Hold Coromandel Int; target of Rs 690: PINC Research

PINC Research has recommended hold rating on Coromandel International with a target of Rs 690 in its October 20, 2010 research report.

?Coromandel International (CIL) Q2FY11 results were better than our expectations as net sales grew by 63.6% to Rs 27.6 billion. OPM expanded by 37bps to 18.7% and consequently net profit surged by 86.4% YoY to Rs 3.5 billion. There is an extraordinary income of Rs 1972.3 million in the quarter corresponding to FY10?s subsidy and hence adj OPM and net profit stands at 12.4% and Rs 2.2 billion (our estimate was 12.5% and Rs 1.7 billion respectively).?

?CIL is benefitting from multiple factors in FY11 apart from implementation of NBS and they are coming as positive surprises in different quarters resulting in buoyant performance. Prior to NBS regime, actual subsidy amount get disclosed later & hence there used to be positive surprises if management's calculations were conservative. Extra income of ~Rs 2 billion in Q2FY11 as subsidy for FY10 is because of the same reason. Realisation for traded complex fertilisers are as per NBS where as their international prices were significantly lower in H1FY11 (Ex DAP is subsidised at USD 500/ MT, however, avg international price in Q1FY11 was USD 445 Despite firming up of prices of DAP in the international market, prices of Phosphoric acid remains stable As per NBS calculation, INR-USD is fixed at 46 for FY11, however, with strengthening rupee, actual conversion factor is hovering towards 44 & directly adding to margins.?

?We are positive on the fertiliser sector & believe that there should be significant capacity addition driven by favourable policy. Complex players are better positioned due to strong push from govt for usage of balanced nutrients & huge demand-supply mismatch. We believe the story for this decade to be significantly different from the last decade which calls for strong re-rating of fertiliser sector.?

?We have slightly increased our PAT estimate for FY12 by 2.4% on the back of higher traded volumes (Urea included in portfolio). At the CMP of Rs 683, CIL trades at FY11 and FY12 P/E of 17.2x and 13.9x and EV/EBITDA of 8.8x and 8.3x respectively. Stock has outperformed index by ~160% in last 1year and current valuations looks expensive. Hence we downgrade our recommendation to ?HOLD? with a target price of Rs 690 (14x FY12E EPS),?PINC Research report.

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