Coromandel bets on backward integration to boost profitability

In his first interaction with analysts this week, managing director and CEO S Sankarasubramanian highlighted the increased thrust on cost-savings from backward integration. This would result in an increase of around 40% in Ebitda per tonne for manufactured fertilisers to around ₹7,000 by FY28 from the current guidance of ₹4,500-5,000 per tonne for FY25. In H1FY25, this metric stood at ₹4,800. 

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The bulk of the gains are likely to come from captive manufacturing. The company is in the process of ramping up sulphuric acid and phosphoric acid capacities to 2000tpd and 650tpd at its plants in Kakinanda, which will be operational in FY25 and FY26. Management is upbeat on H2FY25 business prospects as the fertiliser business is expected to see healthy growth and better year-on-year margins.

Dependence on subsidies

Coromandel’s image has been that of a company dependent on subsidies from the government for fertilisers. It derived 72% of its Ebitda in H1FY25 from subsidy-dependent businesses. Management’s goal is to reduce this dependence and earn about half of its profit from non-subsidy businesses in the future. To do so, it plans to launch contract development and manufacturing operations (CDMO) for agriculture and specialty chemicals.

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Coromandel also has a 58% stake in Dhaksha Drones – a new-age business that offers innovative solutions for precision agriculture, defence, and industrial operations. The company has an order book of around ₹250 crore for defence, but a meaningful earnings contribution from this could accrue gradually. The company intends to expand its distribution reach across India by doubling the number of retail outlets from the current 850, which should help it sell more agrochemical products apart from fertilisers. 

The stock’s sharp rally so far this year has been attributed to various factors such as a good monsoon and expectations of a favourable government policy on nutrient-based subsidy. Coromandel is also debt-free and has a healthy cash balance of ₹4,214 crore as of H1FY25. Adjusted for this, the current market capitalisation discounts FY27 Ebitda estimates by 14x, based on projections by Motilal Oswal Financial Services.

While the valuation may appear reasonable, the preponderance of the subsidy-dependent business means no further expansion of the valuation multiple is warranted. On the flip side, any execution delays in the capacity expansion at the Kakinada plants could trigger downgrades in earnings estimates.

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