Indian Agri-input sector is witnessing a strong tailwind on the back of very good monsoon and high water levels in reservoirs. Agri-input sector which is quite cyclical depending on the monsoon consists of Seeds, Fertilizers and Crop protection products(pesticides). To understand the sector, I studied Coromandel International Ltd, one of the larger player in agri-inputs in India. I will share my understanding and learning in the blog ” Coromandel International Ltd- Analysis “.
In the current blog I will be covering: 1) Brief about agri input industry 2) About the company 3)Acquisitions 4)Raw material & Strategic alliances 5) Products 6) Financial analysis 7) Impact of subsidy dependence
I also have written one more blog on agri-inputs. I would request you to go through that before reading this article.
Agri-input industry
To begin with if you are not aware that in 1940s globally there was an acute food shortage across the world. With just 100cr population that point of time, many pundits predicted severe problems are to come if the population grows.
Now, 80 years since then, 770 cr population, we have more than enough. And that can be credited to fertilizers & crop protection products.
Talking about India, with a lot of emphasis on agriculture in the last 5 decades, today India is the 2nd largest agricultural producer globally, with a net trade surplus(AR20). But still its productivity levels have remained relatively low, resulting in a low farm income. We have larger percentage of people working in the fields compared to other nations.
Some of the factors contributing to this are:
Fragmented land holdings , Lower irrigation, Imbalanced nutrient usage, Low mechanization, Lack of output marketing infrastructure, Weak storage & distribution and gaps in output marketing linkage.
One of the solution to this problem is increasing the use of agri-inputs. Agri-inputs consists of seeds, fertilizers & crop protection.
Fertilizer as the name suggest is used to fertilize the soil for the right growth of the plant/crop and better yield.
Crop protection is used to protect crops from fungus(fungicides), unwanted herbs(herbicides) & insects(insecticide). More you can read here.
Coming to fertilizers, a plant need 17 essential nutrient to grow like the way we need several categories of nutrients. Of which 3 are the most important i.e. Nitrogen(N), Phosphorus(P) & potassium(K). These 3 comes under primary nutrient category.
The proportion of N: P: K most suited for Indian soil is 4:2: 1.
In the primary nutrient category, Urea is the fertilizer mainly used as the source of Nitrogen and has lot of govt interference in it. That is the reason domestic manufacturer goes for manufacturing mainly phosphatic(P) & potash(K) fertilizers (limited interference by the govt in the form of Nutrient based subsidy.)
Different crops require different combination of NPK nutrients. So, you can see that packets of fertilizers with 14:35:14 and several other combination. Some secondary & micro-nutrients are also added to fertilizers depending on the soil the region.
Due to lower prices of Urea coz of govt subsidy, farmers go for higher usage of the same that leads to soil nutrient distortion which impacts crop output.
In the current blog, I will be discussing about one of the largest fertilizer company in India which is Coromandel International.
Coromandel International Ltd- Analysis
Incorporated in 1961,Coromandel International Ltd is a flagship company of the Murugappa group.
Murugappa group is one of the renowned business group on India. Its business includes Coromandel International, EID Parry, Wendt, Cholamandalam, Carborundum Universal etc. One of the best known names in terms of corporate governance. I am sure you must have heard you atleast a few of these names.
A group company E.I.D Parry (India) Limited holds 60.47% of Coromandel International Ltd as of March 2020.
EID Parry was the pioneer in bringing fertilizer to India & in 1980s EID Parry acquired Coromandel Fertilizers, which then acquired Godavari fertilizers.
Coromandel International Ltd- Analysis
Business Highlights
I will highlight key pointers explaining the business of the company:
Coromandel International Ltd is a market leader in phosphatic fertilizer(Fertilizer that contains phosphorus(P) nutrient), it is the second largest phosphatic fertilizer companies in India (after IFFCO) and had 15.7% market share as on FY20. The co. derives 38% revenue from unique grade products(branded) through which it demands better margin. Over time the company has moved towards specialized products to improve its margins.
Company is a leader in many of the segment it serves to. The company manufacturers 13 different types of fertilizers. Coromandel accounts for ~22% of India’s total phosphate fertilizer production capacity.
In terms of SSP fertilizers which is a low phosphate containing fertilizer, the company has a market shares of 14% via the acquisition of Liberty Phosphate. Similarly, the company ventured into crop protection products via acquisition of Sabero Organics.
Coromandel derives 85% revenue from Fertilizers(Nutrients) & 15% from Crop protection products(Pesticides) and about 95% of the business is India centric.
