Q2FY24 Review: Coromandel Intl: Fertiliser margins to come under pressure

30 Oct 2023 , 01:35 PM

Coromandel delivered resilient performance in Q2 – as it managed to improve margins despite providing for cut in NBS rates. Raw materials particularly ammonia has been very volatile and Coromandel displayed robust sourcing capabilities to protect its fertilizer margins. The steep cut in NBS rates will pressurise margins in H2’24, however the benefits of backward integration (phos acid + sulphuric acid) will limit the impact. Analysts of IIFL Capital Services cut their FY24-26 estimates by 4-7% and their TP, rolled forward to Dec’24 comes down to Rs1,160. With limited upside on offer, they downgrade the stock to ADD. 

Fertiliser remained strong, but will come under pressure: 

Fertiliser business was resilient as despite ~7% decline in manufactured volumes and providing for NBS rate cut, EBITDA was up ~5% YoY. Robust sourcing along with higher market share of unique grades seems to have aided EBITDA. Analysts of IIFL Securitites also note that the input costs have been favourable during Q2 and thus it is likely that Coromandel’s margins were better than expected. Conversely, the crop protection business profitability got impacted due to de-stocking and pricing pressures. 

Specialty Chemicals, CDMO and adjacencies: 

The company is closely evaluating the opportunities in the specialty chemicals and CDMO space and has initiated regulatory and infrastructure activities at the new Dahej site. Further, its investment in Dhaksha, a drone start-up, is progressing well and has bagged order for logistics drones from the Indian Army. During Q2, the company also acquired 16.53% equity in XMachines, an AI based robotics start-up focusing on operations like Planting, Weed & Pest Control. 

Limited upside, downgrade to ADD: 

NBS cuts were steep (33-84%) and have resulted into sharp reduction in subsidy (38-84%) which will impact profitability in H2’24. The industry will either have to take price hike or look forward to correction in raw material prices to protect margins. A further increase in the raw materials will be very challenging. Thus the near term outlook on profitability is uncertain. Analysts of IIFL Capital Services cut their FY24-26 estimates by 4-7% now estimate EPS to grow at a Cagr of a mere ~2.4% from FY23-26. With limited upside on offer, they downgrade the stock to ADD.