertiliser usage is divergent towards N (nitrogen or urea), recording a nutrient ratio of 7.8:3.2:1 in FY16 in India. Such high imbalance leads to poor productivity which is aggravated by small farm holdings, low level of mechanisation and crop protection (pesticide) usage. To overcome this problem, the government launched soil health card project in 2015 which focuses on issuing soil health cards every three years to the farmers. These cards contain crop-wise recommendations of nutrients and fertilisers required for individual farms to help farmers to improve productivity through judicious use of inputs.

The government has linked farmers’ aadhar card, land records and other identity details with soil health cards. These soil health cards have been disbursed after physical sample collection and detailed lab testing. Thus, whenever a farmer presents his details for the purchase of fertiliser, he is guided by the seller to a more suitable option with respect to his soil conditions. In fact, the government is encouraging the use of customised fertilisers specific to soil, crop and area. It has notified 34 customised fertilisers for around 100 districts of the states, namely Andhra Pradesh, Telangana, Maharashtra, Uttar Pradesh, Uttarakhand, Tamil Nadu and Karnataka for crops namely rice, wheat, oil palm, sugarcane, chilli and potato. If implemented properly (which we understand is a big ‘if’), then it has potential to increase usage of NPK fertilisers to a large extent. Please see more details on the scheme later in this report.



Target & status - The scheme was launched in 2015, with a target to provide such cards to all the farmers across the country. These cards contain information regarding the particular farmer’s land quality after a physical sample collection and lab testing. The aim was to correct the nutrient imbalance of the land that had crept in because of misusage of fertilisers over the years and is now affecting crop yields. It will also suggest the best crop to grow on the type of land farmer holds. These cards are refreshed after fresh sampling every three years. Farmers can also track and see details on the specialised mobile app.

Under Phase 1 (FY16 & FY17) 107.4mn cards were issued (100% of the target) by 30June, 2018, translating into a delay of 15 months.

Under Phase 2 (FY18 & FY19) 73.7mn cards were issued till 22nd January 2019 (more than 61% of the target). As soil sample collection is already over 95% of the target, the cards may be issued shortly.

Exhibit 21: A sample soil health card

Source: Ministry of Agriculture & Farmers Welfare, Nirmal Bang Institutional Equities Research



Exhibit 22: Nutrient deficiency in Indian soil

Source: Indian Institute of Soil Science, Bhopal







e-NAM – National exchange for agri-produce trading

In April 2016, the Modi government launched an online trading platform for agricultural products. The platform has over 90 commodities including food grains, vegetables and fruits listed for trading. The objective is to provide better price discovery and connect various local markets in real time. This should help in increasing farmers’ income as the middlemen get eliminated. Farmers can opt to trade directly or through an agent on their own mobile phone. The platform is linked to 585 APMCs (mandis). We believe this market could be a game changer if state governments give support. The ultimate goal is to connect nearly 7,000 small/big markets (mandis) across the country to a unified national market. This concept is very similar to a national-level stock exchange rather than regional exchanges that India has for trading in stocks and securities.

Currently, only 585 mandis are connected and the plan is to connect 200 mandis this year, followed by 215 next year. The number of transactions is increasing, especially between in-state mandis, helping the farmers to get a better price for their produce even in case of over-production. The mention is important as agriculture is a state government subject and historically there has been almost no trade between two APMCs. Thus, this is a fundamental change/reform introduced by the central government which could have a long-lasting effect.



Exhibit 25: National Agriculture Market Working Model



Diversification into non-subsidy & related businesses

Crop protection segment

CRIN is among India’s top 5 players in crop protection chemical business and its focus on recently off-patented molecules. The segment derives 44% of its revenues from exports. Ithas the capability to manufacture 15 technical items and is globallythe third- producer of Mancozeb. CRIN’s total manufacturing capacity (across six plants) in crop protection business stands at over 60,000 metric tn per annum. It has a wide product portfolio of 60 brands. Currently, the company has operations in 81 countries through over 900 registrations. During FY18, the business received 73 new registrations and it introduced 4 new products. Led by exports, we expect the segment to continue posting 7%-9% volume growth over the next couple of years.

Exhibit 26: Crop protection business overview

0%

5%

10%

15%

20%

25%

0

1,000

2,000

3,000

4,000

5,000

6,000

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

2Q

FY

19

3Q

FY

19

4Q

FY

19

E

Revenue EBIT Margin

(Rsmn)

Source: Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 27:Crop protection – revenue split

India56%

APAC14%

Africa12%

South America8%

Central America7% Europe

2%

China1%

Source: Source: Company, Nirmal Bang Institutional Equities Research



Growth opportunities – India’s crop protection market is expected to grow from US$2.3bn in FY15 to US$3.1bn in FY20E, while the export opportunity should increase from US$2.1bn to US$3.2bn in the same time period. Going forward, the management expects the Indian market to grow 7% and exports at 9%. In the generic space, by 2022, nearly 26 crop protection molecules are going off-patent and the cumulative opportinuty could be in excess of US$1.5bn, as per our estimate. Also, India’s 16% share of herbicide usage is much below global share of 47%, indicating a long-term opportunity.

Exhibit 28: Rising Incidence of pests hurting farm produce

total pests At present

in 1940 Serious pests Total pests Serious pests

Rice 35 10 240 17

Wheat 20 2 100 19

Sugarcane 28 2 240 43

Groundnut 10 4 100 12

Mustard 10 4 38 12

Pulses 35 6 250 34

Source: Company reports, Tata Strategic Management Partner, Nirmal Bang Institutional Equities Research

Exhibit 29: Molecules going off-patent

1.2

1.6

0.4

0.7

0.20

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2016 2017 2018 2019 2020

(US$bn)

Source: Company reports, Tata Strategic Management Partner, Nirmal Bang Institutional Equities Research

Specialty nutrients

This business unit comprises water soluble fertilisers (WSFs), sulphur products and other micro nutrients. The company employs a team of agronomists which is supported by an integrated marketing team for spreading awareness and generating demand for its products. During FY18, the unit introduced three new products which has extended its crop-based approach to paddy, potato, pulses and other horticulture crops. The unit has three manufacturing facilities, including the one in a joint venture with SQM. CRIN established India’s first bentonite sulphur plant at Vizag in 2006. It is currently an exclusive producer of WSF grades like Speedfol, Insta, Superia, Ultrasol. The company plans to increase its focus on crop-based approach i.e. specialised WSF for a particular crop rather than a generic offering. Currently, focused WSF contributes 39% to its business as compared to 20% in 2010. The installed capacity is in excess of 40,000tn, including Kakinada’s 15,000tn WSF plant and Vizag’s 25,000tn bentonite sulphur plant.



Organic manure

Future growth of the business can be assessed from the fact that more than 60% of Indian soil is deficient in organic carbon. CRIN is the leader in the business with 18% market share in city compost segment and 30% value share in overall organic manure in India. During FY18, the unit increased its sales volume by 9% to 0.14mt. In the last 10 years, the unit has increased its volume at a 25% CAGR. To propel volume in the segment, the company is partnering with city administration (like Visakhapatnam) for processing of waste into organic manure. The unit focuses on oil cakes, phosgold (compost + rock phosphate), molasses and other by-products. The growth drivers for the business are largely dependent on government push as of now. In the 2018 budget, government announced multiple measures to promote organic farming. Waste procurement and management also found mention in smart cities and swachh Bharat schemes. The Galvanizing Organic Bio-Agro Resources Dhan (GOBAR-DHAN) scheme also helped in spreading awareness.

Exhibit 30: CRIN’s Product Portfolio – organic fertilisers


Retail stores

CRIN has established a chain of 800 rural retail stores across the states of Andhara Pradesh, Telangana and Karnataka. These stores cater to nearly 3mn farmers anually and provide products and services. The company is currently expanding stores in Maharashtra. These stores provide fertilisers, crop protection products, seeds, animal feed, farm equipment, agriculture insurance services, agri-credit, soil testing services and other related activities. The company is pitching them as ‘one-stop’ for all agri-needs. Nearly 75% of the revenues from retail shops is derived from CRIN’s captive products and the company is targeting to garner 45% of the sales from non-fertiliser products/services.



