Kakinada Acid Plant And Nano DAP Expansion Will Propel Growth And Boost Profit Margins

Key Takeaways

• Completion of new plants and expansion in fungicides and fertilizers improve operational flexibility, cost savings, and revenue potential.
  
• Diverse growth strategies, including retail expansion and innovative products, aim to boost high-margin revenues and enhance overall earnings.
  
• Raw material price volatility, government subsidies dependency, and geopolitical tensions pose risks to production costs, revenue stability, and margin growth.

Catalysts

Provides agriculture solutions in India and internationally.

• The completion of the phosphoric and sulfuric acid plant at Kakinada by March 2026 is expected to meet 60% to 70% of captive asset requirements internally, providing operational flexibility and raw material security, positively impacting cost savings and net margins.
  
• Launching new formulations and achieving a revival in global demand for Mancozeb, while investing in a multipurpose plant for fungicides, positions the Crop Protection business to sustain growth, improving revenues and profitability.
  
• Expanding granulation capacity by 7.5 lakh tons in Kakinada to meet increasing demand for NPK fertilizers and facilitating import substitution, enhancing revenue potential through increased sales volumes.
  
• Scaling up nano DAP production and leveraging the success of recent launches demonstrates a strategic shift towards high-margin, innovative products, potentially increasing revenues and profit margins.
  
• Focus on retail expansion with 45 new stores opened, along with initiatives in specialty fertilizers and drone services, indicates a diversified growth strategy aiming to boost non-subsidy revenue streams and enhance overall earnings.

Coromandel International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coromandel International's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 10.2% in 3 years time.
• Analysts expect earnings to reach ₹29.8 billion (and earnings per share of ₹88.66) by about January 2028, up from ₹13.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.9x on those 2028 earnings, down from 38.7x today. This future PE is greater than the current PE for the IN Chemicals industry at 26.9x.
• Analysts expect the number of shares outstanding to grow by 4.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.11%, as per the Simply Wall St company report.

Coromandel International Future Earnings Per Share Growth

Risks

• The company faces challenges with raw material price volatility, particularly phosphoric acid and ammonia, which can impact production costs and squeeze margins. This could affect overall profitability.
  
• The dependency on government subsidies and policies introduces uncertainty. A decrease in subsidy rates has already contributed to revenue declines, affecting cash flow and net earnings.
  
• Global geopolitical tensions and supply chain issues are impacting raw material procurement, such as DAP availability. This could lead to disruptions in production and affect revenue stability.
  
• There is significant exposure to fluctuations in international markets, such as Chinese competition in chemicals impacting pricing power, which may affect revenue and margin growth in the Crop Protection business.
  
• The company’s earnings could be affected by increased competition and execution risks as it attempts to expand into northern markets and diversify product offerings, potentially straining resources and impacting net margins.

Valuation

• The analysts have a consensus price target of ₹1959.25 for Coromandel International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2347.0, and the most bearish reporting a price target of just ₹1300.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹291.7 billion, earnings will come to ₹29.8 billion, and it would be trading on a PE ratio of 31.9x, assuming you use a discount rate of 13.1%.
• Given the current share price of ₹1792.8, the analyst's price target of ₹1959.25 is 8.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.