COROMANDEL — earnings call
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Prepared remarks
“Coromandel International Limited
- COROMANDEL INTERNATIONAL LIMITED · MS. JAYASHREE SATAGOPAN – CHIEF FINANCIAL
DR. RAGHURAM DEVARAKONDA - EXECUTIVE DIRECTOR
MS. JAYASHREE SATAGOPAN – CHIEF FINANCIAL OFFICER - COROMANDEL INTERNATIONAL LIMITED Coromandel International Limited February 06, 2023
Moderator · Conference Operator
Ladies and gentlemen, good day and welcome to the Coromandel International Limited Q3
Thank you very much.
We will now begin the question answer session.
The first question is from the line of Tarang Agarwal with Old Bridge Capital.
Please go ahead.
Coromandel International Limited February 06, 2023
Tarang Agarwal
Good afternoon, thank you for the opportunity.
I have three questions.
The first is, if there is any update on BMCC mines, and when can we see some round of commercializations coming from them.
The second, on the S3 plant, you said that the commercialization will start from July 2023.
Just wanted to get a sense on what is the post-tax cash payback that you are anticipating for this plant once it commercializes and how much time will it take to run at optimal utilization and the third is phos acid prices for the quarter.
Jayashree Satagopan
On the BMCC mines, I would request Sankar to provide an update and Sankar, if you want you can take in SAP-3 and the PA price.
S. Sankarasubramanian
In respect of BMCC operations, we are seeing good traction in the last three months.
In fact, we have deployed our team and we have engaged mainly focusing on the mining part and that has yielded good result and we are stabilizing the operations.
We started receiving shipments and hopefully we should be able to achieve the target volumes what we plan for the year 2023-2024.
So, at this point of time, whatever we envisage to do, we are on the right track.
Tarang Agarwal
Sir just a follow up.
So my sense is about a third of your requirement were to be met by this mine.
So can you anticipate that coming in from FY2024.
S. Sankarasubramanian
It should meet 20% of our requirement to begin with but the potential is high.
In fact, it will be beyond what we envisaged earlier, potentially it is high, but next year we can say approximately 20% of our requirements can be met from this mine.
In respect to sulfuric acid plant is your second query, right?
Tarang Agarwal
Yes.
S. Sankarasubramanian
Sulfuric acid plant will be commissioned by July and whatever we stated to achieve as per the plan we would be able to get the production as planned earlier.
So, from August onwards we should be able to come back to full stream.
We may require a month of stabilization.
From August onwards, we should be achieving the rated capacity.
Tarang Agarwal
How much would the payback be sir, on this, I mean, in how many years.
S. Sankarasubramanian
See the sulfuric acid is more investment from the view point of securing the raw material.
As currently our requirements are quite significant almost 1 million ton of sulfuric acid.
A part of it 50% is being covered through our captive facility what we have envisaged.
So, we look at more of augmenting our captive source of raw material.
It is a function of import prices, Coromandel International Limited February 06, 2023 sulfuric acid versus the cost of own manufacturer, and also it generates other savings in terms of power and other utilities.
So, I would see it is a supply security.
Tarang Agarwal
And the last one on phos acid prices.
S. Sankarasubramanian
We have finalized our fourth quarter price at $1050 as against $1175 which was there for the previous quarter.
We have signed up with our joint venture partner, Foskor.
Tarang Agarwal
Thank you.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Bharat Sheth with Quest Investment Advisors Private Limited.
Please go ahead.
Bharat Sheth
Hi!
Coromandel management team, thanks for the opportunity and welcome Sankar and Dr. Raghu on the board.
So, I have a question first on the fertilizer.
See Jayashree in view of declining fertilizer raw material price as well as final product price and the farm output price is also declining.
So, with that background, how do we see fertilizer demand for FY2024, that is first question, and since we are operating almost at full capacity, so what will be our strategy to grow that volume, and second thing, our EBITDA per ton has increased substantially over last six to seven years from almost 2000 level to around 6000 in FY2023 because of several business initiatives as well as backward integration program.
Can you give the margin trajectory how do we see now from here onwards?
How much decline if at all if it happens can we anticipate or any further room to improve.
Jayashree Satagopan
The first one is in terms of the raw material prices coming down.
We have seen this trend over the last few months, and we expect in most of the materials, this trend to continue.
With that we would also expect some sort of a correction in the subsidy realization from the Government, which is what I was mentioning a little while ago.