In the phosphatic fertilizer, the company primarily produces complex(combination of all three primary nutrients NPK) fertilizers. The production lines can be shifted to produce different grade of products depending on the market demand i.e. if raw material cost such as phosphoric acid increases, the company can produce NPK fertilizer with lower levels of Phosphorus.
Smaller or regional players usually make fertilizer consisting of single or mostly 2 nutrients. Mostly plain vanilla/commonly used products where the margins are lower.
Given the dependence on imported raw materials for its phosphatic fertilizer, the fertilizer plants are located close to the port. Two of this fertilizer plant are completely integrated at Visakhapatnam(Vizag) and Ennore, and are among the lowest cost producers in India. Also, the company has formed several strategic alliances for procuring raw materials from companies in resource rich nations, which is quite unique.
Now coming to the manufacturing plants, of the total 16 plants of the company, two of the larger fertilizer plants at Kakinda & Vizag are running at almost full capacity. Management is looking to debottleneck these. If the demand is robust requiring higher utilization of plants, the company imports plain vanilla DAP fertilizer and produce more of NPK.
To achieve self sufficiency, the Company has its own facility(two) for manufacturing Phosphoric acid at its plant in Vizag & one phosphoric acid plant at Ennore. That eliminates one step of manufacturing & hence increases the margin of the company.
BEING A LOWEST COST PRODUCER IS SOMETHING THAT IS VERY DIFFICULT TO BEAT
Every year company keeps introducing new products under almost all its sub verticals.
In terms of which fertilizer to push into the supply channel, the company has to look at farming patterns based on several factors prevailing at that time.
Talking about the remuneration , the MD Sameer Goel gets paid ₹4.57 cr & CFO ₹2.22cr. The salary is quite conservative in comparison to other companies of similar or smaller sizes. Looking at the execution history and how the company has continuously improved the performance, it looks like the management is quite capable.
For Financing the sales of their products, the company has tie up with Cholamandalam (group company) in their retail outlets.
The company has team to anticipate how prices(raw material) are increasing or decreasing & the company makes contracts accordingly. Also, they have a China office to track what is going on in China & form any sort of strategic alliance(also very unique from what others do).
To be able to ready for the next leg to growth in the industry, the company has already doing a lot of stuff such as focus on organic products, use of technology (Drone etc) in various aspects of farming.
How are product pricing done?
The product pricing is largely dependent on raw material prices. If raw material cost goes up, the product prices increase & vice versa.
In the recent past, the prices of phosphoric acid have been declining. With declining raw material prices the companies’ cost goes down but the product prices do not gone down in the same fashion, leading to higher margins.
Complex/unique products fetches little better margin
Farmers are very price conscious, being a lower cost manufacturer helps in terms of maintaining margins.
Competition
Their competitor includes Chambal Fertilizers, UPL and a few public sector enterprises. I have not studied the competitors yet, so would not be able to comment on it right now.
Coromandel International Ltd- Analysis
Acquisitions
The company has grown mainly via inorganic route i.e. via acquisitions.
Acquired companies:
1.Bio pesticide business from E.I.D Parry (India){a Murugappa group company} in FY18.
2. Liberty Phosphate Limited and Liberty Urvarak Limited: In January 2013, CIL acquired more than 50% stake in liberty group for 284cr. They were the market leader in SSP fertilizers with a market share of 14%.
3. Sabero Organics Gujarat Limited: In May 2011, Coromandel International Ltd (CIL) acquired 74% stake in Sabero Organics Gujarat Limited (SOGL) for Rs 452 crore. Sabero was a major player in pesticides segment and has significant presence in export market.
Coromandel merges the parent company of the acquired group and then the subsidiaries of these companies become the direct subsidiary of Coromandel International Ltd.
If you can observe, the acquired businesses are quite strategic helping CIL in terms of spreading its presence in other agri-input segments where it lacked presence.
The company has 13 subsidiaries, 3 joint ventures and 17 associate companies.
Coromandel International Ltd- Analysis
Raw materials, Strategic alliances & Plants
Coming to raw materials, the key raw material of for the company is Phosphoric acid. Other raw material includes sulphuric acid, ammonia, potash & urea. Ammonia, Phosphoric acid & Sulphuric acid comes in liquid form and are transported to the plant from ship via pipelines whereas Potash & urea in solid form are transported via trucks.
Global alliances: Tunisian Indian Fertilizers ( TIFERT) with Group Chemique,Tunisia, Foskor, South Africa for the supply of phosphoric acid. More is visible in the image below.
