Friday, 3 October 2014

Coromandel international-Standing tall on Fertile Grounds of Next Agriculture Revolution

(Coromandel was recommended in Aug at 245/- it is now at around 310/- but it is still a great buy)
Bodybuilders build their bodies following a nutritional regime that fulfills varying needs of their bodies. They take variety of foods which supplies them protein, Fat, carbs, essential minerals and vitamins…each of these has its role to play in maintaining a healthy disease free state.  They know that eggs will supply them high quality protein but for Omega-3 fatty acids-which play some of the most important roles in the body like lowering LDL cholesterol while raising HDL cholesterol, preventing bone loss etc-they have to take almonds, walnuts, fish etc. 

However one can find almonds, walnuts costly and may have to bypass it. But they will never take more eggs in place of almonds thinking eggs will fill the void.  Excess protein in the body will do more harm than benefit. 

But the same thing is happening in our country at a grand scale. Our farmers are supplying their farms with huge overdoses of Nitrogen fertilizer (Urea) as they can’t afford costly phosphorus and potassium. The result, high toxicity in soil, pollution of water reserves as excess nitrogen seep into water resources, wastage of money, high subsidy bill of more than 1 lac crore as urea is sold well below cost of production and international prices, falling yields ( our per hectare yield of rice is lower than bangladesh and pakistan, china produce twice and USA almost 10 time more than us), high inflation due to low yields…current high prices are a result of very low productivity inspite of having highest arable land relative to total land mass of the country, our food lacks essential minerals like phosphorus, zinc etc.

Situation is grave and prompt measures are required. Land just like our body needs a variety of nutrients to be in most fertile state. Normally land can recuperate any loss of nutrition in the soil…but due to present industry level farming where high yield hybrid seeds are used which absorb high amount nutrients from soil, gap between crops are very less giving very little time to land to rejuvenate itself. The result…heavy loss of essential minerals from top soil. Soil needs many of these nutrients like Nitrogen, Phosphorus, potassium, zinc, calcium, boron, iron etc. However Nitrogen, Phosphorus, potassium are most important and are called NPK. Each of these mineral has a different role to play like nitrogen promotes healthy body of the crop, they are building blocks of protein. Phosphorus is a major component in plant DNA and is also critical in root development, crop maturity and seed production, photosynthesis and energy/nutrient transport.

The role of potassium in the plant is indirect, meaning that it does not make up any plant part. Potassium is required for the activation of over 80 enzymes throughout the plant. It's important for a plant's ability to withstand extreme cold and hot temperatures, drought and pests. It increases the immunity of crop. It is just like the calcium absorption mechanism of our body…you can drink large amounts of milk but your body will not absorb the calcium unless vitamin D is present. 
So unless you go for sunshine for vitamin D, your bones will always be weak regardless of high intake of calcium.
Since Indian govt is offering huge subsidy on Urea so our farmers, who are illiterate and technically poor, thinks that every fertilizer is just a fertilizer. They don’t understand the intricacies of NPK. They can’t understand that soil will absorb Nitrogen only in the presence of Phosphorus and potassium. Ideal ratio of these two is around 4:2:1 and can vary slightly according to land. But our use is 20:6:1.

There is a reason for this…we produce Urea in the country which is enough for 85% of our needs…Gas is the preferred feed stock for Urea. But Phosphorus is very scarce in india…producing just 15% of needs. Morocco and china are the biggest producer of phosphorus. It is produced or actually mined from phosphoric rocks. Literally every country in the world is dependent upon almost 100% import of phosphorus but unlike nitrogen phosphorus is in limited supply in the form of phosphoric rocks. Hence unless we find out more resources or an equal substitute, our food security is in grave danger. Infact this problem is bigger than Global warming because in the later, the solution is in our hands in the form of reduced discharge of green house gases…but for phosphorus not much is in our hands.