Given those and the good monsoon conditions that is there and the increase in the overall area under cultivation, we expect the demand for fertilizers to continue to be good, both in terms of NPK, DAP as well as SSP.
So given that there is a good demand for fertilizers, our production, our imports will be helpful in terms of meeting the farmer requirements.
As far as the capacity is concerned, you will see, I was mentioning that on a year-to-date basis, our capacity utilization is more than 100%.
As I have mentioned in the past too we have taken a few actions at the plants for debottlenecking the capacities and also some intelligent mix of using certain raw materials has also increased the throughput.
Coromandel International Limited February 06, 2023 Apart from it, as we have been sharing in the past, the type of product that we produce, meaning the grade, also determines the throughput at our plants.
So, a combination of all of these three will help in terms of getting our capacity utilization at decent levels.
Apart from that, we would also be looking into strategically importing complex fertilizers.
This year, we have imported DAP to a great extent because importing DAP vis-à-vis manufacturing made more economic sense.
In the past we have also imported NPK so we will continue to resort to these practices, which happens on a month-to-month, quarter-to- quarter basis.
Apart from this the business is also contemplating to see how we can increase the capacity, like we have alluded in the past.
This will also mean that we will have to look at securing some of the key raw materials, which the business is actually tying up very well.
So probably as the business plan for next year gets firmed up, we will have a little more clarity in terms of how we go forward.
But the demand for NPKs is quite good and we expect it to go up and based on that the business will come with the proposal for further capacity expansion.
The last one from your end was in terms of EBITDA per ton margin.
Yes, over a period of time, the EBITDA per ton has been showing an upward trend and despite an increase in the raw material prices, given the fact that the commercial team has worked in terms of securing multiple sources for our raw materials and the flexibility that our manufacturing plants have exhibited in processing these raw materials have ensured that this has been on a good upward trend.
Rs.6000 per metric ton is something that we should look at stabilizing and maintaining in the coming years though there could be some sort of adjustments in raw material prices or the MRP correction and so on and so forth.
Bharat Sheth
Two more questions, with your permission.
One is what is the potential of this nano DAP and how do we see the convergence of economic interest of Government, our company and farmers and farmers mindset for the acceptance of this nano DAP and what is our strategy whether we will be manufacturing and how is the raw material scenario for that.
Is it again imported and second on drone side, are we going to enter into manufacturing or we will be just providing the services.
Jayashree Satagopan
I will take the drones question first.
As you know, couple of quarters back we mentioned that we have invested in an AgTech company which is manufacturing drones.
This is part of our investment in agri start-up companies.
We will be leveraging the drones manufactured by this company and two of our businesses have already done the pilot trials.
CPC and specialty nutrients and we want to sort of scale it up because we believe AgTech is going to be the future.
So that is the strategy around drones.
Coromandel International Limited February 06, 2023 As regards nano DAP this is a very interesting area and I am going to once again request Sankar, as he is much more closer to the business to articulate on this question.
S. Sankarasubramanian
On nano DAP as a company, we have taken a lead in terms of developing this technology in- house and we have applied for patent and we have also applied to Government for the approval, which is expected anytime, and we are also carrying out field trials to understand the efficacy of the product, and the results are mixed.
We have to wait and see.
We have to carry out more such trials in the next season to establish nano DAP.
We could see some improvements, partial replacements in certain crops with a higher foliage that is what our initial studies have revealed.
It is too early stage to comment on how this will play out, but we are very much focused on it and we will be able to share more as we progress.
But it is looking very promising and we have taken a lead on this.
Bharat Sheth
Sir can this cannibalize our NPK sales going ahead.
Where it will replace.
S. Sankarasubramanian
See, the bulk fertilizers soil application that will continue to remain because predominantly, the NPK grades, including DAP what we consume is predominantly soil applications, the nano DAP is more focused on foliage.
So, it may be an add on supplementary nutrient.
It cannot replace in entirety and also it requires that sort of adaptation by the farmers, it will take time and also it involves additional costs in terms of spraying as well.
It requires a lot of education, and the effect has to be seen on the ground.
So, the question of replacement is too early to talk about, and our view is bulk fertilizers application will continue to remain and this will help to replace some portion of the top dressing stage as and when the farmer applies it.
Bharat Sheth
Jayashree, have we received any subsidy post Q3 and what is the Government, I mean, undertaking if we have not received, whether this will keep on increasing or not.