To achieve self sufficiency, the Company has its own facility(two) for manufacturing Phosphoric acid at its plant in Vizag & one phosphoric acid plant at Ennore that helps improve margins.
Company has 16 manufacturing facilities located across India.
Strategic alliances:
Slow release nutrients: Shell technology, Japan
Farm mechanisation: Yanmar, Japan
Water Soluble Fertiliser: SQM, Chile
Supply security for Phosphoric acid: TIFERT , Tunisia and Foskor, South Africa
Research collaboration in nutrient technology with many reputed universities
Coromandel International Ltd- Analysis
Products
1.Nutrient and other allied business: Phosphatic Fertilizer
For the key product category which is the Phosphatic fertiliser, CIL is 2nd largest manufacturer and marketer in India. The company Segments its Fertilizer business as Nutrient & allied business.
Phosphoric fertilizers are made from phosphate rock which mainly contains phosphate minerals. India lacks these resources and are hence imported.
To produce different kinds of phosphatic fertilizers, these imported rocks are treated with different acids to create different grades. Sulfuric acid route produces a low phosphorus fertilizer – single super phosphate(SSP). Phosphoric acid produces a higher concentration phosphorus fertilizer. By treating with Nitric acid, we get Nitrophosphates which are combined with potassium to produce the complex NPK fertilizers.
DAP(diammonium phosphate) is the most common phosphate fertilizer, contains 46% phosphorus. The co. manufacturers DAP and NPK fertilizers. Urea comes under a separate nitrogenous fertilizer category which the company does not manufacture but trades in.
If raw material cost such as phosphoric acid increases, the company can produce NPK fertilizer with lower levels of Phosphorus.
In FY20,the company integrated its SSP & NPK business to generate operational efficiency. Will also help in cross selling.
2. Nutrient and other allied business: Specialty Nutrients & Organic Fertilizer
This segment consists of Water Soluble fertilizers(WSF), Sulphur, City compost and bio-pesticides, most non-dependent on subsidy.
WSF: Company was a pioneer in launching water soluble fertilizer(WSF) in India. To get the technology of WSF, co formed a joint venture(50:50) with with SQM, Chile manufacturing WSF at Kakinada; Andhra Pradesh. The JV was formed in 2009, the Kakinda plant came on stream in 2013, in July 2020, Coromandel bought back the stakes of its JV partner for 12 cr. WSF are niche and expensive, so the market is quite limited.
Bio pesticides: In 2018, CIL acquired Bio-Pesticide business from its parent EID Parry. Biopesticides is a form of pesticide based on micro-organisms or natural products rather than chemical ingredients. Biopesticides are expensive ones, takes longer to kill pests, need to use it very precisely. Hence, they are not used much in developing world but more in the developed world(Europe & North America). The co. is targeting its Bio pesticides in that particular region only.The company is presently the largest neem-based bio pesticide manufacturer globally and Organic marketer in India.
City compost: Under this govt initiative, the company processes organic waste of cities for fertilizers & addresses to the carbon deficiency of arable soil. Company gets compensated a part of cost of produce(₹1500/T) by the govt. Co. has highly diversified product range in organic manure, including City Compost, Pressmud,K-ash, which is potash derived from molasses, and other products.
The company has taken a number of steps to be a leader in the organic manure space looking at the shift towards sustainable farming.
Coromandel SQM (India) Private Limited( In crores)
3. Nutrient and other allied business: Retail
The company started its retail stores in the year 2007 with just 2 stores with reached to 660 in 2014 and 800 in 2015. Since then there has been no growth in the number of stores and the company closed 50 stores in FY20 and the current number stands at 750.
The purpose of setting up these stores as to be the front face of the company in its core areas. Other than selling the company’s product, these Retail outlets also offers farming services including crop advisory, soil testing and insurance to around 3 million farmers. This also act as a brand building exercise & get the farmers directly involved with the brand.
The company also has a tie up with Yanmar of Japan for Agri-machinery. The company rents out agri machinery to farmers under an govt scheme(Custom hiring & service centre) which has seen great traction lately(42% growth in FY20).
RETAIL BUSINESS IS DEPENDENT ON MONSOON
Yanmar Coromandel Agrisolutions Private Limited(In Crores)
4. Crop Protection Products
Coming to crop protection products(Pesticides), they derives 50% of sales from exports & 50% from domestic market (15% of total revenue). Pesticides continues to be a key focus area of export and will be the major growth driver going forward. In the Crop Protection segment, the company has setup 3 new plants for manufacture of Pymetrozine, Pyrozosulfuron, and Mancozeb WDG in FY20.