Exhibit 31: Number of Retail Stores

20

300

400 423

641

800

Dec-07 Dec-08 Mar-09 Mar-11 Mar-13 Mar-16


Farm mechanisation

CRIN entered the farm mechanisation business by forming a JV with Yanmar (40%) and Mitsui (20%). The company has partnered with local governments and has established custom hiring centres for farmers to take farm machinery on rent. The company is a leading player in rice transplanters in Tamil Naidu, Andhra Pradesh and Kerala. The business is synergetic with the company’s retail operations.

Rising share of non-subsidy businesses

CRIN is continuously transforming its product mix towards non-subsidy businesses. EBITDA contribution from non-subsidy businesses has increased from 23% in FY09 to 32% in FY19. We do not expect any pick-up from the current run-rate of a 1%-2% shift every year. However, the shift is important as it not only improves EBITDA because of higher margins, but also helps in reigning working capital costs. Crop protection, currently the biggest contributor among non-subsidy businesses,contributes 14% to total revenues. This implies that other businesses in this categy i.e. specialty nutrients, organic fertilisers and retail contibute 8% to CRIN’s total sales.

Exhibit 32: Non-subsidy revenue & EBITDA contribution




Exhibit 33: CRIN’s Revenue Mix

86.2% 85.1% 86.1% 85.5% 85.6%

13.8% 14.9% 13.9% 14.5% 14.4%

FY17 FY18 FY19E FY20E FY21E

Nutrient & Other Crop Protection


Exhibit 34: CRIN’s EBIT Mix

70.3% 74.6% 77.5% 76.9% 77.8%

29.7% 25.4% 22.5% 23.1% 22.2%


Nutrient & Other Crop Protection Source: Company reports, Nirmal Bang Institutional Equities Research



Superior financials among peer group

Highest EBITDA margin in the listed space

CRIN commands highest EBITDA margin among all listed fertiliser companies in India. The company has constantly earnerd higher-than-average EBITDA margin in India. Two of the distingushing factors among Indian and global phosphatic fertiliser companies has been backward integration and government intervention. Almost all global peers have solid backward integration including ownership of phosphoric rock (mosaic, phosAgro). We would like to highlight that CRIN’s quest to build a strong raw material supply chain will help it to maintain and even widen its lead over Indian peers. The reason for having a stronger supply chain is regular procurement of raw materials which allow the plants to run at optimum capacity and yield better fixed-cost absorption.

Exhibit 35: EBITDA margin of peer group

EBITDA Margin (%) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Coromandel International (CIL) 10.6 13.2 14.8 11.3 9.1 8.5 7.9 6.7 9.8 11.2

Indian Peers

IFFCO 6.5 10.4 12.2 8.1 9.8 7.9 8.4 6.5 9.5 5.2

The Fertilisers and Chemicals Travancore (FACT) (3.0) 1.9 5.7 6.6 (6.3) (5.8) (7.7) (10.7) 3.3 10.5

Paradeep Phosphates Limited (PPL) 14.6 9.7 10.7 7.8 6.4 2.9 5.7 6.3 11.7 11.7

Deepak Fertilizers (DFPCL) 19.6 23.4 22.7 17.6 13.1 13.6 8.0 9.5 11.2 9.4

Rashtriya Chemicals & Fertilizers (RCF) 6.2 9.1 9.7 8.7 9.9 9.5 11.7 6.8 6.7 4.5

Zuari Agro Chemicals (ZACL) NA NA NA 5.4 5.6 3.9 4.9 4.4 8.2 8.6

Gujarat State Fertilizers and Chemicals (GSFC) 15.5 13.7 26.0 23.5 14.4 12.1 12.4 11.4 10.0 10.5

Indian Average 10.0 11.6 14.5 11.1 7.7 6.6 6.4 5.1 8.8 9.0

Global Peers

The Mosaic Company (MOS US) 26.8 25.4 31.3 28.1 22.1 22.8 22.7 14.4 15.3 17.7

Israel Chemicals Ltd (ICL US) 25.1 27.5 31.0 29.0 23.1 19.4 22.1 7.5 18.8 35.5

Potash Corp (POT US) - Acquired 37.5 46.6 55.0 45.4 44.9 42.9 41.4 25.9 19.8 22.7

PhosAgro PJSC (PHOR RM) 25.0 26.6 35.2 32.9 22.9 30.5 43.5 38.5 28.3 31.4

Sinochem International Corp (600500 CH) 4.5 3.2 2.0 1.1 2.7 3.9 5.0 4.3 5.2 5.0

OCP SA (550328Z MC) - Morocco 22.9 - - - 26.8 25.7 33.9 24.5 23.8 -

Global Average 16.3 17.6 21.3 17.4 14.6 14.1 15.7 11.1 13.0 14.2




Best FCF generation in India

CRIN has consistently generatedbest free cash flows with respect to its sales among all Indian peers. The management’s approach towards sustainable growth has resulted in a much better balance sheet and working capital situation. An analysis over a longer period reveals that the management is not ready to sacrifice balance sheet strength to chase growth. Also, one of the important reasons of slower past growth has been the management’s concisious decision to stay away from nitrogenous fertiliser or urea. While urea has seen its consumption grow tremendously, the government’s interferance in the form of delayed subsidy payment and controlled selling prices have hurt companies operating in this space.

Exhibit 36: Free cash flow generation of peer group

Free cash flow (Rsmn) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Coromandel International (CRIN)

CFO 159 6,928 7,956 940 9,853 14,609 861 184 9,152 2,556 -

Minus: Net capex (1,161) (2,215) (1,907) (2,361) (2,585) (1,114) (921) (1,075) (808) (1,210) -

FCF (Rsmn) (1,002) 4,713 6,049 (1,421) 7,268 13,495 (60) (891) 8,344 1,346 -

Net revenues (Rsmn) 95,336 63,947 76,393 99,016 90,337 100,532 113,064 114,814 100,308 109,467 -

FCF to sales (%) (1.05) 7.37 7.92 (1.43) 8.04 13.42 (0.05) (0.78) 8.32 1.23 4.30

The Fertilisers & Chemicals Travancore (FACT) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

CFO (463) (1,435) 1,451 1,493 (1,021) 611 1,920 (2,368) 314 994 -

Minus: Net capex (62) (245) (154) (184) (400) (441) (97) (40) (77) (91) -

FCF (Rsmn) (525) (1,680) 1,297 1,308 (1,421) 170 1,823 (2,408) 237 903 -


FCF to sales (%) (2.47) (7.98) 5.27 4.55 (6.13) 0.77 9.20 (13.79) 1.27 4.69 1.02

Paradeep Phosphates (PPL) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

CFO NA (2,343) 4,648 (5,733) (14,441) 11,272 5,325 (5,522) NA NA -

Minus: Net capex NA (264) (413) (642) (1,838) (2,532) (1,579) (2,413) NA NA -

FCF (Rs mn) NA (2,607) 4,235 (6,376) (16,278) 8,740 3,746 (7,936) NA NA -

Net revenues (Rsmn) NA 29,841 35,054 47,261 52,726 42,311 41,588 47,817 36,967 37,966 -

FCF to sales (%) NA (8.74) 12.08 (13.49) (30.87) 20.66 9.01 (16.60) NA NA -8.74

Deepak Fertilizers & Petrochemicals (DFPCL) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

CFO 1,876 2,281 2,393 921 2,248 4,148 (538) (1,104) 7,962 (1,295) -

Minus: Net capex (2,351) (2,398) (1,909) (2,234) (1,336) (1,496) (1,408) (3,480) (7,448) (9,456) -

FCF (Rsmn) (475) (117) 484 (1,313) 911 2,652 (1,946) (4,584) 514 (10,751) -


FCF to sales (%) (3.20) (0.88) 2.97 (5.44) 3.41 6.77 (5.10) (10.64) 1.24 (17.93) -2.04

Rashtriya Chemicals & Fertilizers (RCF) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

CFO 2,688 6,396 6,561 (1,503) (5,558) 3,153 2,117 (6,335) 15,954 10,781 -

Minus: Net capex (2,389) (1,706) (1,279) (3,436) (1,769) (2,224) (2,074) (2,668) (1,879) (5,009) -