Jayashree Satagopan
No, the total subsidy outstanding is a combination of what we have already sold and raised as a claim and it also includes the channel inventory.
So, the Government has been sort of giving subsides.
It has been a little slower compared to previous year, but we do not see a concern in this area.
As you know, this year, the subsidy rates have also gone up compared to last year.
Therefore, you would see the quantum is slightly higher, but that does not mean that we are not going to receive the subsidy.
Bharat Sheth
So, we have not received post December, correct.
Is that fair understanding.
Jayashree Satagopan
No, we have received even in January.
So, we continue to receive subsidy.
Coromandel International Limited February 06, 2023
Bharat Sheth
So how much subsidy we received so far post December.
Jayashree Satagopan
Around 1,200 Crores.
Bharat Sheth
Okay thank you.
If I have any questions I will come back in queue.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Ankur Periwal with Axis Capital.
Please go ahead.
Ankur Periwal
Thanks for the opportunity and congrats for a good set of numbers.
First question on the Crop Protection side.
While you did mention in your initial commentary on the overall growth in the domestic market, while Mancozeb was slightly weak.
If you can put some more light on what is the pricing or volumetric trend in Mancozeb as well as on non-Mancozeb Crop Protection portfolio, how has our performance been and some guidance there.
Jayashree Satagopan
As I mentioned during this year the business is seeing some amount of pressure, especially on Mancozeb given the fact that the ban of this molecule in Europe has happened and the excess capacity from our competitors, namely UPL and Indofil is now available for other markets as well as for India.
So that has actually led to a bit of a pricing war if I want to use that terminology, and from our standpoint, the business has taken a pretty conscious call that beyond the point, we would not be subsidizing and selling the product for the sake of volume.
So that has been the prime reason for sort of, I would say a lower increase in the revenue as such.
In terms of absolute volume increase or decrease, let me come back to you.
But from a team standpoint, the intent is to ensure that the production is happening, and we are able to sell at reasonable margin levels.
Having said that, the business has also been focusing on seeing how do we derisk our portfolio from the old generics that we have had, especially in Mancozeb still is about 40%, 45% of our overall turnover.
With that in mind, they have identified quite a good number of so-called patented molecules.
As I was mentioning the multipurpose plant for production of three of such molecules got commissioned recently, and the first order has also been executed.
This is for products like Azoxystrobin, Picoxystorbin and Cyproconazole.
These three are relatively new products and a couple of them have very large potential.
In the new land that is planned to be acquired, the business is looking into adding few more technical.
So, from an overall portfolio standpoint, there is conscious efforts to move from the old generics though there is still a large demand for it, as we see lot of competition action there.
Practically, we have to manage volume with these new products.
That is the way one should look into the CPC technical business.
Coromandel International Limited February 06, 2023
Ankur Periwal
Sure and just next question related to crop protection, again.
We have seen some bit of margin pressure over the last couple of quarters, primarily because of RM inflation there, is large part of RM inflation only pass through given there is a decline in RM prices as well.
Jayashree Satagopan
Yes, I would think so.
The raw material prices are coming down, which is a good trend, but in some of the molecules we are seeing that pricing pressures are there.
That is where we have to manage between volume, price and margins.
So, this is a very tactical operational call that we take on a monthly basis.
I expect this to continue for a little while and the business also is working on a number of initiatives at the plant level in terms of cost optimization, both on the conversion cost side, on the fixed cost side and they have come up with several ideas, which will help us to remain cost competitive including purchasing of raw materials at better rates.
I think all of this should start playing out very soon and we should be able to handle the pressures on the margin front.
I would request Raghu to sort of chip in and add his comments here.
Raghuram D
Yes.
Thanks, and good afternoon, everyone.
So, the only other point that I would like to add to what our CFO has already shared is that other than the product portfolio, even the business portfolio, we are trying to change in terms of the proportion of revenue that comes from our various streams.
So primarily, the B2C side of things, we are investing heavily in that area to improve the product portfolio and also in terms of putting more feet on the street, so that our market penetration also improves.
With that, the margin pressures that we are seeing in the commodities like technical, we should be able to tide over somewhat.
Ankur Periwal
That is helpful.
That is it from my side, I will get back into the queue.
Thank you.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Sumant Kumar with Motilal Oswal.
Please go ahead.
Sumant Kumar
Sir in Q2 FY2023, we raised our EBITDA per ton estimate for manufactured fertilizer from Rs.4500 to Rs.5500.
