This Fertilizer Company Forays into Specialty Chemical Sector. A Bold Move?

'Beta mann me dusra laddoo phoota?' (To be extremely happy).

This is a popular tagline from none other than Mondelez owned - Cadbury Dairymilk Shots' advertisement.

Mann mein laddoo phootna is a popular adage which means being extremely happy after an incident. The company sold two chocolate balls in one packet hence the ad-makers twisted the adage and used the above tagline to symbolize another happy incident.

The above tagline precisely explains the situation of investors in Coromandel International.

The fertilizer company recently made a big-bang announcement.

Coromandel International was already enjoying massive tailwinds but its announcement last week to foray into the specialty chemical space has added to positive sentiment.

Coromandel International: on a growth trajectory...

Coromandel International is part of the Murugappa group. It is headquartered in Hyderabad, Telangana. Originally named Coromandel Fertilisers, the company is in the business of fertilisers, pesticides and specialty nutrients.

It is one of the leading agriculture solutions providers in India having diverse range of products and services. The company enjoys a large market share in the field of an important business segment.

India is an agrarian country. More than 50% of the total Indian workforce is employed in agriculture. Also, India is the world's most populated country. Hence, a robust agriculture sector is both an economic and social need for India.

A robust agriculture sector means better quality agri-produce at an increased pace along with higher income for individuals engaged in the agriculture sector. It does not take Sherlock Holmes to figure out that a growing agriculture sector indicates a growth opportunity in the fertiliser industry.

It looks like Coromandel International is making the most of this opportunity. As of September 2022, the company was a leader in phosphatic fertiliser and super phosphate space with around 17.9% market share.

It had spent a capex of Rs 2.8 billion (bn) in 2022 and plans to spend around Rs 9 bn for the financial years 2023 and 2024. Despite such heavy capex, it plans to retain its debt-free status.

Along with a big capex plan, it also launched nine new products in 2022.

The company has also given decent financial performance during the past five years. In the last five years, the company's revenue has grown at a compound annual growth rate (CAGR) of 11.6%, driven by volumes due to its strong retail presence with over 750 outlets.

The net profit has seen a 17.1% growth on a CAGR basis due to the captive production of phosphoric acid, a key input, and established relationships with the suppliers.

Coromandel International Financial Snapshot (2018-2022)

Particulars (Rs m)	FY18	FY19	FY20	FY21	FY22
Total Revenue	110,985	132,616	131,767	142,570	192,551
Growth		19.5%	-0.6%	8.2%	35.1%
Operating Profit	12,564	14,192	17,310	19,842	21,499
Operating Profit Margin	11.4%	10.7%	13.2%	14.0%	11.2%
Net Profit	6,919	7,196	10,643	13,238	15,247
Net Profit Margin	6.3%	5.4%	8.1%	9.3%	8.0%

Data source: Ace Equity

During the quarter ended 31 December 2022, the company reported total sales of Rs 83,492 million (m), which is a sharp rise of 64% on a YoY basis. During the same period, its profit went up by 41%.

Apart from earning well, the company has also rewarded its shareholders generously. It paid a dividend of 1,200% amounting to Rs 12 per share for the year ended March 2022.

The company also declared an interim dividend of Rs 6 on 2 February 2023. Over the last 5 years, it has paid an average dividend of Rs 9.

Coromandel International dividend payout history (2018-2022)

Particulars (Rs m)	FY18	FY19	FY20	FY21	FY22
Dividend per share (Rs)	6.5	6.5	12.0	12.0	12.0
Dividend payout ratio	27.5%	26.4%	33.0%	26.6%	23.1%
Dividend yield (eoy)	1.2%	1.3%	2.2%	1.6%	1.5%

Source: Equitymaster

Owing to bright growth prospects and decent financial performance, even FIIs have increased their stake in the company in the last three quarters. As on 31 December 2022, the total FII stake in the company stood at 10.3%.

After recognising the opportunity in agri-tech, the company is also adopting new technologies. The company invested in a drone-based startup to launch the first of a kind 'drone-as-a-service'.

All these reflect the company's efforts to become the largest player in the fertilizer industry.

The efforts are also reflected in its share price chart. In the past five years, its share price went up by 63.7%.

Foray into specialty chemical segment

On 22 March 2023, the company announced that its board of directors have approved the plan to expand their operations in crop protection chemicals and foray into the contract development & manufacturing organisation (CDMO) business.

The board further approved to diversify into new growth areas namely specialty and industrial chemicals.

Along with establishing a larger market share in its existing business, the company will also leverage its deep technical capabilities and best-in-class infrastructure to enter into new business avenues.

According to the announcement, the company plans to invest Rs 10 billion (bn) over the next two years in the above businesses and leverage the macro tailwinds in the specialty chemical sector to build a business of scale.

How this foray will help Coromandel leverage on the opportunities...

Its entry into the CDMO business can help leveraging its expertise in handling complex chemistries at a commercial scale and strong development capabilities across various chemistries.

The rising need for better medicines has resulted in the increasing willingness of pharma companies to outsource drug development to CDMOs. In the near future, Indian CDMOs will look to offer end-to-end product development, scale-up and regulatory approval solutions and create compelling new products at rapid velocity.

From ideation to high-volume manufacturing - all elements of the new product's research and development will be taken up by the CDMOs who get into marketing alliances with strong branded generic companies.

The company's current capabilities in crop protection chemicals offer a strong starting position and flexibility for play in speciality and industrial chemicals.

With global supply chain diversification trends and strong policy push by the government, these businesses offer significant growth prospects.

Covid-19 was a blessing in disguise for the Indian specialty chemical sector. China commands a 20% market share in the US$ 800 bn (about Rs 658.8 bn) global specialty chemical industry. But due to strict lockdown restrictions in China, the world turned to India.

India is the sixth largest chemical producer. Low production cost, cheap labour and a proven track record of producing world-quality products made India an attractive investment.

Apart from this, India's proximity to the Middle East, the world's largest source of petrochemicals stockpile, enables it to benefit from economies of scale.

How Coromandel International share price has performed recently

In 2023 so far, Coromandel shares are down 2%. In the past one year, Coromandel International is up 10.8%.

Coromandel International has a 52-week high of Rs 1,094.4 touched on 1 September 2022 and a 52-week low of Rs 779.8 touched on 28 March 2022.

Since specialty chemical stocks interest you, check out the below video where chartist Brijesh Bhatia shares his view on the sector.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...