FCF (Rsmn) 299 4,690 5,282 (4,938) (7,327) 929 43 (9,002) 14,075 5,772 -


FCF to sales (%) 0.36 8.31 9.56 (7.68) (10.82) 1.41 0.06 (11.12) 19.83 7.92 0.88

Zuari Agro Chemicals (ZACL) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

CFO NA NA NA (18,962) (6,288) 9,193 8,389 (8,690) 10,970 2,927 -

Minus: Net capex NA NA NA (545) (1,526) (651) (1,850) (1,504) (1,448) (721) -

FCF (Rsmn) NA NA NA (19,507) (7,814) 8,542 6,538 (10,194) 9,522 2,206 -

Net revenues (Rsmn) NA NA NA 82,327 78,891 73,408 76,354 76,116 63,769 72,648 -

FCF to sales (%) NA NA NA (23.69) (9.90) 11.64 8.56 (13.39) 14.93 3.04 3.04

Gujarat State Fertilizers and Chemicals (GSFC) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

CFO 8,280 2,492 13,567 5,405 (8,867) 15,750 2,596 (2,429) 9,113 3,575 -

Minus: Net capex (1,291) (1,533) (4,681) (4,059) (4,150) (3,029) (1,391) (2,193) (2,491) (4,989) -

FCF (Rsmn) 6,989 960 8,886 1,346 (13,017) 12,722 1,205 (4,622) 6,621 (1,414) -


FCF to sales (%) 11.88 2.39 18.69 2.54 (20.82) 23.50 2.26 (7.57) 12.58 (2.26) 2.46




CRIN’s strategy of sustainable, albeit slow growth, along with FCF generation has proved to be successful. Resultingly, its stock price has compounded over 10% CAGR (since FY09) as compared to Indian peer average (including CRIN) of 3.2%.

Exhibit 37: Share price performance of peer group

Source: Bloomberg

CRIN’s 10-year median FCF-to-sales ratio stands at 4.3%, which is 100bps above global peer average. We would point out that again the companies with a higher degree of backward integration have posted better FCF-to-sales ratio. Thus, we can reasonably assume that CRIN’s FCF generation should also improve as it increases in-house phosphoric acid production.

Exhibit 38: FCF to sales

FCF to sales (%) - Global peers FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

The Mosaic Company (MOS US) 4.48 6.59 11.71 9.60 6.57 13.17 11.67 5.82 1.56 8.64 7.61

Israel Chemicals (ICL US) 18.76 21.21 11.06 15.96 5.16 2.59 1.67 6.23 7.25 2.54 6.74

Potash Corp of Saskatchewan Inc. (POT US) - Acquired (21.12) 16.09 15.02 13.78 21.74 20.74 17.85 8.24 12.62 12.62 14.40

PhosAgro PJSC (PHOR RM) (3.86) 3.73 22.02 12.98 1.00 6.32 11.45 5.62 (3.27) 6.27 5.94

Sinochem International Corp (600500 CH) 0.27 (0.42) 0.93 (0.70) (0.72) 0.12 (1.21) (0.96) (2.81) NA (0.70)

OCP SA (550328Z MC) - Morocco (14.06) — — — (34.72) (26.23) (13.27) (12.79) (6.35) NA (13.67)

Global average (2.59) 9.44 12.15 10.32 (0.16) 2.78 4.69 2.03 1.50 7.52 3.39




Prudent working capital management

CRIN has managed its working capital relatively better than its peers. In general, working capital stress in the sector has increased tremendously because of government interference (delayed subsidy payment and GST refund). CRIN has receivables of 148 days which is not very good even when compared with other players. For CRIN, the number also includes GST refund relating to inverted duty structure in the past. It has inventory of 91 days which is much higher than that of the industry while its payables of 145 days seem to be working in its favour.

Exhibit 39: Cash conversion cycle

Cash conversion cycle (incl. subsidy) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Coromandel International (CRIN)

Receivable days 38 71 74 77 117 105 94 116 151 148

Inventory days 60 82 76 81 88 76 82 93 100 91

Payable days 71 86 73 85 116 120 118 128 151 145

CCC 27 67 78 72 88 61 58 81 99 94

The Fertilisers and Chemicals Travancore (FACT) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Receivable days 49 71 75 68 90 107 122 142 143 147

Inventory days 62 83 85 83 107 104 99 96 77 83

Payable days 13 38 54 56 58 39 61 82 74 77

CCC 98 116 106 94 139 171 160 156 147 153

Paradeep Phosphates (PPL) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Receivable days 75 73 58 80 149 195 133 133 225 199

Inventory days 47 46 45 45 47 53 57 56 79 75

Payable days 18 18 18 32 28 15 23 32 65 63

CCC 104 101 85 93 167 232 167 157 239 212

Deepak Fertilizers & Petrochemicals (DFPCL) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Receivable days 58 63 49 59 78 63 79 101 119 99

Inventory days 22 29 29 27 29 26 34 41 46 38

Payable days 43 35 19 25 33 30 30 32 47 44

CCC 37 57 59 60 75 59 82 110 118 93

Rashtriya Chemicals & Fertilizers (RCF) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Receivable days 77 85 56 79 120 145 141 169 201 165

Inventory days 30 35 31 48 63 55 42 48 49 38

Payable days 61 57 32 50 59 40 28 28 34 35

CCC 46 63 55 77 124 160 154 189 216 168

Zuari Agro Chemicals (ZACL) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Receivable days NA NA NA 166 187 201 168 177 215 173

Inventory days NA NA NA 48 47 45 44 41 41 44

Payable days NA NA NA 50 40 32 47 51 61 68

CCC NA NA NA 163 193 213 165 167 195 150

Gujarat State Fertilizers and Chemicals (GSFC) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Receivable days 32 49 55 76 122 89 128 151 200 156

Inventory days 42 60 44 40 37 39 43 35 43 46

Payable days 28 39 34 35 35 35 37 31 45 46

CCC 45 69 64 81 125 92 135 155 198 156


Road ahead for working capital

CRIN’s inventory days are much higher than the industry average as it also runs a chain of 800+ retail stores. According to the new DBT system, fertiliser producers will get subsidy payment 15 days after it is sold to the farmer. This is unlike the old system where the producer received 80% of the subsidy receivable at the time of despatch from factories and the remaining after the state government’s confirmation of the fertiliser



reaching retailers. The introduction of the new system took priority and outstanding subsidy from earlier months got further delayed. The government has been slow in clearing past subsidy outstanding and as of September 2018, CRIN was to receive Rs6,500mn (vs. Rs9,000mn) in old subsidy payment. This is equal to 21% of the total subsidy pending at the end of FY18.

When DBT becomes stable, fertiliser companies should see relief in their working capital stress. For CRIN, subsidy outstanding as of end-March 2018 was Rs31,380mn which declined to Rs20,200mn by December 2018. With the claims already filed, we expect the outstanding subsidy to come under the Rs10,000mn -Rs13,000mn range. If working capital financing costs are assumed to be 10%, then on full-year basis the potential after-tax interest savings could be Rs1,200mn which is equivalent to 18% ofreported FY18 PAT.

Exhibit 40: CRIN’s working capital overview

WC - Including subsidy FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Debtors 1,015 1,398 2,024 9,579 18,201 14,835 14,464 16,419 16,217 15,234 - - -

Subsidy receivable 8,803 13,682 13,989 16,260 13,756 11,123 17,894 24,215 26,070 31,380 - - -

Total: Debtors + subsidy receivable 9,818 15,080 16,014 25,839 31,957 25,957 32,358 40,089 41,787 41,503 51,444 54,241 58,558

Receivable days 38 71 74 77 117 105 94 116 149 139 139 135 135

Inventory days 60 82 76 81 88 76 82 93 100 91 91 85 84

Payable days 71 86 73 85 116 120 118 128 151 145 148 147 147

CCC 27 67 78 72 88 61 58 81 98 85 82 73 72




Stellar capital allocation: RoCE and RoE are almost 2x that of Indian peer group

CRIN’s 10-year median RoCE and RoE (which includes a full business cycle and two inventory cycles) at 20.1% and 20.5%, respectively, is almost 2x when compared to the Indian peer group’s averageat 12.5% and 10.1%, respectively. It is also higher than global peer average RoCE and RoE of 17.7% and 16.5%, respectively. This indicatesCRIN’s superior capital allocation and lean operations, especially when its EBITDA margin is much lower than the global average.

