Improved Margins, Cash Balance Of Rs 1753 Crores, Makes This Stock Good To Buy

Markets have once again begun trading soft. The Sensex, which had crossed the 60,000 points about a month ago, is back to 56,800 levels. This does provide some opportunities to investors to buy stocks on declines. Sharekhan is recommending investors to buy the stock of Coromandel International Ltd.

Coromandel International

The company is the largest complex fertiliser manufacturer and marketer in the country and offer a wide range of products, customised to the crop and soil needs. The company also caters to speciality nutrients. The Crop Protection business produces insecticides, fungicides, herbicides and plant growth regulators and markets these products in India and abroad. Coromandel is the second largest manufacturer of Malathion and is the major manufacturer of Phenthoate in Asia.

According to Sharekhan, for the quarter ending March 31, 2022 results were strong with 51% beat in net profits at Rs. 290 crore (up 86% y-o-y) due to sharp beat in EBITDA margin and higher other income.

"Revenue growth was also strong at 50% y-o-y to Rs 4,227 crore (marginally ahead of our estimates). Revenue/EBIT from nutrients and other allied business grew strongly by 56%/92% y-o-y to Rs. 3,683 crore/Rs. 325 crore; EBIT margin was up 166 bps y-o-y to 8.8%. Crop protection revenue/ EBIT up 8%/14% y-o-y, while EBIT increased 67 bps y-o-y," Sharekhan has noted.

Reasons to buy the stock of Coromandel International

Sharekhan sees a number of reasons to buy the stock of Coromandel International. Cash balance of Rs. 1,753 crore provides scope for inorganic growth and the same could accelerate growth in the CPC business, the brokerage has said.

Higher fertiliser subsidy, selective recent price hikes, and backward integration would help protect margin and strong growth outlook for the CPC business (product launches), which would act as key drivers for earnings growth, according to Sharekhan.

"Moreover, higher adoption of complex fertilisers (as compared to urea) by farmers bodes well for Coromandel. We expect revenue/PAT to grow at 10%/13% over FY2022-FY2024E along with high RoE of 23-24%. Moreover, a strong balance sheet would help Coromandel pursue inorganic growth opportunities and report sustained strong growth over the medium to long term. Hence, we maintain our Buy rating on Coromandel with an unchanged price target of Rs. 1,070. At the current market price, the stock trades at 15.5x its FY2023E EPS and 13.4x its FY2024E EPS," the brokerage has said.

Management commentary remains optimistic

According to the management, Nutrient-based subsidy (NBS) rates for phosphatic and potassic fertilisers for H1FY2023 largely covers rise in raw-material cost; thus, management has guided for fertiliser margin of Rs. 4,000- 4,500/tonne for manufactured products. "Exploring inorganic opportunities in the crop protection business and may announce something on this front in the current fiscal," Sharekhan has said.

The key risks according to the brokerage firm are lower demand due to poor monsoons and regulatory changes might affect revenue growth momentum and adverse variations in raw-material prices, delay in the ability to pass on price hikes, and adverse currency fluctuations might affect margins. The stock of Coromandal International were last seen trading at Rs 896 on the NSE.