Crop protection biz works somewhat like pharma where the company has to register its products in new markets & then start selling. Also, the company is ready with its products whenever any patented molecule is about to expire.
Coromandel International Ltd- Analysis
Financial Analysis
Coromandel International Ltd- Financial Analysis(In crores)
Coromandel’s revenue moves up and down with monsoon but over the years the dependence/ volatility has reduced. Also, the company has reduced its debt considerably from ₹2600cr in 2016 to ₹1600cr in 2020 while growing its revenue from ₹11,500 cr in 2016 to more than ₹13000 cr in 2020. The borrowing is just short term working capital loans, which attracts lower interest rates.
One more point that got highlighted during the Q1FY21 concall was the drop of about ₹150 cr in freight(logistics) cost. So, according to the management the company keeps on trying new initiative to bring down costs. One of which was directly delivering the products to dealers rather than sending to warehouses, storing it & then transporting it to the dealers. Sign of very good management.
The return ratios of the company are excellent implying very prudent use of capital.
Sales to fixed asset varies between 7 to 9 implying for incremental growth incremental capital required will be quite low. One reason for the high asset turnover is some part of the sales(10-20%) is traded that is company does not manufacture it but just buy and sell it such as Urea, sometimes DAP.
If you look at the quarterly numbers, the September quarter(Q2) gets the highest revenue(40% of sales) & profitability. This is due to the Kharif season(June to Oct). Also, during that time the inventory levels also goes up as the company does not want to miss out on peak demand period. Another point to keep in mind is, since the production cannot be increased significantly just for one season, so the company manufacturers evenly throughout the year maintaining inventory.
Coromandel International Ltd- Analysis
EBIT Margin movement between Nutrient & Crop Protection biz
EBIT Margin movement between Nutrient & Crop Protection biz
The graph on the top represents EBIT margin for Nutrient(Fertilizer) business and crop protection business.
Crop protection(CPC) biz margins are much higher than fertilizer business. In Jan 2019, there was a fire at the company’s crop protection plant in Sarigam, Gujarat. The operation of the plant restarted only in July 2019. Due to which their was an big impact on the CPC biz margins.
As you can observe, there is significant margin improvement in the nutrient business from 5.7 % in 2016 to 13% in 2020, that is quite remarkable. The management cites the below reason for the same:
1. Moving away from plain vanilla products to more complex & unique grade(have doubled the share in the last 4-5 years, currently at 38%) products
2. Smarter sourcing of raw materials
3. Increasing capacity utilization
4. Backward integration
Coromandel International Ltd- Analysis
Impact of Subsidy
Being a dominant player in the fertilizer industry(85% of revenue), the company is dependent on the Govt policies/subsidies a lot. Around 20% of total sales of the company are always stuck with the govt(THAT IS QUITE SIGNIFICANT) in addition to the regular business receivables.
As you can see in the above image, how the Cash conversion cycle changes drastically by including the govt subsidy receivable in total receivable amount. Higher receivable impacts working capital quite substantially as well as the operating cash flow.
Earlier the companies used to get 75% of subsidy payment when fertilizers was transferred to wholesalers but under the new DBT policy,companies get the payment only once it gets sold to farmers via POS. A POS system captures all data of the farmers and farmers are provided the fertilizer at the subsidized rate.
And quite often to show lower Fiscal deficit(Govt revenue- Govt expenditure), the central govt defers a large percentage( more than 50%) of subsidy payable. DBT was thought to be a gamechanger. Although it has streamlined a lot of stuff. BUT STILL BOUND BY ONE BIGGEST PROBLEM
WHICH IS FACED NOW BY FERTILIZER COMPANIES OF HUGE WORKING CAPITAL REQUIREMENT.
As on FY20, the company’s fertiliser business has some sort of subsidy dependence on 80% of sales. The company plans to bring it down to 50%.
In terms of backlog clearance, govt gives first preference to Urea manufacturers, then to NPK & last one to SSP.
Coromandel International Ltd- Analysis
Growth drivers:
Launch of new products, be it in newer categories or towards new crops. This is the key growth drivers.
Export in the International market is on a high priority in management’s radar. In particular crop protection biz, where the company is aggressively registering its products in several new markets. Three new crop protection plants that have come on steam recently.
Two very large scale irrigation projects in the key market of Telangana & Andhra Pradesh. The Telangana project is already inaugrated.