Exhibit 41: Financial ratio of the peer group

Coromandel International (CRIN) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 1.5 1.4 0.8 1.2 1.3 0.8 1.0 1.0 0.8 0.9 1.0

Asset turnover (x) 2.5 1.4 1.5 1.5 1.1 1.3 1.4 1.3 1.1 1.2 1.3

RoA (%) 14.8 9.9 13.7 9.4 5.3 4.6 5.0 4.1 5.4 7.2 6.3

RoE (%) 55.7 34.5 40.1 29.1 18.9 16.3 17.9 14.9 17.3 22.1 20.5

RoCE (%) 40.2 24.1 30.4 23.4 14.6 16.4 18.6 15.4 18.0 21.7 20.1

The Fertilisers and Chemicals Travancore (FACT) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) (negative equity) 2.7 5.6 6.5 4.7 -5.2 -2.4 -1.3 -1.4 -1.6 -1.4 -1.4

Asset turnover (x) 1.7 1.3 1.4 1.6 1.4 1.3 1.2 1.1 1.2 1.2 1.3

RoA (%) (net loss) 3.4 -6.0 -2.7 1.1 -19.6 -14.8 -22.2 -27.3 -16.2 -7.7 -11.3

RoE (%) 0.0 -106.4 -29.5 13.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

RoCE (%) 12.1 1.3 8.1 15.8 -23.0 -10.1 -64.3 -49.7 5.9 25.1 3.6

Paradeep Phosphates (PPL) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 1.7 1.7 1.3 1.1 2.6 2.2 2.0 2.6 2.0 1.3 1.8

Asset turnover (x) 1.1 1.3 1.5 1.8 1.4 1.0 1.2 1.2 0.8 0.9 1.2

RoA (%) 6.0 6.3 7.5 6.6 2.7 -3.1 1.2 1.9 1.2 0.4 2.3

RoE (%) 21.0 22.2 22.9 18.7 9.5 -11.8 4.4 7.3 7.0 10.8 10.1

RoCE (%) 13.0 14.4 18.4 16.4 9.8 2.7 6.6 7.7 13.0 13.9 13.0

Deepak Fertilizers & Petrochemicals (DFPCL) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 0.8 0.8 0.8 0.7 0.9 0.7 0.9 1.3 1.0 1.7 0.8

Asset turnover (x) 1.0 0.8 0.8 1.1 1.0 1.4 1.2 1.2 0.9 1.0 1.0

RoA (%) 8.7 8.9 8.9 8.7 4.7 7.9 2.0 3.0 3.4 2.8 6.3

RoE (%) 18.3 19.3 19.1 18.8 10.4 17.7 4.6 7.8 8.8 8.2 14.1

RoCE (%) 20.1 18.5 17.8 18.3 11.8 18.2 7.9 9.7 9.4 8.5 14.8

Rashtriya Chemicals & Fertilizers (RCF) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 0.9 0.7 0.3 0.6 0.8 0.7 0.7 1.1 0.6 0.5 0.7

Asset turnover (x) 1.6 1.2 1.3 1.4 1.2 1.2 1.3 1.2 1.0 1.1 1.2

RoA (%) 4.1 4.8 5.8 5.3 4.7 4.2 5.8 2.5 2.5 1.2 4.5

RoE (%) 12.6 13.4 12.7 11.9 12.1 10.0 13.3 6.2 6.2 2.7 12.0

RoCE (%) 14.1 13.2 14.9 14.3 13.4 11.8 14.6 7.8 6.6 4.4 13.3

Zuari Agro Chemicals (ZACL) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) NA NA NA 3.6 4.1 3.7 3.4 3.8 3.1 3.1 3.6

Asset turnover (x) NA NA NA 1.4 1.3 1.2 1.3 1.1 0.8 0.9 1.2

RoA (%) NA NA NA 3.0 1.2 -0.9 0.3 -2.0 -0.6 1.3 0.3

RoE (%) NA NA NA 18.2 7.2 -5.4 1.6 -12.0 -3.3 7.0 1.6

RoCE (%) NA NA NA 9.1 7.9 6.1 7.4 4.5 6.4 9.0 7.4

Gujarat State Fertilizers and Chemicals (GSFC) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 0.2 0.3 0.1 0.2 0.4 0.2 0.2 0.2 0.1 0.2 0.2

Asset turnover (x) 1.9 1.2 1.2 1.1 1.0 1.1 0.9 0.9 0.6 0.7 1.1

RoA (%) 15.9 7.2 18.5 15.3 8.3 6.9 6.1 5.5 4.8 4.9 7.0

RoE (%) 29.3 12.5 30.1 23.9 13.9 11.9 9.2 8.1 6.9 6.8 12.2

RoCE (%) 36.7 16.8 37.4 30.8 16.8 14.4 11.6 10.3 6.2 6.9 15.6

Indian peer average FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 1.3 1.7 1.6 1.7 0.7 0.8 1.0 1.2 0.9 0.9 1.0

Asset turnover (x) 1.7 1.2 1.3 1.4 1.2 1.2 1.2 1.1 0.9 1.0 1.2

RoA (%) 8.8 5.2 8.6 7.1 1.0 0.7 -0.2 -1.8 0.1 1.4 2.2

RoE (%) 22.8 -0.8 15.9 19.1 10.3 5.5 7.3 4.6 6.1 8.2 10.1

RoCE (%) 22.7 14.7 21.2 18.3 7.3 8.5 0.3 0.8 9.3 12.8 12.5



The Mosaic Company (MOS US) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 0.2 0.2 0.1 0.1 0.3 0.4 0.4 0.4 0.5 0.4 0.3

Asset turnover (x) 0.8 0.5 0.7 0.7 0.5 0.5 0.5 0.4 0.4 0.5 0.5

RoA (%) 19.2 6.5 17.6 11.9 5.9 5.4 5.6 1.7 -0.6 -0.4 5.7

RoE (%) 30.9 9.6 24.7 16.3 9.1 9.1 9.9 3.1 -1.1 -0.7 9.4

RoCE (%) 37.8 14.2 32.1 22.3 NA 10.2 10.4 3.5 4.7 5.6 10.4

Israel Chemicals (ICL US) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 0.5 0.6 0.6 0.5 0.6 1.0 1.1 1.3 1.1 0.6 0.6

Asset turnover (x) 0.8 0.9 1.0 0.9 0.8 0.7 0.6 0.6 0.6 0.6 0.8

RoA (%) 13.2 16.7 22.1 17.8 10.7 5.7 5.8 -1.4 4.2 15.0 12.0

RoE (%) 29.5 38.0 53.1 40.4 23.3 14.0 17.0 -4.4 13.4 40.0 26.4

RoCE (%) 28.5 35.7 47.3 36.3 25.3 14.9 15.1 0.7 12.8 NA 25.3

Potash Corp (POT US) – Acquired FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 0.6 0.8 0.6 0.4 0.4 0.5 0.5 0.6 0.5 0.5 0.5

Asset turnover (x) 0.3 0.5 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3 0.4

RoA (%) 8.5 12.5 19.4 12.1 9.9 8.6 7.2 1.9 1.9 1.9 8.5

RoE (%) 17.8 27.0 42.4 23.4 18.3 16.7 14.8 3.9 4.0 4.0 17.2

RoCE (%) 21.8 38.0 50.9 27.9 21.8 19.1 15.1 3.4 1.4 2.6 20.5

PhosAgro PJSC (PHOR RM) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 0.1 0.1 0.5 0.6 0.9 3.4 2.2 1.3 1.2 1.2 1.0

Asset turnover (x) 0.7 0.9 1.0 0.9 0.9 0.8 1.0 0.8 0.8 0.9 0.9

RoA (%) 7.7 12.0 19.4 18.4 6.3 -8.9 18.4 26.9 10.5 8.6 11.2

RoE (%) 12.8 19.2 39.2 44.3 14.5 -29.6 76.1 80.8 27.2 21.1 24.1

RoCE (%) 20.9 26.0 44.2 47.6 15.6 -11.9 40.0 48.0 21.9 17.0 24.0

Sinochem International Corp (600500 CH) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 1.0 1.4 1.4 1.4 0.6 0.7 0.7 1.1 0.8 NA 1.0