We can only conserve or better use it. However studies have shown that human Urine contains all three of NPK and if we use it in our fields we can supply almost 40-50% of our fertilizer needs. In fact china is still using it in its fields. In india also, in old times people would go to farms for nature’s call and it is still present in some of our villages. 

Same is true for potassium also called Potash. The name derives from "pot ash", which refers to plant ashes soaked in water in a pot, the primary means of manufacturing the product before the industrial era. Earlier wood/plant stocks were burnt and their “ashes” were used to produce Potash. All commercial potash deposits come originally from marine deposits and are often buried deep in the earth. For deep potash deposits hot water is injected into the potash which is dissolved and then pumped to the surface. 

In india urea is heavily subsidized, but subsidy for Phosphorus and Potash is fixed as per NBS scheme. Hence producers of P and K have to raise the prices relative to rise in international prices as their cost increases. Also the prices of phosphorus have risen by almost 8 times in last 5-6 years or so. After NBS prices of phosphorus have increased from Rs. 9300/- per tonne to 26000/- per tonne while prices of urea are stable due to high variable subsidy. Hence this leads to the indiscriminate use of urea.

In the state of Haryana, farmers used 32 times more nitrogen than potassium in the fiscal year ended March 2009, much more than the recommended 4-to-1 ratio. In Punjab, they used 24 times more nitrogen than potassium. These costs are ultimately paid by the consumers as higher food prices and higher taxes, in return for a zero or negative impact upon agricultural output.

The government has not revised the prices of urea and there was no increase in MRP in the last few years. The price of urea in India is $85 a tonne while it is in the range of $350 in China; $350-400 in Pakistan and $250 in Bangladesh without subsidies. International prices are around $500. Also in order to make maximum out of flawed subsidy policy, companies produces fertilizers which contains excess quantities of subsidized nutrient. Like Urea contains 46% nitrogen. Such high concentrations are not needed and so only a third of the nitrogen in urea gets used. The rest leaches into groundwater or escapes into the atmosphere. It is a complete waste of money and resources.

So next revolution in Indian agriculture will be of efficient use of fertilizer. Govt is planning to raise the urea prices to make farmer use it wisely and to use other nutrients like PK also. Direct cash subsidy transfer on the basis of per acre land can bring huge benefits.

RBI is fighting the battle with high inflation for a long time by keeping the interest rates high but with no success…it is just like fighting water with sword. Hence time has come to ignite this new revolution or else we all will fight or beg for food.

Coromandel international is finding itself at the forefront to lead this revolution. It is the second largest phosphatic fertilizer and complex fertilizer player. Its plants are located at Visakhapatnam & Kakinada in Andhra Pradesh and Ennore & Ranipet at Tamil Nadu. 

The range of products from Coromandel is popularly known by the brand GROMOR.  it is the lowest cost manufacturer of phosphatic fertilizers in India due to partial backward integration and ownership of logistics/support infrastructure. It manufactures phosphoric acid from rock phosphate (25% of its requirement) at its Vizag facility from its captive mines. As all its plants are located along the coast, it is able to save on the cost of inland transportation of imported raw material. Its plants are also close to fertilizer target markets, which help to reduce the cost of transporting finished goods.

As India has limited phosphorus reserves, the complex fertilizer industry has to rely on imports. CRIN has entered into a number of strategic agreements to ensure assured supply of raw material. It sources only ~15% of its requirement from open markets; 25% comes from its captive capacity at Vizag and ~60% from strategic tie-ups. 

CRIN has a technical assistance agreement with Foskor (South Africa), one of the world’s largest phosphoric acid producers, and holds 14% of its equity. It has invested ~USD29m for 15% equity stake in Tunisian Indian Fertilizers Company (TIFERT), a JV between Groupe Chimique Tunisien (GCT) and CPG of Tunisia (Both Govt enterprises of Tunisia), and GSFC of India ( also having 15% share), to set up a phosphoric acid plant at La Skhira in Tunisia.
The management has indicated that most future raw material supplies will come from overseas tie-ups.