So can you talk about the margin profile for fertilizer business for FY2024 and what is the revised guidance for FY2023.
Jayashree Satagopan
As you know, we do not give guidance for a quarter or a year.
The indication obviously is it would be in the range of Rs.5500 to Rs.6000 per metric ton.
That is our endeavor to sustain the Rs.5500 to Rs.6000 type of range per metric ton and every effort will be done by the business to see how we can maximize it.
I have already spoken about multiple initiatives that have been taken starting from procurement, manufacturing, selling and logistics.
So all of those will continue.
So I think I would leave it there and let us take it every quarter and then look at it on an annualized basis.
Coromandel International Limited February 06, 2023
Sumant Kumar
So what are the key reasons?
Can you talk about the price, had all of your prices corrected, as we have not cut the price of our key products or backward integration.
So there are many factors.
So can you talk about from here that if we are going to reduce price, this margin is sustainable or not for FY2024.
Jayashree Satagopan
Yes.
As you know that during the beginning of the year the raw material prices were very high, Government had increased the subsidy and when the raw material prices come down, it is very natural for the Government also to relook at the subsidy that is being offered.
Today the Government’s outflow in terms of subsidies is actually very, very high and as I was mentioning they are contemplating a downward revision in the subsidy rate and the MRP also will get moderated.
If the raw material prices are coming down, obviously, like in the past, there will be a correction to subsidy, there could be corrections to MRP because end of the day, we have to make fertilizers affordable for the farmers.
Sumant Kumar
So, can we conclude saying that the EBITDA per ton whatever we have generated in FY2023 is not going to be in FY2024.
Jayashree Satagopan
No, I would not say that.
As I said, we have been in the range of Rs.5500 to Rs.6000.
We should continue to maintain those levels.
Sumant Kumar
Thank you so much.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Gagan Thareja with ASK Investment Managers.
Please go ahead.
Gagan Thareja
Good afternoon.
Just one question.
I think around the second quarter, there was an initiative by the Government to promote unbranded fertilizers basically the Government logo on the fertilizer packaging would be 2/3rd and the company logo probably 1/3rd.
What could be the implications of this move as far as brand building and brand patronage are concerned for you.
S. Sankarasubramanian
See this is the initiative by the Government.
We welcome the move by the Government, especially considering the fact that in the products like urea, Government is extending significant amount of subsidy.
They have come up with this universal brand of Bharat brand and also being extended to other grades of fertilizers.
Branding and packaging is only one aspect of communication but companies like Coromandel, are engaged with the farming community more by way of communicating the farmers about these products and our extensive farm activities which have been carried out Coromandel International Limited February 06, 2023 besides other activities like soil testing, organic carbon testing, and the value proposition of new products what are introduced those brand value proposition continues to remain and also in the 1/3rd portion we communicate our brand and our logo.
So, we do not see any major change, but we welcome this suggestion which has come from the Government to have a universal branding of Bharat Urea or Bharat NPKs.
Gagan Thareja
Sir, as I understand it from the Government side, the initiative probably is being done to rationalize the subsidy cost on the transit of fertilizers the idea being that subsidies being bulky.
It is appropriate for certain radius to be maintained within which the sale is done, probably that was their incentive.
Would that therefore not have some sort of follow on repercussions or limit in some way what companies can do in terms of brand building and selling a little far away from where the plants are based.
S. Sankarasubramanian
Maybe true in the case of products like urea where you cannot make in any differentiation at the product level.
But whereas the NPKs with the multiple nutrients and also the value creation, what we give in terms of for example we have grades which are unique to us like 24-24, which are fortified with sulfur.
Similarly, we have grades like 20-20, which is unique to Coromandel.
These unique grades are value proposition, it is different and that needs to be communicated and the farmers prefer those grades.
So we do not see much of a challenge and we have been building these volumes on those grades over a period of time.
I agree maybe for generic products like urea or generic grades for that matter DAP farmers maybe agnostic about the brand but any grades what we have there will be traction and the demand will be there for these markets and that purely depends on the extension activities what companies carry out.
Gagan Thareja
Just one final question, if you could enumerate what is the degree of backward integration you have now and with the mine that you have taken a stake in over a three year time frame to what degree further can you increase your backward integration for the fertilizer business.
S. Sankarasubramanian
Backward integration varies from product to product.
