Buy This Debt Free Mid Cap Agriculture Stock For A Target Price Of Rs 1160/Share, Sees 16% Upside

Coromandel International Ltd, an agriculture sector mid-cap stock has been given a 'buy' rating by Motilal Oswal, a leading brokerage firm, for a target price of Rs 1,160/share. The brokerage sees potential gains of 16%, considering the estimated target price by the brokerage and the Current market price of the stock on NSE. Coromandel International repaid short-term debt of Rs 16m in FY22 and is debt free.

Stock Outlook

The Current Market Price (CMP) of Coromandel International is Rs 1004.25/share on NSE. It was opened at Rs 1004.95/Share, while the previous close was Rs 1000,85/share. The 52-week low is Rs 709.35/share and the 52-week high is Rs 1019.45/share, respectively. The CMP is Rs 15.2 below the 52-week high level which it touched on Monday, 18 July before closing. 

 Its share price moved up nearly 2.95% in the last 1 week & 11.95% in the last 1 month, respectively. In the last 1 year, the stock has moved up roughly 16.91%. It has given multibagger returns on 3 and 5 years of investments. In 3 years it gave 169.33% and in 5 years it gave 135.41% returns, respectively.

Long-term strategic initiatives to create a moat in the long run

Strengthening the supply-chain: Coromandel International has strengthened its back-end supply-chain across businesses with significant backward integration, in addition to ramping up its manufacturing capacities through sustained de-bottlenecking efforts. Such backward integrations and strategic procurement initiatives for key input materials helped the business partially tackle the critical issue on the raw material front.

The company pursued a strategic investment in a Senegal rock phosphate mine in FY22. The Senegal mine is expected to provide up to one-third of Coromandel International's rock phosphate requirements in due course of time. Coromandel International is also initiating a new sulfuric acid plant and debottlenecking its existing phosphoric acid plants. The new sulfuric acid plant is expected to come on stream in FY24 and will help Coromandel International augment its sulfuric acid capacity at Visakhapatnam to 3,300MTPD from 1,800 MTPD, while its phosphoric acid capacity will rise to ~1,300tpd from ~1,000tpd.

Improving R&D: Coromandel International's R&D team is using an agriculture research field trial tool (ARM) to enhance the impact of its trials. The tool saves time on designing the trials and developing reports. It also improves accuracy and the quality of the results of such trials. It is using 'Minitab', an advanced tool for analyzing research data and conducting hypothesis testing and regression analysis.

Digitizing processes: Coromandel International is looking to overhaul its IT infrastructure and is ramping up its digital and analytics capabilities. Under its digital transformation program, it has provided its units with a dashboard for materials management, tracking customer escalations, and ascertaining the status of different batches.

Tapping into the emerging growth opportunity: The management is setting up a dedicated office in Chennai to embark upon growth opportunities in adjacent areas that can complement its existing businesses. It has set up a separate structure for looking at investments in new startups and agritech ventures.

Organizational realignment: The management is seeking to re-align its organizational structure to provide greater control, responsibility, and independent decision-making ability at the strategic business unit level.

Aligning with industry trends to improve its business performance

In line with the current trend, Coromandel International has developed a diverse product portfolio, including biological and organic products. It launched nine products in FY22. Aligning itself with the Government of India's intent to promote drone usage in agriculture, Coromandel International has initiated drone spraying on various crops. It has procured five drones and has trained 20 pilots for the same. It is in the process of active collaboration with technology companies and universities for improving its drone spraying services. The management is also focusing on the key strategic levers such as deepening its understanding of the consumer, building power brands, investing in R&D and data analytics, becoming a player of scale, creating new markets, and strengthening its efficiency and quality across the value chain.