Asset turnover (x) 1.3 1.8 2.2 1.9 1.6 1.3 1.1 1.1 1.1 NA 1.3

RoA (%) 3.5 3.0 3.1 2.1 2.1 3.3 1.2 0.4 1.2 NA 2.1

RoE (%) 11.1 11.5 12.8 8.7 6.9 10.0 4.2 1.6 5.6 NA 8.7

RoCE (%) 13.0 17.3 18.3 15.9 16.4 18.8 11.2 10.4 14.5 NA 15.9

OCP SA (550328Z MC) – Morocco FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 0.7 0.4 0.3 0.4 0.4 0.7 0.8 0.8 0.7 NA 0.7

Asset turnover (x) 0.5 0.8 0.8 0.7 0.4 0.4 0.4 0.3 0.3 NA 0.4

RoA (%) 2.5 15.5 23.5 16.6 7.2 4.4 5.9 2.6 3.0 NA 5.9

RoE (%) 8.5 43.1 53.2 34.3 14.2 9.1 13.2 5.6 6.4 NA 13.2

RoCE (%) 8.5 28.6 39.1 NA 13.0 8.4 12.1 5.9 7.2 NA 10.3

Global peer average FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 10Y Median

Debt/equity (x) 0.5 0.6 0.6 0.6 0.5 1.1 1.0 0.9 0.8 0.7 0.7

Asset turnover (x) 0.7 0.9 1.0 0.9 0.8 0.7 0.6 0.6 0.6 0.6 0.7

RoA (%) 9.1 11.0 17.5 13.1 7.0 3.1 7.4 5.3 3.4 6.3 7.6

RoE (%) 18.4 24.7 37.5 27.9 14.4 4.9 22.5 15.1 9.2 16.1 16.5

RoCE (%) 21.8 26.6 38.7 30.0 18.4 9.9 17.3 12.0 10.4 8.4 17.7




Valuation

CRIN’s stock has declined 21% from its recent high last year because of lower YoY margin as raw materials have become dearer. Revenue growth of 19% during 9MFY19 as compared to 12% YoY has been much better and in fact supported by 13% YoY volume growth. With the recent price hikes and rising backward integration, we expect CRIN to increase its margins in the coming quarters. Additionally, we expect fast payout of past subsidies and GST refunds. This should help in interest cost savings as the working capital intensity declines. We see CRIN as a solid business that continues to generate FCF and RoCE much above its peer group. Expansion into non-subsidy businesses would also lower working capital requirement with overall incremental growth. On the demand side, government’s efforts to ease farm distress, rising subsidy for complex fertilisers and linking soil cards with fertiliser sales could accelerate volume growth for the company.

We have valued the stock on the basis of five-year average forward P/E and assigned a 25% premium to historical mean P/E for the following reasons:

Rising degree of backward integration – sustainable margin improvement and better control over raw material supply.

Higher capacity utilisation – improved fixed-cost absorption and economies of scale.

Volume growth to 9.2% during FY18-FY21E as compared to 6.7% in the past five years.

Reduction in capital expenditure should lead to higher FCF generation.

Exhibit 42: Price Target

September 2020E EPS 30.02

Five-year average forward P/E 16.1

Target P/E 20.0

Target price (Rs) 600

Upside 32%


Exhibit 43: Coromandel's 5-Year Forward PE

0

5

10

15

20

25

30

Jan

-14

Ap

r-1

4

Jul-1

4

Oct

-14

Jan

-15

Ap

r-1

5

Jul-1

5

Oct

-15

Jan

-16

Ap

r-1

6

Jul-1

6

Oct

-16

Jan

-17

Ap

r-1

7

Jul-1

7

Oct

-17

Jan

-18

Ap

r-1

8

Jul-1

8

Oct

-18

Jan

-19

Forward PE 5 yr median PE SD +1 SD -1

(x)


Exhibit 44: Enterprise Value

Enterprise Value FY14 FY15 FY16 FY17 FY18 September 2020E EBITDA

Market capitalisation 62,899 78,185 55,318 91,244 153,159 133,243

Total debt 18,429 22,878 26,767 22,284 27,284 27,284

Cash + deposits 7,572 7,876 6,778 6,901 9,586 9,587

EV 73,756 93,187 75,307 106,627 170,858 150,941

EBITDA 8,052 8,535 7,668 9,827 12,269 17,204

EV/EBITDA 9.2 10.9 9.8 10.9 13.9 8.8




Risks

Volatile phosphoric acid prices

India is the largest importer of DAP in the world as it has almost no quality rock phosphate resources to produce DAP and other complex fertilisers. Phosphoric acid is manufactured from rock phosphate and sulphuric acid. It is the primary raw material required to manufacture DAP, APS, SSP, MAP, complex fertilisers, etc. It forms nearly 40% oftotal raw material costs for CRIN, as per our estimate. India is deficient in rock phosphate and imports most of it even as Rajasthan States Mines & Minerals supplies some quantity. Sulphuric acid is produced domestically.

To manufacture 1tn of DAP, the inputs required are 1.5tn to 2tn of rock phosphate, 0.4tn of sulphuric acid and 0.2tn of ammonia (naphtha). Other complex fertilisers may require lower level of rock phosphate (or phosphoric acid), depending upon the required grade.

As per our estimate, 1.2mt of phosphoric acid can produce 4mt of fertiliser.

Morocco, China and the US are the biggest exporters of phosphoric acid globally and control a major market share. India is the major importer of phosphoric acid and accounts for 40%-45% of total exported volume. For a vertically integrated firm likeCRIN, rock phosphate (used in manufacturing phosphoric acid) becomes equally important. For its needs, CRIN imports rock phosphate from Jordan which along with Egypt accounts for 60% of India’s imports. Mosaic Corp. OCP, PhosAgro and Sinofert Holdings are the major suppliers (exporters) while CRIN, IFFCO, GSFC and Zuari are major importers.

Why did the price of phosphoric acid shoot up in 2018?

China’s new environmental regulations – starting 2019.

Closure of Vedanta’s copper smelter at Tuticorin, Tamil Naidu.

US tariff on Chinese gypsum product imports.

Increase in captive consumption by major exporting companies.

Fall in INR – negatively impacted import prices of raw materials.

To overcome soil pollution problem, China introduced its first-ever comprehensive Soil Pollution Prevention and Control Law starting January 2019 (under planning since 2016 and gathered steam in September 2018). This new law affects phosphoric acid production as the process generates gypsum (pollutant) as a by-product. To produce 1tn of phosphoric acid, 4.5tn of gypsum is produced which was largely disposed of via wet land fill or disposal into the sea. As the captive supply of phosphoric acid became tight, China started importing a major quantity for its fertiliser industry leading to high prices.

Gypsum is also used in manufacturing cement and boards for the construction industry. China is the largest supplier of these products to the US. Under the ongoing US-China trade war, the US imposed a 10% tariff on gypsum products imported into the country from China. This lowered demand for gypsum which further de-motivated chemical companies to produce phosphoric acid.

Vedanta’s copper smelter at Tuticorin, Tamil Naidu, was shut down in May 2018 by the state government after a public protest over local pollution. Recent media reports quoted its copper division’s CEO Mr. P. Ramnath highlighting the importance of the copper plant (and its by-products) for regional fertiliser units. The plant produced 1.2mt of sulphuric acid per year of which 0.6mt is sold in the market, which catered to a large portion of India’s total demand. Thus, the closure of the plant has led to a sharp increase in the prices of sulphuric acid. During 1HCY18, sulphuric acid was being sold close to Rs4,000/tn, which increased to Rs9,000/tn in October, Rs12,000/tn in December 2018 and further to Rs15,000/tn in January 2019. Phosphoric acid prices have also followed this trend.



Delay in subsidy payment or GST refund

Delay in payment of subsidy or GST refund is the risk which the fertiliser sector faces in India because of its interaction with the government. In the past, the government had delayed subsidy payment to fertiliser companies which led to working capital stress and ultimately rising financing costs for the sector. While the introduction of DBT promises of payment of subsidy within 15 days of fertiliser sales, it still continues to face technology-related problems.