In the case of Phos acid, we are almost close to 50% we can say on the backward integration and in terms of rock, we diversify our source.
Definitely we will not be able to go into mining to meet up the entire rock requirement.
As I mentioned in my earlier response, we have visibility up to 20% to 30% of requirement being met through our mines at Senegal.
Any further opportunities we need to evaluate.
In terms of sulfuric acid, we have currently 50% to 60% and are augmenting capacities further.
Gagan Thareja
And on rock, are you currently at 20% to 30%.
Or are you lower than that.
Coromandel International Limited February 06, 2023
S. Sankarasubramanian
This is the first overseas investment on mining.
So far, we have been only buying.
It just started with our Senegal investment.
So, this will be 20% to 30%.
Gagan Thareja
Thanks, I will get back in the queue.
Thank you.
Moderator · Conference Operator
Thank you very much.
Our next question is from the line of Chintan Chhedawith Quest Investment Advisors Private Limited.
Please go ahead.
Chintan Chheda
Good afternoon and thanks for the opportunity.
My first question is related to the growth in the crop protection segment.
So given the headwinds that we are facing in Mancozeb and the new MPP plant, which is coming up.
What is the growth that we are envisaging in this segment over the next couple of years.
Jayashree Satagopan
Once we see some sort of stability in the market and the new products kicking in, we should see a growth of about 10%-12%, or so.
That is what we are looking at.
Having said that the businesses are working through our annual budgeting process, and we will get more clarity in the next couple of months.
As Raghu was mentioning, the intent is to see how we grow our B2C business furthermore, because there is an opportunity to not only grow the revenue but also the margin since our base is also relatively smaller compared to our B2B and our export business.
So, I think, we should be in a position to see the growth in double digit.
Chintan Chheda
And secondly in this new growth areas of nano DAP and drone technologies.
So is there any capital commitment that you have made.
Or over the next two, three years, what is the kind of investment that will be required over here.
Jayashree Satagopan
On the drone, we made an investment in the AgTech.
So that is as much at this point in time.
Over a period of time, we will see how we can help the startup in terms of scaling up their own operations given the expertise that Coromandel has in terms of best manufacturing practices.
In terms of approach to the market also and piloting through our own business mainly crop protection, SND and retail.
So that will take care of the drone part of the business.
On the nano DAP, as Sankar was mentioning, we have applied for a patent.
We will be working closely with the Government to see that we are getting the approval and putting up a nano DAP plant.
Compared to any other granulation plant, there is going to be much shorter in terms of the time frame, as I understand even IFFCO for capacities that they have created, which is roughly about 5 Crores to 6 Crores bottles, is about Rs.150 odd Crores, which is not a huge investment, if I look at it from a benchmark standpoint.
So from Coromandel as we go along, we will be taking a call.
We already have our pilot plant for liquid fertilizers in Vizag, which currently the business is using for production of nano DAP Coromandel International Limited February 06, 2023 to sort of test in the universities and in the fields.
But the proposal for putting up a dedicated nano DAP facility and the investments will come through during the business planning cycle.
Chintan Chheda
Got it.
Thanks a lot.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Prashant Biyani with Elara Capital.
Please go ahead.
Prashant Biyani
Thanks for the opportunity.
Jayashree madam, what could be the capacity utilization of the granulation plant and how much utilization are we targeting next year.
Jayashree Satagopan
The capacity utilization of our plants currently for all the three quarters put together is about 102% which is what I was mentioning earlier during the call.
Prashant, you would also recall that there are several measures that have been taken by the company to hit this type of capacity utilization.
One, we spoke about some debottlenecking operations.
Second, we looked into multiple sources of raw materials.
Third is the grades that we are producing and fourth is obviously looking at what grades we can import, so that we can produce more of certain other grades.
So, combination of this actually helped to hit about 100 plus percentage till now.
In Q4, we will be doing the annual turnaround in both Vizag and Kakinada, therefore it would moderate for the full year.
This is also in line with our past performance.
Q4 typically we do ATA.
For the coming year, we expect similar trends to continue.
In fact, Kakinada debottlenecking and using different source of raw materials has helped in scaling up our capacities there and we should be able to hit even slightly higher volumes with all our three plants fully in operation next year.
Prashant Biyani
How much incremental capacity would be available through debottlenecking next year.
S. Sankarasubramanian
See there are multiple opportunities in which we can increase the volume.
It depends on the mix.
