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Aarati Krishnan

A view of a Coromandel Fertlisers unit... The company has scaled up capacities through acquisitions.

SKYROCKETING prices of inputs and an uncertain subsidy dispensation combine to make this a challenging period for companies focussed on the production and marketing of phosphatic and complex fertilisers. But Coromandel Fertilizers, now the second largest phosphatic producer in India, has made all the right strategic moves to secure its position in the industry over the long term. The pesticides business also holds good potential, given the scope for low-cost manufacture of generics and established brand equity for the company's formulations.

Despite the near-term pressures on the company's earnings performance, investors with a three-year perspective can consider accumulating the stock for long-term appreciation. At Rs 154, it trades at a modest price-earnings multiple of about seven times its trailing 12-month earnings.

Cost pressures high

After reporting an impressive surge in both sales and profits in 2003-04 due to the merger of EID Parry's farm inputs division, Coromandel Fertilisers' earnings took a hit in the September quarter, plunging 33 per cent over the corresponding previous period. Rising prices of inputs such as ammonia, sulphur and rock phosphate have put pressure on margins.

While prices of ammonia (which is indirectly pegged to gas and, thus, crude oil prices) have doubled since the beginning of this year, those of sulphur and phosphates have also risen by 10-15 per cent on the back of robust global demand. The surge in input costs has prevented companies from taking full advantage of the surge in demand for phosphatic fertilisers this fiscal after a good monsoon the previous year.

Though prices of inputs have now receded from their peaks, they continue to hover well above last year's levels and will continue to keep the cost pressure on producers such as Coromandel.

Subsidy boost

This will be offset partially by higher subsidy payments from the government, but only after a time lag.

The Government only recently acceded to the producer's demand for a subsidy linked to the contracted prices of phosphoric acid for shipments received in early 2004.

The payment of these subsidies will bring substantial relief to Coromandel Fertilisers. But as there is usually a time lag between sales and the receipt of subsidies, the relief on margins may come in late.

Despite these glitches, a friendlier policy environment is likely to evolve over the long term. The recent surge in commodity prices has taken the prices of imported fertiliser well beyond domestic production costs.

The unexpected surge in landed costs, coupled with glitches in availability, has helped drive home the point that a degree of self-reliance in fertiliser production may be a desirable goal over the long term.

Right strategic moves

On its part, Coromandel Fertilisers has made the right strategic moves to emerge as one of the most competitive producers in the domestic industry.

For one, it has rapidly scaled up capacities by acquiring a strategic stake in Godavari Fertilizers, a phosphatic producer. It has also been quick to effect an operational turnaround at Godavari through debt reduction and investments in modernisation.

Between Coromandel and Godavari, the group now commands a lion's share of the southern and eastern markets for fertilisers.

Scale could be of considerable importance in reducing costs and competing at import parity prices, once the sector is further deregulated.

Second, the company has sought to introduce greater stability to its raw material suppliers by offloading strategic stakes in Godavari Fertilisers to Foskor and Groupe Chimique Tunisien, two of the largest suppliers of phosphates in the world.

Backward integration into intermediate products such as phosphoric acid and sulphuric acid and long-term arrangements with a range of global suppliers also lower the risks associated with raw material availability and volatility in prices.

Third, the company has also leveraged its locational advantages to the hilt. The group is unique in having easy access to three ports, a crucial advantage in a business where 90 per cent of the materials are imported.

Investments over the years in handling and unloading facilities have helped further reduce inland freight costs.

The company is also working at slowly extending its distribution reach. Attempts are on to expand the catchment area, which extends over a good chunk of the southern and eastern belt, into States such as Maharashtra and Uttar Pradesh.

The pesticide business acquired from EID Parry has displayed robust growth in the past year. In this business, the transition to a product patents regime from January 2005 may leave MNCs with an upper hand at the premium end of the business.

However, as a low-cost manufacturer of pesticides with an extensive distribution network, Coromandel should be in a position to leverage on opportunities from marketing pacts and contract manufacture for MNCs.

The company should also continue to hold its own in the market for specialised formulations from off-patent molecules, which constitute a chunk of the volume sales in the domestic agrochemicals market.

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