Coromandel International: Input cost concerns a short-term blip, hold for the long-term

Coromandel international reported a disappointing set of Q4 FY18 numbers. Though revenue grew by a marginal four percent year-on-year (YoY), net profit nearly halved compared to last year. Earnings before interest, tax, depreciation and amortisation (EBITDA) margins contracted almost 40 percent YoY and operating profit declined 48 percent YoY. After successive quarters of savings, interest costs saw an uptick of around seven percent YoY.

Rapidly increasing input cost along with higher other expenses were the major factors which impacted profitability during the quarter gone by. With bi-annual revision of raw material contracts, fresh prices came into force from January which led to a steep jump in input costs.

Although the company has undertaken a price hike at the end of January, the new prices could not be fully passed on to customers due to a pile up in channel inventory. As a result, the same was not visible in the numbers of Q4.

Increase in the other expenses was due to higher forex loss of around Rs 30 crore and one-time provision of Rs 35-40 crore incurred for the port lease rental contract renewal which is currently under negotiation.

Though the company remained free from long-term debt, noticeable increase in short-term debt was reported, which led to higher interest cost. According to the management, this was mostly on account of changes in subsidy claims, collections and strategically planned increase in inventory stock.

Q4 also saw a 11 percent deficit in north-east monsoons which remained erratic and unevenly distributed especially in regions of Coromandel’s operations. Reservoir levels were almost 24 percent lower compared to a 29 percent increase during the same quarter last year.

Raw material prices have been the main cause for the muted Q4 performance. Prices of phosphorous acid inched up almost 20 percent in January and another eight percent in April. The management expects it to remain around current levels in upcoming quarters. The impact of the increase in cost might be mitigated to a certain extent due to: 1) Price hike taken by the industry towards the end of January, benefits of which are expected to flow in with clearer inventory channels in the current quarter; 2) Strategic build-up of inventory stock at lower costs; 3) Increase in phosphorus subsidy by 27 percent under the recent Nutrient Based Subsidy (NBS) amendment; and 4) Some softening in the prices of ammonia and sulphur.

However, continued scarcity of supply from China still remains a hurdle pushing up costs. Since the management is yet to finalise suppliers for smooth supply of raw materials, this would be something to watch out for.

Post the announcement of Q4 result, there has been a sharp correction in the stock. In the last three months the stock has corrected almost 15 percent post an uptick of around 29 percent in the 12 month period. Coromandel now trades at an estimated FY19 P/E of 17 times and EV/EBITDA of 10.6 times.

The Met Department and Skymet have predicted an above normal southwest monsoon which bodes well for a topline revival in the upcoming Kharif season. Government policies with respect to the minimum support price and full implementation of the direct benefit transfer (DBT) scheme also stand to work in favour of the company in coming quarters.

Though we expect some relief on the raw material cost front due to factors mentioned above, we feel China contract negotiations would be something to watch out for. But the overhang due to raw material cost could continue to a certain extent. Given the clearer channels in Brazil, we see volumes improving for the crop protection business. We expect improved performance in upcoming quarters as Q1 is a seasonally weak quarter for the company.

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