In the médium term, the company is looking at superior products and also looking at different formats of fertilizers which are coming, which are more crop-specific from a marketing point of view
New phosphoric acid plant at Vizag is likely to aid the margin further by way of backward integration
BEING PRESENT IN THE RIGHT STATES
ANDHRA PRADESH & TELANGANA ARE TWO CORE STATES FOR THE COMPANY(fertilizers) & THE STATE GOVT’S FOCUS ON AGRICULTURE HAS HELPED THE COMPANY A LOT. Other key states include Karnataka & Maharashtra.
Two very large scale irrigation projects in the key market of Telangana & Andhra Pradesh. The Telangana project is already inaugurated.
THINGS ARE GOING TO GET BETTER WITH THE PROJECTs COMING ON STREAM. IF FARMERS ARE MORE ASSURED OF IRRIGATION WATER THEY CAN PLAN BETTER AND PURCHASE MORE, SOMETHING THAT HAPPENS IN HARYANA & PUNJAB.
ALSO, AGRICULTURAL OUTPUT HAS GONE UP BY 2.5X IN TELANGANA SINCE THE FORMATION OF THE STATE IN 2014. ASSURED & TIMELY PURCHASE BY TELANGANA GOVT IS AN ADDED PLUS POINT.
In Telangana, the govt has launched ‘Rythu Bandhu scheme’, under which the govt pays ₹5000 per crop season under direct cash transfer scheme(TOTAL 10,000 PER YEAR). The farmer is free to buy what he intends to do with the money wrt agri-input choice. The scheme has seem good amount of success. Similar scheme has also been launched in Andhra Pradesh by the name of Rythu Bharosa giving out ₹13,500 for the entire year.
ALL OF THE ABOVE WILL DRIVE THE COMPANY’S GROWTH IN THE FUTURE. THE CO. IS A BENEFICIARY OF BEING PRESENT IN THESE 2 STATES.
Key pointers to understand the Fertilizer sector
Dependence of the company on govt subsidy
State govt policies in the key markets of the company
Agriculture is highly cyclical and depends on monsoon, so will the industries depending on it.
Consecutive droughts leads to lower consumption of agri-inputs. That leads to higher inventory in channels. Higher inventory leads to stressed cash flow.
In terms of monsoon, First year of good monsoon goes towards inventory liquidation. From second year of good monsoon, things start getting better in terms of encouraging financial performance. Also, first year of drought is not a big problem as the high level of water in the reservoir helps to mitigate the impact of low rainfall.
Coming to the raw material for P& K fertilizers, it is completely imported, if the raw material cost increases, domestic production declines, import increases. So, it is important to understand how is the raw material sourcing is done
Coromandel International Ltd- Analysis
Based on my understanding, Coromandel International Ltd is a Very good company in a bad sector.
These companies needs to change their business model with changing policies of the govt.
Also, every now and then there is some changes & notification from the govt. Recent was May 20 notification on the govt’s plan to ban 27 key crop protection product(Revenue generated from them $2Bn). If this is implemented it would be huge setback for the country & crop protection industry which exports 50% of its total produce.
Looking at all these factors the company wants to distance away from subsidy dependent biz(currently 80%) to 50% in the medium term by focusing on specialized nutrition, organic products and also on Crop Protection on the bio pesticide.
Its a huge company (almost ₹2bn in revenue), with a few business verticals having several products in different categories . So if one goes down, other makes up for it. That makes the business consistent along with a very capable management in place.
Coming to lockdown, the company had a very limited impact given that the business had been categorized as an essential one.
ONE SIMPLE SOLUTION SUGGESTED BY COROMANDEL INTERNATIONAL’S MANAGEMENT IS THAT OF TRANSFERRING SUBSIDY DIRECTLY & TIMELY TO THE FARMER’S BANK ACCOUNT. IT WILL BE A SOLUTION TO MANY PROBLEMS SOMETHING THAT WORKS SEAMLESSLY FOR SUBSIDIZED LPG CYLINDER. IT WILL SOLVE THE WORKING CAPITAL PROBLEM FOR MANUFACTURERS, FARMERS GET TO BUY THE PRODUCTS AT SUBSIDIZED RATES AND GOVT ANYWAY IS PAYING FOR THESE SUBSIDIES. I AM SURE IT WILL HAPPEN SOMEDAY.
AS OF NOW, IT SEEMS THE FERTILIZER COMPANIES ARE PAYING THE SUBSIDIES ON BEHALF OF THE GOVT TILL THE GOVT PAYS. And this is probably the reason that is holding back the fair valuation of the company despite very impressive performance. The subsidy due every quarter remains at around 40-50% of sales which are receivables from the central govt.
Good video showing the Bird sanctury at the Kakinada plant as well as the manufacturing process at the same facility
Further reading: