Coromandel International Q3FY12 Earnings’ Review

Murrugappa Group-led Coromandel International has reported a dismal performance in the December quarter with consolidated profits dipping by 13 per cent (YoY) to Rs 130.63 crore from Rs 150.45 crore in December 2010. Adjusting for an exceptional item of Rs 35.5 crore arising out of a one-time payment to promoters of Sabero Organics towards non-competent fees, the net profit for the December 2011 quarter stands marginally higher by 3 per cent at Rs 155.32 crore.

This along with a decent consolidated revenue growth of 25 per cent to Rs 2,550 in December 2011 from Rs 2,043.25 crore in December 2010 paints a clear picture that while the topline has been robust on a YoY basis, the bottomline has come under severe pressure as a result of higher input costs, greater contribution from low margin-yielding traded goods and rise in interest outgo. While the raw material and interest costs have gone up by 20 per cent and 40 per cent, the purchase of traded goods have shot up by a whopping 2.6x to Rs 1,057 crore from a mere Rs 290 crore.

As traded goods carry lower margin benefits, the margins consequently came under pressure. The EBIDTA margin for the quarter ended December 2011 has contracted by 340 bps on a yearly basis to 9.05 per cent. The PAT margins have contracted by 224 bps to 5.12 per cent. Another interesting factor that’s come to light on close observation of the initial numbers is that there has been a massive pile-up of stock-in-trade and work-in-progress in the December quarter, which points towards near-term risks of sluggish demand. These two have shot up by 17.8x to Rs 630.09 crore from Rs 33.67 crore last year whereas sales hasn’t managed to keep up the same pace. Hence this clearly indicates towards a scenario of higher supplies and sluggish demand, which would eventually put pressure on the prices going forward.

This same trend in the inventories can be seen on a sequential basis which shows that the pile-up in stock has occurred between the months of September to December. Talking further on the sequential numbers (QoQ), it is evident that the heat of slowdown has been felt by the company in strong measures. The reasons for the dismal sequential performance can be attributed to the same that were seen on a yearly basis, but the gravity is far deeper here.

Both topline and bottomline have shown dismal performance between the quarters of September and December 2011. While the topline has marginally dipped by 6 per cent, the severity is far greater on the bottomline front which has seen a fall of 53 per cent from Rs 282.38 crore in September 2011. The margins have fallen sharply by 663 bps on an EBIDTA level and 529 at the PAT level.

In conclusion, we expect this dismal performance of Coromandel to severely impact its profitability going forward. With international prices declining and the rupee showing signs of appreciation, Coromandel will also suffer loss on its inventory pile-up. Add to this the recent media reports which suggest that the government may revise downwards the subsidy component for FY13 on complex fertilisers, which will further affect the company’s financials. Our advice to readers is stay away from the counter.