We cannot go by the current volume, with the current trains we can produce multiple products.
We have taken two, three steps.
One is in terms of producing different grades in the same plant.
If X grade can produce 100 tons, Y grade can produce 120 tons.
It depends on the mix optimization.
So, there is a scope of increasing volume through the mix optimization.
Second can be through the debottlenecking of the capacities which we are seriously contemplating which should come through in the second quarter of next year and third we Coromandel International Limited February 06, 2023 use different sources of raw materials which can increase the throughput and fourth we are also looking at additional trains, those possibilities being explored.
So always the business will look for opportunities of volume growth as well as the mix, which can bring in top line growth for us and as Jayashree mentioned in the earlier response, there is also option for us to produce certain grades in our plant and the generic grades can always be imported.
So, our focus will be to increase production of NPKs and import DAP.
So that strategy also will play out more in the next year.
Prashant Biyani
Sir, with regard to future growth for the industry and as well as for Coro, I mean, we are right now at a very critical stage where on one hand, nano fertilizers are promoted, and on the other hand, we are also short of granulation capacity.
So going forward, I mean, how do you see this.
How much has been the acceptability of nano fertilizers while you are doing trails and whether it would be prudent to set up capacity.
How much granulation new capacities prudent to be set up in the country.
Is there any risk of some of the granulation capacity being available because of some market shift of nano fertilizers over the next three to five years.
Because of all these things, how do you see, which path would be correct for Coro to take.
S. Sankarasubramanian
The phosphatics industry segment in India ranges between 20 million to 22 million tons and India produces roughly 13 million tons.
So basically 6 million tons to 7 million tons is imported.
So even if you were to assume that nano DAP is going to come in first it will only replace the imported DAP.
So, our aim is also to see that how this can replace the imported DAP, that is what Government is also looking at it.
We do not see any challenge to the domestic capacities and there will be coexistence.
There are multiple products, whether it is water soluble fertilizers or specialty nutrients or nano DAP, they will coexist along with the main soil applicant and we do not see any challenge to the existing capacities when we are almost importing 40% of the total annual requirement of phosphatics and Coromandel will definitely look at expanding volumes and there are opportunities available in this space, and we will look at growing the granulation capacity as well.
In tune with Government focus on Atma Nirbhar Bharat, it makes immense sense for the companies to augment domestic capacities, not only for granulation but also to create backward integration opportunity and we will continue to focus on that.
Prashant Biyani
Sir, lastly while we have applied for patent for nano DAP, what would be our plans for other nano fertilizers, and specifically do we plan to venture into nano urea and have you been able to find another route to manufacture nano urea.
S. Sankarasubramanian
So we have nano urea technology as well, which we have applied for patent and we are going through the various studies, which are required for making our application to the Government.
We are going through that phase.
We are also carrying out the field trials.
Once we get the Coromandel International Limited February 06, 2023 studies completed, we will update to the Government and take the approval and then we will launch nano urea.
So, we have got an alternate route of manufacturing nano urea as well, but again, I repeat my response in the earlier case these are all meant for foliar applications, which are much later part of the crop stage at the time of flowering and it cannot replace the traditional soil applications which are happening.
So, to that extent, there are no immediate challenge in terms of the volumes prospects for the phosphatics.
But our effort on nanotechnology applications will continue to be there and we will look at opportunities including nano micronutrients also going forward.
Jayashree Satagopan
I just want to add one more comment here.
These are still very early days of nano technology.
It was launched this year, I mean, in this current financial year, nano urea, and talking about nano DAP we just need to see even on the full year application to what extent there is going to be a substitution.
It is such an interesting area to watch out.
We will have to wait and see rather than getting into some sort of a conclusion whether there is going to be a substitution or whether it is going to be an add on application.
But it is an interesting phase to look out for.
Prashant Biyani
In your trial have you seen the farmers’ acceptability for nano fertilizer.
Jayashree Satagopan
As I said, it is very early stage.
They are doing some university trials.
Once we get to some level of certainty, we will definitely be happy to share all of these.
Prashant Biyani
Thank you.
That is it from my side.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Rohan Gupta with Nuvama.
Please go ahead.
Rohan Gupta
Hi!
Sir, hi madam, good evening.
Glad to see Sankar sir joining call after such a long time.
Sir, a couple of questions from my side.
First is on fertilizer margin itself.
Jayashree madam, you have guided roughly Rs.6000 that is the margin per ton you are looking in fertilizer.