Lower subsidy allocation

Lower subsidy allocation to complex or phosphatic fertilisers would lead to their retail price to rise in the market. As a result, demand for these already expensive fertilisers could take a hit.

Farm distress, environmental problems lead to lower demand

Indian farmer continues to remain under distress because of multiple factors. While lower inflation is helpful to city dwellers, farmers get a lower price for their produce. Additionally, as most of the farms are still irrigated by rains, even a small variation in the monsoon pattern has a large effect on crop yield and ultimately on a farmer’s income. If the farmer is not earning well, demand for fertiliser automatically goes down.

Monsoon pattern

India’s major monsoon season falls between the months of June and September (four months) each year. This is called the South-West monsoon which leads to kharif crop sowing during August. The monsoon enters the country from its east coast (Bay of Bengal) and progresses towardsthe north (Rajasthan), effectively covering the whole country. Rainfall between 96% to 104% of the long period average (LPA) is considered to be normal. LPA for South-West monsoon is 89cm or 887mm.

Another rainfall season in India is North-East monsoon which falls between October and December (three months) each year. This season is typically constrained to the coastal states of Telangana, Andhra Pradesh, Tamil Naidu and some times also extends to Karnataka’s border areas. Rainfall between 89% to 111% ofthe LPA is considered normal. LPA for South-West monsoon is 33cm or 332mm.

Exhibit 45: Monsoon Pattern in India

Year SW - % of LPA NE - % of LPA Foodgrain production (mt) Phosphatic fertiliser sales

2018 91% 56% 284.8 17.5

2017 95% 89% 275.1 17.1

2016 97% 55% 251.6 18.6

2015 86% 77% 252.0 15.8

2014 88% 67% 265.0 14.0

2013 106% 118% 257.1 16.5

2012 93% 79% 259.3 21.7

2011 102% 52% 244.5 25.0

2010 102% 45% 218.1 22.1

2009 77% 108% 234.5 19.9

Source: Indian Metrological Department, Ministry of Agriculture, Department of Fertilisers

SW-Southwest Monsoon; NE-Northeast Monsoon

Joker in the pack: El Niño

El Niño means ‘the boy’ in Spanish and refers to a weather pattern that leads to deficit rainfall in India. The counter-weather pattern called La Niña or ‘the girl’ in Spanish generally leads to normal or even higher rainfall in India. Between 2013 and 2015, India witnessed strong El Niño which resulted in lower rainfall leading to lower crop production and ultimately lower fertiliser sales. Also, when food production is low, inflation increases taking along interest rates with itself. This results in increased interest costs for fertiliser companies which are already coping with lower sales volume.



Recent Results – 3QFY19

For 3QFY19, CRIN posted a 12% YoY increase in revenues to Rs30.5bn. EBITDA declined 7.2% YoY to Rs3.0bn as margins fell 200bps to 10%. The fall in margins was largely expected because of run-away inflation in raw material prices in the past few quarters.

Nutrient (fertiliser) segment’s revenues increased 12% YoY to Rs26.2bn as realisation increased 29% YoY, indicating a 13% YoY decline in sales volume. Segment EBIT declined 9% YoY to Rs2.4bn as margins contracted 210bps to 9.2%. EBIT/tn increased 5% YoY to Rs2,344 during 3QFY19.

The crop protection segment posted a 3% YoY increase in revenues to Rs4.5bn. Segment EBIT declined 2% YoY to Rs699mn as margins contracted 77bps to 15.7%.

In the conference-call, the management disclosed that it has gone for a 10%-15% price hike to pass on cost inflation to consumers from 1November 2018. Thus, we expect the margins to recover slightly as raw material prices since then have largely stayed flat.

Exhibit 46: Quarterly Performance

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

10,000

20,000

30,000

40,000

50,000

60,000

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

2Q

FY

19

3Q

FY

19

Net Sales EBITDA EBITDA Margin

(Rsmn)




Management team

Mr. M. M. Murugappan, 62, chairman

Mr. Murugappan is a chemical engineer from the University of Michigan, USA. He has held the position of chairman in group companies like Tube Investments of India, and Cholamandalam MS General Insurance Company. He is on the board of Mahindra & Mahindra, IIT Madras Research Park, Cyient and TI Financial Holdings.

Mr. Sameer Goel, managing director

Mr. Goel is an IIM Ahmedabad alumnus and holds a Bachelor’s degree in Economics from St. Stephens College, New Delhi. He started his career with GlaxoSmithKline Consumer Healthcare (GSK) and worked there for more than 25 years under various roles in India, UK, UAE, West and South Africa. He wasVice President for Africa when he exited GSK. Prior to joining CRIN, he was with Cipla as Country Head - India. He has extensive experience in managing businesses, driving sales across multiple geographies and building B2C businesses.

Exhibit 47: Major shareholders

Name Percentage of Shareholding

Promoters 61.80%

ICICI Prudential Life Insurance 3.85%

DSP Equity Opportunities Fund 2.40%

L&T Midcap Fund 2.02%

UTI - Long Term Equity (ELSS) 1.62%

Kotak Bluechip Fund 1.53%

Franklin India Prima Fund 1.40%




Appendix

Exhibit 48: CRIN’s business attributes

Crop Protection14%

Nutrient & Other86%

Revenue Mix


Exhibit 49: EBIT mix

Crop Protection20%

Nutrient & Other80%

EBIT Mix


Exhibit 50: Fertiliser Business

0%

2%

4%

6%

8%

10%

12%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


Revenue (Rsmn) EBIT (Rs mn) Margin

(Rs/mn)




Exhibit 51: Crop protection business

15%

15%

16%

16%

17%

17%

18%

18%

19%

19%

0

5,000

10,000

15,000

20,000

25,000


Revenue EBIT Margin

(Rsmn)


Exhibit 52: CRIN’s Fertiliser sales volume

CRIN’s sales volume FY17 FY18 FY19E FY20E FY21E

Complex (NPK) 1.9 2.2 2.5 2.7 2.9

YoY (%) - 15.7 14.6 10.5 7.7

DAP 0.6 0.6 0.6 0.6 0.6

YoY (%) - 1.2 (5.7) 3.0 4.0

SSP 0.5 0.5 0.6 0.6 0.6

YoY (%) - 8.8 12.1 2.0 2.0

MOP 0.2 0.2 0.1 0.1 0.2

YoY (%) - (3.9) (15.8) 2.5 3.0

Urea 0.9 0.9 0.8 0.9 0.9

YoY (%) - 2.5 (10.6) 3.0 3.0

Total 4.0 4.4 4.6 4.9 5.2

YoY (%) - 8.9 4.9 6.9 5.6


Exhibit 53: Coromandel's Phosphatic Capacity & Production (mn tons)

3.5 3.5 3.5 3.5 3.6 3.6 3.6 3.6

2.3 2.4 2.4 2.42.7

2.9 2.93.1

66% 68% 68% 68% 75% 79% 82% 86%

FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Capacity Production Utilization

(mn/tons)




Exhibit 54: Coromandel's NPK & DAP Production Estimate

2.032.31

2.60 2.73 2.73

0.38

0.560.26

0.21 0.36


NPK Production Estimate DAP Production Estimate


Exhibit 55: CRIN's phosphatic fertiliser manufacturing plants

FY12 FY13 FY14 FY15 FY16 FY17 FY18

Kakinada, AP

Capacity (mt) 1.3 1.9 1.9 1.9 1.9 1.9 1.9

Production (mt) 1.1 0.9 1.2 1.3 1.3 1.3 1.4

YoY (%) (19.1) (20.9) 39.1 4.1 1.6 0.0 9.4

Capacity utilisation 84.6 45.8 63.7 66.3 67.4 67.4 72.7

Vizag, AndhraPradesh

Capacity (mt) 1.3 1.3 1.3 1.3 1.3 1.3 1.3

Production (mt) 1.0 0.7 0.9 0.9 1.0 1.0 1.1

YoY (%) 7.7 (28.6) 22.9 7.0 3.3 0.0 15.8


Ennore, Tamil Nadu

Capacity (mt) 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Production (mt) 0.3 0.2 0.2 0.2 0.2 0.1 0.3