Sustainable operating margin on account of better sourcing and backward integration

Revenue grew 35% YoY to Rs 191b in FY22 on the back of higher realization growth in both the Nutrient and Crop Protection business. The Nutrient and Allied business segment grew 36% YoY, with its share in consolidated revenue improving marginally to 87% in FY22 from 86% in FY21. In volume terms, manufactured fertilizer grew 3.8% YoY to 3.7MMT on the back of strong traction in DAP/SSP (up 10.2%/12.8% YoY to 2.2MMT/7.6MMT) and a 1.1% growth in NPK to 27.7MMT. However, volumes for traded fertilizer fell 22% YoY to 0.96 MMT. Revenue from the Crop Protection segment grew 20% YoY to Rs 25.1b in FY22. 

Margin: EBITDA/adjusted PAT grew 8.3%/15% YoY to Rs 21.5b/Rs 15.3b. As per our calculations, EBITDA/MT for manufactured fertilizers (including SSP, assuming an EBITDA/MT of Rs 1,300) stood at Rs 3,925/MT (up 10% YoY). The same for manufactured NPK and DAP stood at Rs 4,588/MT (up 12% YoY). EBITDA for the Crop Protection segment stood at Rs 4.3b (up 18% YoY), with margin at 17.9% (down 50bp YoY). 

Operating performance: Coromandel International's fertilizer plants operated at 84% capacity and produced 2.9MMT of DAP and complex fertilizers. Its consumption market share improved to 16.7% (up 100bp YoY). The SSP product segment within fertilizer grew 55% and maintained its leadership position, with a market share of 16.1% in FY22 v/s 12.8% in FY21. 

Working capital cycle: In FY22, its overall working capital days fell to 42 days from 56 days, led by a decrease in trade/government subsidy receivable days to five/six days (v/s 14/15 days in FY21). Coromandel International's reduced its trade and subsidy receivables by over 50% as collection improved on the back of higher consumption, while subsidy disbursements by the government improved.

Cash flow analysis: CFO fell 50% YoY to Rs 20.7b in FY22. The CFO/EBITDA ratio stood at 97% in FY22 (v/s 209% in FY21). The decline was primarily due to extraordinarily high cash flow in the base year (FY21) as the government released pending subsidy to aid fertilizer companies. 

Capex: Total capex stood at Rs 2.8b in FY22 (v/s Rs 1.9b in FY21). In FY22, Coromandel International began setting up a sulfuric acid plant in Vishakhapatnam and commissioned a state-of-the-art liquid fertilizer plant. Other major projects included expansion of capacity for granulated SSP and Bio-pesticides, phosphoric acid evaporator, structural stability, and other maintenance initiatives. 

RoCE/RoE: RoCE/RoE stood at 27.5%/26.6% in FY22 v/s 25.3%/28.1% in FY21. The fall in RoE was due to lower net profit margin (8% in FY22 v/s 9.4% in FY21) and higher asset turnover (3x in FY22 v/s 2.7x in FY21), while the equity multiplier remained at 1x in FY21 and FY22.

Valuation and view

The management has taken various strategic initiatives such as strengthening its back-end supply chain, improving its R&D capabilities, and digitizing its processes. It is aligning itself with key industry trends by expanding its product portfolio to address the growing demand for high-performance complex Agri input solutions. All such initiatives will help it to create a moat and drive growth in the long run.

Going forward, the key growth levers include: i) the management's focus on increasing penetration in existing markets, ii) debottlenecking to raise capacity and strengthening its back-end supply chain, iii) efforts to lower the cost of raw material, while maintaining the same level of quality, and establishing an alternative sourcing destination (which will aid cost savings), iv) launch of threeto-four molecules in the Crop Protection segment, v) inorganic growth, and vi) its focus on profitable growth in the Retail business by reorganizing stores based on consumption patterns.

The brokerage has said, "We expect revenue/EBITDA/PAT CAGR of 12.7%/9.6%/10% over FY22-24. We value Coromandel International at 18x FY24E EPS to arrive at our TP of Rs 1,160. We maintain our Buy rating."

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.