MOSL: COROMANDEL INTERNATIONAL (Buy)-Favorable crop dynamics to fertilize growth

Coromandel International: Favorable crop dynamics to fertilize growth; Shift in crop mix likely to boost consumption in FY19

(CRIN IN, Mkt Cap USD2.4b, CMP INR461, TP INR557, 21% Upside, Buy)

Coromandel International (CRIN) manufactures and trades in farm inputs in India. The company operates in two segments: (1) Nutrient and Other Allied Business and (2) Crop Protection. It offers phosphatic fertilizers, crop protection products, specialty nutrients (such as bentonite sulphur, water soluble and organic fertilizers and micronutrients) and organic compost.

 Indian farmers’ preference is likely to shift toward higher-fertilizer-consuming crops such as paddy, soybean and sugarcane due to their increasing prices. This should spur consumption of fertilizers, benefiting companies like CRIN. In this report, we look at the incremental volume prospects for CRIN in its key markets of Andhra Pradesh (AP), Telangana, Maharashtra, Karnataka, West Bengal (WB) and Odisha. These six states account for 93% of CRIN’s NPK/DAP volumes and 73% of its overall volumes. The company also enjoys a leadership position in AP (market share of 59% in NPK fertilizers and 51% in DAP fertilizers) and Telangana (market share of 57% in NPK fertilizers and 61% in DAP fertilizers). Key takeaways from our analysis:

Sowing area under paddy, soybean and sugarcane set to increase

• Prices of key crops like cotton (-8%), gram (-10%), arhar (-34%), moongbean (-21%) and urdbean (-37%) in India have declined sharply year-on-year in 2HFY18.
• On the other hand, paddy prices have increased by 7% and soybean prices have risen by 3% over the same period, indicating a likely shift in the crop mix toward paddy and soybean.
• Our channel checks across the six key states for CRIN indicate that farmers’ profitability in cotton has been adversely impacted by lower yield due to the damage caused by the pink bollworm, and profitability in pulses has been deteriorated due to low prices. We expect cotton and pulses (primarily arhar) acreages to decline by 10% and 4%, respectively in FY19 across the states under study.
• Paddy and soybean acreages, however, are expected to increase by 4% and 13%, respectively.
• Furthermore, stable farm economics for sugarcane are expected to lead to a 12% increase in the crop’s acreage.