Market share gain makes Coromandel a preferred pick among fertiliser stocks

The stock of Coromandel International has been hitting its yearly highs. It is the preferred pick in the fertiliser space. An increase in rabi sowing and volume growth in fertilisers has led to a bullish view on the company.

Overall acreage for the ongoing rabi season is up nearly 7 per cent over last year’s levels, with sowing for key crops of wheat, rice, and pulses being higher than the year-ago period.

In addition to a better rabi season, reservoir levels — 40 per cent above the average in key agricultural states — are also a welcome sign. Analysts highlight other positives — including improving farm economics and lower raw material costs — should help the sector and the company.

Higher minimum support prices and rise in rural inflation to the highest level in two years, and support from insurance claims are expected to aid spending on farming.

The extended kharif and rabi seasons have reflected well in fertiliser sales for the December quarter. Sales growth of complex fertilisers (NPK and DAP) for October and November is up 27 per cent year-on-year due to a low base and sharp correction in channel inventories.

Fertiliser volume for Coromandel was down 12 per cent in the year-ago quarter. Given strong growth, analysts expect the company to improve its market share.

Analysts at Spark Capital are positive about the company. They expect improvement in margins on backward integration. The company is setting up a plant for phosphoric acid production, which accounts for 40-45 per cent of its raw material costs.

Margins over the next three years are expected to improve by 70 basis points over FY19-22. Further, the start of large irrigation projects, which will reduce dependence on rain, increase in crop cycles, and improvement in subsidy disbursement mechanism, too, are a positive for Coromandel.

At the current price, the stock — up 53 per cent since its lows in August — is trading at 14.6x its 2020-21 earnings estimates. Investors can add the stock to their portfolios on dips.