We have seen that we have been continuously improving our stable margin guidance from almost Rs.4000 to Rs.4500 to Rs.5000 and now are roughly Rs.6000.
We have been living in an environment where the phos acid prices were continually going up and now they have started correcting.
So I think that during this time, we definitely enjoyed some margin because of backward integration, high backward integration.
When we are talking about Rs.6000 stable margin per ton, assuming that DAP prices come back to the normal of Rs.40000 per ton what they used to trade earlier.
That is a pretty handsome margin on an average realization basis of Rs.6000 and given that our profitability will be primarily coming from the Government subsidies, do you think that the Government will be okay with this kind of margin enjoyed by the industry.
Though I understand Coromandel will have efficiency also driving this Coromandel International Limited February 06, 2023 margin, but still do you see that this margin for the industry can sustain at this level once that phos acid prices and DAP normalizes.
Jayashree Satagopan
As you know, the margins have been improving on a year-on-year basis, primarily based on the cost efficiencies, backward integration, building on the brands, creating demand for unique grade based on agronomist activities in the field, so on and so forth.
So, I would look at a steady state, as I was mentioning, the Rs.5000 to Rs.6000 as the EBITDA per ton margin for us.
These levels, based on the efficiencies that have come in, should sort of be doable.
While we see that PA prices are coming down, in the immediate future, I do not see a drastic reduction per se, because demand next year also is expected to be higher.
We still do not know how China is going to play the cards or there is going to be still a lot of imports that happens into the country.
For DAP, primarily, we are seeing more imports and we will also continue to import that and start manufacturing more of NPKs in unique grades in our facilities.
So with that, we should start to be able to maneuver around these margin levels.
The Government, obviously, will be looking into reduction in the subsidies, which I was also mentioning a little earlier.
So it is going to be a combination of multiple factors, and as the capacity of the plants go up primarily due to debottlenecking and using multiple grades or sources of materials or types of materials, there is also going to be efficiency in the fixed cost front.
So one just look into to it overall, so I think we should be comfortable in this way, I will not be worried in terms of whether these numbers are reasonable or not.
Rohan Gupta
Second is a clarification.
In Q2, we mentioned that definitely, we do have some high cost inventory of phos acid and the prices of phos acid last quarter come down $1175 while they have further come down to $1050 now.
We have seen that despite that cautious outlook, which you shared in Q2 which could have led to some inventory led losses, we are seeing the Q3 numbers are pretty robust and the margin has been very well maintained.
So when the prices of raw materials has further fallen to $1050, Government is still holding onto subsidy rates which they have revised in the month of October.
I am sure that we are almost half of the Feb now.
So it means that for the current quarter, the subsidy rates will be same as what we have seen in Q3. So it means that we are looking at very, very attractive Q4 with the fall in raw material prices and also even the prices coming down in previous quarter also.
Market prices of DAP and NPK whatever channel checks suggest are still holding on.
So it indicates in all probability a good Q4, unless the Government further reduces the price on the subsidies.
Is that understanding correct, madam?.
Jayashree Satagopan
Well, as I was mentioning, Government is already contemplating reduction in the subsidy rate and it is in discussions within DOF, will go for approval to the cabinet, because they are seeing a trend which is coming down as far as raw material prices are concerned.
What we Coromandel International Limited February 06, 2023 do not know now is from when this reduction in subsidy rate would be applicable.
Like, for instance, 1st April onwards, the rate went up, but the announcement did not happen in March, it happened subsequently.
While the Government was willing to give an increase in the subsidy rate as of 1st April, maybe they did not want to reduce the subsidy rate from 1st January because we have been talking about it.
But at this point in time, we do not know the exact date.
So I would not jump to say Government may not change the rate for the quarter.
They are definitely considering a reduction of the rate.
We do not know how much and we do not know the date, and if that does not happen, there may be some corrections in the market price also, because the expectation is to see how the farmers benefit out of it, and we all know that the subsidy outlet of the Government has been quite high, and the incentive for them also is to reduce the subsidy rate, you are also seeing that tonality coming in the budget speech of the Finance Minister.
Therefore, I would rather wait a week or so, then we will get a little more clarity on this subject relating to the change in the subsidy rates by the Government.
I hope that clarifies.
Rohan Gupta
Yes, right madam.