YoY (%) (2.3) (27.5) (2.7) 33.3 (26.3) (19.2) 109.8



Exhibit 56: CRIN’s phosphatic fertiliser sales volume

CRIN’s phosphatic fert. sales volume FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Unique grade sale (mt) 0.6 0.8 0.9 0.8 1.0 1.2 1.3 1.5

% of total sales 27.3 30.8 33.3 32.0 35.7 39.1 39.7 41.7

Other complex fertilisers (mt) 1.6 1.8 1.8 1.7 1.8 1.9 2.0 2.1

% of total sales 72.7 69.2 66.7 68.0 64.3 60.9 60.3 58.3

Phosphatic fert. sales volume (mt) 2.2 2.6 2.7 2.5 2.8 3.0 3.3 3.5

YoY (%) 0 18.2 3.8 -7.4 12.0 8.5 9.1 7.1




Exhibit 57: CRIN’s market share

16%

13%

16%16%

14% 15%

16%



Raw materials & products

Exhibit 58: Production assumptions

To manufacture Inputs required

1tn of complex fertiliser 0.3tn of phosphoric acid

1tn of DAP 1.5tn to 2tn of rock phosphate

0.4tn of sulphuric acid

0.2tn of ammonia

For 3.5mt total capacity 1.05mt of phosphoric acid


Exhibit 59: Coromandel's tie-ups for Phos. acid (mt)

FY13 FY18 FY19E FY20E

Captive (internal consumption) 0.23 0.25 0.25 0.35

FOSKOR, ICL, GCT, Phoschem 0.60 0.60 0.60 0.60

TIFERT JV 0.20 0.40 0.40 0.40

Market-Spot 0.20 0.10 0.10 0.10

Total (mt) 1.23 1.35 1.35 1.45




Indian fertiliser industry - Overview

Exhibit 60: Fertiliser: Supply Demand Balance 17-18 (in mil tons)


Exhibit 61: Total Fertilizer Production in India (Rsmn)

22.7 22.6 24.5 24.2 24.0

6.9 7.8 8.3 8.0 8.3

3.6 3.4 3.8 4.4 4.7

4.2 4.2 4.3 4.4 3.90.5 0.4 0.4 0.5 0.6

FY14 FY15 FY16 FY17 FY18

Urea Complex DAP SSP A/S Source: Company, Nirmal Bang Institutional Equities Research



Exhibit 62: India’s urea output

9.4 9.3 10.5 10.4 10.7

6.8 6.97.1 7.1 7.0

6.6 6.46.9 6.7 6.4

FY14 FY15 FY16 FY17 FY18

Private Sector Public Sector Cooperative Sector


Exhibit 63: Production & Sale of Phosphatics in India (mn tons)

11.8

9.8 10.511.3

12.2 12.2 12.9

10.6

6.1

3.7 4.1

6.24.9 4.7

21.7

16.5

14.015.8

18.617.1 17.5


Production Imports Sale


Exhibit 64: FY18 NPK fertiliser producers

CIL28%

IFFCO22%FACT

8%

PPL7%

DFPCL7%

RCF6%

ZACL6%

GSFC5%

TCL3%

GFL3%

GNFC3%

MCF1%

MFL1%

Total Production: 8.3mn tons Source: Company, Nirmal Bang Institutional Equities Research



Exhibit 65: FY08 NPK fertiliser producers

CIL24%

IFFCO31%FACT

7%

PPL7%

DFPCL1%

RCF8%

ZACL8%

GSFC3% TCL

6%

GFL0%

GNFC3%

MCF1%

MFL1%

Total Production: 5.8mn tons


Exhibit 66: FY18 DAP producers

Cooperative Sector42%

Public & Private Sector58%


Note: We estimate that during FY18, Coromandel produced 0.56mt of DAP;


Exhibit 67: FY08 DAP producers

Cooperative Sector25%

Public & Private Sector75%





Exhibit 68: Major NPK Grades - Production (mn tons)

2.21.3

2.43.2 2.8 3.1

2.3 2.63.1 3.3 3.0 2.9

1.48

1.97

2.33

2.20 2.851.33

1.311.59

1.85 1.63 1.73 1.89

1.60

0.99

0.88

0.681.12

1.23

0.74

0.86

1.08 1.231.08 1.050.36

0.03

0.17

0.65

0.68

0.27

0.20

0.14

0.24 0.270.25 0.310.48

0.47

0.47

0.49

0.45

0.50

0.48

0.33

0.42 0.460.47 0.480.18

0.15

0.16

0.21

0.25

0.24

0.170.18

0.08 0.120.10 0.13

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

20:20:0:13 10:26:26 12:32:16 14:35:14 15:15:15 16:20:00


Fertiliser subsidy & GST - Overview

Exhibit 69: GST on inputs (raw materials)

Jul-17 Jan-18 Jul-18 onwards

Phosphoric acid 18% 12% 5%

Sulphur 18% 5% 5%

Ammonia 18% 18% 18%

GST on fertilisers (all kinds) 5% 5% 5%

Pre-GST on fertilisers 6% - -

GST on bio-pesticides 18% 12% 12%


In 1957, the then Indian government started regulating the fertiliser sector by tagging it as an essential commodity. Control was put over fertiliser price, production and sales. As the control limited profit- making opportunities, manufacturers lost interest in R&D and innovation. When the green revolution was in full swing in India, the government introduced fertiliser subsidy during 1977 in order to promote the usage and increase crop yield. The first form of subsidy was under the Retention Pricing Scheme. Under this scheme, retail prices were set on a simple cost + profit margin formula. As a demand driver, the scheme worked wonderfully well and fertiliser volume increased dramatically. During the era of economic reforms in India in the early 1990s, the government fully decontrolled NPK fertilisers and also removed subsidy on it. Urea was kept under control. As a result, NPK fertilisers witnessed run-away inflation in retail prices which prompted the government to announce a new concession scheme for these fertilisers within a few months. Under the new concession scheme, the fertiliser was sold only to the state government and money was received from the central government. In 1998, the government introduced a new system of subsidy payment which was calculated on a quarterly basis. It was again a cost-plus approach with a separate payment for transportation. 80% of the subsidy was paid on factory departure and remaining after the state government’s confirmation. After four years, subsidy rates were increased because of cost inflation, but retail prices were kept fixed.



Exhibit 70: Total fertiliser subsidy (Rsbn)

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

P&K fertilisers 415.0 361.0 306.0 294.0 207.0 219.0 190.0 201.0 251.0

YoY (%) - (13.0) (15.3) (3.8) (29.8) 6.1 (13.4) 5.8 24.9

Urea 658.0 738.0 706.0 713.0 731.0 743.0 701.0 508.0 458.0

YoY (%) - 12.1 (4.3) 1.0 2.5 1.7 (5.7) (27.6) (9.8)

Total 1,073.0 1,099.0 1,012.0 1,007.0 937.0 963.0 891.0 709.0 709.0

YoY (%) - 2.4 (7.9) (0.5) (6.9) 2.7 (7.5) (20.4) -

Subsidy backlog 118.0 330.0 273.0 312.0 506.0 578.0 410.0 362.0 300.0

Backlog as a % of total subsidy 11.0 30.0 27.0 31.0 54.0 60.0 46.0 51.0 42.3


In 2010, the government introduced a Nutrient Based Subsidy (NBS) scheme for complex fertilisers which is still in force today. As prices are fully decontrolled, a subsidy rate of per kg nutrient is announced each year.

Exhibit 71: NBS rates (Rs per Kg) Nutrients FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

‘N’ (Nitrogen) 27.2 24.0 20.9 20.9 20.9 15.9 19.0 18.9

‘P’ (Phosphate) 32.3 21.8 18.7 18.7 18.7 13.2 12.0 15.2

‘K’ (Potash) 26.8 24.0 18.8 15.5 15.5 15.5 12.4 11.2

‘S’ (Sulphur) 1.7 1.7 1.7 1.7 1.7 2.0 2.2 2.7

*Including Rs. 300/- per MT for secondary freight from rake point to retail points.