So, I think that the future reduction in subsidy or any point of time, the Government announcement which maybe retrospective effective from 1st of January itself will be the biggest risk which we are going to face right now and we do not know how the company handles that risk, I mean, because that is not in our hand.
So you must be having some inventory the current quarter phos acid subsidy prices are already fixed.
So I think that we are just doing the business, but there is a risk which we are having right now in terms of the impact to the profitability, correct.
Jayashree Satagopan
Yes.
This happens every time, rates will go up or down.
It is part of the business.
Rohan Gupta
Got it madam.
Thank you so much.
Thanks.
Moderator · Conference Operator
Thank you very much.
Now I would like to hand the conference over to Mr. Ramesh for closing comments.
Please go ahead, sir.
S Ramesh
Let me ask a question before I close the call.
So I would like to have your thoughts on how you see the Crop Protection business, it’s potential in terms of the improved product mix and what are the kind of share you expect from the formulations and when you see some kind of steady trajectory in terms of volume growth and margin expansion, would it be by FY2025 or FY2026. If you can give your thoughts on that in terms of the internal assessment that would be useful, and secondly on the structural soil nutrient content how do you see that imbalance being addressed because you have a problem in terms of the steep discount for the urea price for the farmer.
So any thoughts on that or Government thinking on that if you can Coromandel International Limited February 06, 2023 share in terms of the potential for long-term growth in the Complex fertilizers.
I know these are slightly difficult questions, but if you can give your thoughts, it would be really great.
Jayashree Satagopan
On CPC the opportunities for Coromandel to grow the business is large.
Therefore, from mid- term to a long-term when you look at it, it is extremely critical to work on three factors which we further have shared in the past.
One is revamping and having a good product portfolio, reducing our dependency on Mancozeb, improving our B2C sales compared to our B2B both domestically and also in select export markets and also looking into backward integration, when it comes to the new technical that are being picked up by the business and improving the channel strength both in terms of the dealer network as well as our feet on street.
So multiple of these initiatives are being taken by the business, including a lot of changes within the organization, getting the right people, whether it is for R&D, product development, manufacturing, across multiple areas.
So I honestly believe in the next two, three years we will see a very different play on this business, where we will have a much more enriched portfolio, deeper penetration into the B2C segment and also select markets globally where we will be going on a B2C.
Apart from all this, multiple registrations have been taken.
We are also looking into activating them either on our own or through our B2B customers globally which should also sell.
As far as the soil nutrients question that you have, this is about promoting balanced nutrition.
This is what Coromandel has been doing.
If you look at us as a company, we have been talking about balanced nutrition, selling more of NPKs, not even DAPs, leave urea, urea is primarily for footfall which we also import, sell it relatively to our dealers or market it through our retail network, but Coromandel focus has been on NPKs.
We have about 150 odd agronomists, we have nutri-clinics through which we sort of advocate right farmer practices and behaviors, which has actually helped them in growing the NPK market in our key operating areas.
Whereas there is a higher dependency on urea as well as DAP in many of the northern markets where Coromandel is not present as much.
As part of our initiative working with the Government, Government advocacy we have been constantly talking about and discussing the development on our own through FAI, the need for promoting balanced nutrition and Government is also conscious about it and we do work at some point in time with DBT 2.0 that we are talking, they maybe linking subsidies to usage of fertilizers and thereby sort of moderating the type of fertilizers the farmers will use, which will help in improving the farm productivity.
All of these have its own rationale, and when the Government will do, whether they will do now or they will do a couple of years later, we do not know, but there are different ways how the Government can actually work through it.
You see the Government is also continuously in dialogue through this PM Cares that they have sort of introduced working with different dealer outlets, talking to the farmers.
So, they are looking into this seriously and it is only a question of time.
However from Coromandel standpoint, we will continue our focus on balanced nutrition, we will continue our focus on Coromandel International Limited February 06, 2023 integrated pest management, because we believe this is the right instrument for sustainable agriculture.
Thank you very much for your question.
S Ramesh
Thanks a lot Jayashree that was very helpful.
So, with that we bring this conference call to close.
Let me first thank Jayashree, Sankar and Raghuram from the Coromandel management team for taking time off and giving us this call and answering all the questions.
I also thank all the participants for making this an interactive session.
Thank you very much and have a good day, ladies and gentlemen.
Thank you.
Moderator · Conference Operator
Thank you.
On behalf of Nirmal Bang Equities, that concludes this conference.
Thank you for joining us and you may now disconnect your lines.