** Excluding the secondary freight of Rs 300 per MT, which was paid separately on per tn per km basis.


Exhibit 72: NBS rate (Rs per mt)

NBS rate (Rs per mt) FY12 FY13 FY14 FY15 FY16 FY17 FY18

DAP (18-46-0-0) 19,763 14,350 12,350 12,350 12,350 8,945 8,937

28-28-0-0 16,657 12,825 11,075 11,075 11,075 8,147 8,676

14-35-14-0 18,866 14,351 12,097 11,630 11,630 9,020 8,593

MAP (11-52-0) 19,803 13,978 12,009 12,009 12,009 8,629 8,327

19-19-19-0 16,387 13,263 11,094 10,460 10,460 8,467 8,242

10-26-26-0 18,080 14,309 11,841 10,974 10,974 9,050 8,241

12-32-16-0 17,887 13,697 11,496 10,962 10,962 8,615 8,101

14-28-14-0 16,602 12,825 10,789 10,323 10,323 8,093 7,753

MOP (0-0-60-0) 16,054 14,400 11,300 9,300 9,300 9,282 7,437

24-24-0-0 (from 1.10.10 to 29.5.12 and w.e.f. 22.6.2012) 14,278 10,993 9,493 9,493 9,493 6,983 7,437

24-24-0-8 NA NA 9,493 9,493 9,493 6,983 7,437

17-17-17-0 14,662 11,867 9,926 9,359 9,359 7,576 7,375

16-16-16-0 (w.e.f. 1.7.2010) 13,800 11,169 9,342 8,809 8,809 7,130 6,941

15-15-15-9 (w.e.f. 10.2010) 13,088 10,622 8,909 8,409 8,409 6,869 6,709

15-15-15-0 12,937 10,471 8,758 8,258 8,258 6,685 6,507

20-20-0-13 12,116 9,379 8,129 8,129 8,129 6,085 6,488

20-20-0-0 11,898 9,161 7,911 7,911 7,911 5,819 6,197

16-20-0-13 11,030 8,419 7,294 7,294 7,294 5,451 5,729

TSP (0-46-0-0) 14,875 10,030 8,592 8,592 8,592 6,091 5,519

Ammonium sulphate (20.6-0-0-23) 5,979 5,330 4,686 4,687 4,686 3,736 4,408

SSP (0-16-0-11) 5,359 3,676 3,173 3,173 3,173 2,343 2,166




Exhibit 73: Nutrient Based Subsidy




Financials

Exhibit 74: Income statement

Y/E March (Rsmn): Consolidated FY17 FY18 FY19E FY20E FY21E

Net Revenue 100,308 109,467 135,086 146,653 158,324

y/y (%) (12.6) 9.1 23.4 8.6 8.0

Purchase of finished goods (12,301) (12,436) (26,994) (18,312) (16,756)

% of sales 12.3 11.4 20.0 12.5 10.6

COGS (62,141) (66,609) (73,984) (90,676) (100,588)

Gross Profit 25,865 30,422 34,108 37,664 40,980

Selling, General & Admin Expense (8,896) (10,829) (11,517) (12,408) (13,291)

Other Operating & Employee exp. (7,142) (7,329) (8,173) (8,799) (9,737)

EBITDA 9,827 12,265 14,418 16,457 17,951

Depreciation (1,007) (976) (1,065) (1,539) (1,627)

EBIT 8,820 11,290 13,352 14,918 16,324

y/y (%) 33 28 18 12 9

Interest Expense (2,238) (1,783) (2,468) (2,456) (2,456)

Interest income 475 540 380 383 420

Other Income 0 0 0 0 0

PBT (adjusted) 7,130 10,090 11,265 12,846 14,288

- Income Tax Expense (2,353) (3,452) (3,811) (4,496) (5,002)

Effective tax rate (%) 33.0 34.2 33.8 35.0 35.0

- Minority Interests - - - - -

PAT (adjusted) 4,777 6,638 7,453 8,350 9,286

Diluted EPS (adjusted) 16.38 22.72 25.46 28.46 31.59


Exhibit 76: Balance sheet


Equity 292 292 292 292 292

Reserves 28,616 30,966 36,482 42,661 49,811

Net worth 28,908 31,259 36,774 42,953 50,103

Accounts payables 29,345 33,590 40,945 43,894 47,259

Other ST liabilities 4,162 3,596 3,596 3,596 3,596

Short-term loans 22,284 27,284 27,284 27,284 27,284

Total current liabilities 55,791 64,470 71,825 74,775 78,140

Long-term loans 0 0 0 0 0

Other LT liabilities 1,751 1,544 1,544 1,544 1,544

Minority interest 0 0 0 0 0

Total Equity & Liabilities 86,450 97,273 110,143 119,272 129,787

Gross block 24,007 24,397 28,693 30,746 32,487

Depreciation (10,732) (11,348) (12,413) (13,952) (15,579)

Net block 13,275 13,049 16,280 16,794 16,908

Other LT assets + WIP 924 1,361 1,361 1,361 1,361

Long-term investments 3,884 2,213 2,213 2,213 2,213

Inventories 17,246 22,271 25,176 25,381 27,005

Debtors 41,787 41,503 51,444 54,241 58,558

Cash & ST Investments 6,902 9,587 6,382 11,993 16,453

Other current assets 2,432 7,289 7,289 7,289 7,289

Total current assets 68,367 80,650 90,290 98,904 109,305

Net current assets 12,576 16,180 18,465 24,129 31,166

Total assets 86,450 97,273 110,143 119,271 129,787


Exhibit 75: Cash flow


PBT 7,123 10,088 11,265 12,846 14,288

Depreciation & Amortization 1,007 976 1,065 1,539 1,627

Other Non-Cash Adjustments (848) (1,189) (3,811) (4,496) (5,002)

Changes in working Capital 1,870 (7,320) (5,490) (54) (2,576)

Cash From Operating Activities 9,152 2,556 3,029 9,835 8,338

Disposal of Fixed Assets 103 31 - - -

Capital Expenditures (912) (1,241) (4,296) (2,053) (1,742)

Increase in Investments & Subsidiaries

(1,240) (4,263) - - -

Decrease in Investments 1,239 4,114 - - -

Other Investing Activities 24 1,764 - - -

Cash From Investing Activities (786) 406 (4,296) (2,053) (1,742)

Dividends Paid (1,403) (2,813) (1,938) (2,171) (2,136)

Change in Short-Term Borrowings (4,044) 4,437 - - -

Increase in Long-Term Borrowing - - - - -

Decrease in Long-term Borrowing (941) - - - -

Increase in Capital Stocks 19 167 - - -

Decrease in Capital Stocks - - - - -

Other Financing Activities (2,275) (1,801) - - -

Cash from Financing Activities (8,644) (10) (1,938) (2,171) (2,136)

Net Changes in Cash (278) 2,952 (3,205) 5,611 4,460


Exhibit 77: Key ratios


Profitability & return ratios

EBITDA margin (%) 9.8 11.2 10.7 11.2 11.3

EBIT margin (%) 8.8 10.3 9.9 10.2 10.3

Adj Net profit margin (%) 4.8 6.1 5.5 5.7 5.9

RoE (%) 17.3 22.0 21.9 20.9 20.0

RoCE (%) 16.9 20.6 21.8 22.2 22.1

Pre-tax RoIC (%) 19.5 24.2 25.0 25.7 27.4

Working capital ratios

Receivables (days) 149 139 139 135 135

Inventory (days) 100 91 91 85 84

Payables (days) 151 145 148 147 147

Cash conversion cycle 98 85 82 73 72

Leverage and FCF ratios

Net cash (debt) (Rsmn) 15,382 17,697 20,902 15,292 10,831

Net Debt (cash)/Equity (%) 53 57 57 36 22

Total debt/Equity (%) 0.77 0.87 0.74 0.64 0.54

FCF Yield (%) 9.2 0.9 -1.0 5.8 5.0

FCF/Sales (%) 8.3 1.2 -0.9 5.3 4.2

Valuation ratios

EV/sales (x) 1.1 1.6 1.1 1.0 1.0

EV/EBITDA (x) 10.8 14.0 10.5 9.2 8.4

P/E (x) 19.0 23.1 17.9 16.0 14.4

P/BV (x) 3.1 4.9 3.6 3.1 2.7




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