CRIN has a capacity of 4m tonnes for P&K fertilizers and with production around 2.3 MT capacity utilization is around 60%. Performance of Coromandel in last 2 years was not that good…that was mainly due to low demand for P&K fertilizers due to high prices because of NBS subsidy scheme by the Govt, high imported raw material cost because of fall in rupee, imports of cheap Chinese fertlizers , falling fuel supplies and subsidy delays, leading to inventory pileups and pressure on finances .

I am not counting the growth prospectus for coromandel on the basis of high fertilizer prices, low raw material prices, stable rupee etc. as stability of these depends upon so many factors as global market is big and complex but Instead I am bent on more justified usage of PK fertilizers in india which at present is hell bent on N or urea. This justified demand will be more stable and more local and will create demand for PK twice or thrice of levels at present.

Coromandel is an Indian agricultural behemoth with turnover of 10000/- crores with majority of turnover coming from subsidy based business whether in the form of urea or PK fertilizers. Hence in order to come out of this subsidy dependence, it is focusing big time on non subsidized businesses. It has acquired in recent times Liberty Phosphate - one of biggest single super phosphate producer in india and Sabereo  organics -a producer of generic agro chemicals products like fungicides, herbicides, insecticides and specialty chemicals has global operations across three continents of Europe, Latin America and Australia besides a manufacturing facility in Gujarat, and boasts of about 240 product registrations internationally for key products. Half of its turnover comes from exports. It clocked turnover of around 700 cr in 2013-14 with NP of 33 cr.

Crop protection products usage in india is very low and our crops are subject to attacks of numerous pests and weeds. So this will prove a great business potential for Coromandel as it can market Sabero’s products to its markets.
Liberty phosphate manufactures single super phosphate or SSP which is obtained through a chemical reaction between rock phosphate and sulphuric and is a cheaper alternative to the popular diammonium phosphate (DAP). It helps treat sulphur deficiency in soil and enhances yield of crops such as oil seeds, pulses, sugarcane, fruits and vegetables. 

Liberty group is amongst India’s largest manufacturer of powdered and granulated SSP with around 14% market share and this acquisition will expands product portfolio of the company. SSP with higher indigenous raw material content provides a hedge against foreign exchange fluctuation. Indian soil is very deficient of Sulphur due to heavy and indiscriminate use of urea which was very heavily subsidized. Consequently the productivity level is much below in India. In Egypt more than 90% fertilizer used is SSP & the productivity level is 3 times that of India. Being located in Udaipur gives it natural advantage of being in close proximity to Rock Phosphate & sulphuric Acid (the waste product of HZL). DAP costs more than three times that of single super phosphate. 

SSP improves the use efficiency of other essential plant nutrients, particularly nitrogen and phosphorus. Sulphur is necessary for plant growth and nutrition. S has been found to increase crop productivity from 14% to 72% in different crops and states.
More sulphur is removed from the soil as a result of an increase in agricultural production by increasing fertilizer use, intensifying cropping systems, high-yield crop varieties but less sulphur is added to the soil due to increasing use of sulphur-free fertilizers, such as urea, diammonium phosphate (DAP), and potassium.

Actually SSP is the cheapest source of phosphorus, it is the sole carrier of sulphur, a micro-nutrient which is deficient in about 40 per cent of Indian soils.

Sulphur is deemed essential for optimum plant growth and yield of oilseeds and pulses, both of which are in short supply and are imported in large quantities to meet the domestic demand.

Actually every soil is unique just like humans and so rigid fertilizer compositions will not suffice. Some of our soils are more deficient in sulphur, so applying DAP will not serve the purpose as DAP is having 46% phosphorus against 16% of SSP. So SSP supplies balance nutrition to soil in the form of sulphur and phosphorus that too at lower cost.

In the form of SSP, the farmer gets P at lower rate. Soil will get the much desired S. Productivity will improve due to use of S. Government benefits due to lower subsidy bill as till now the farmer was using P in excess of his requirement as DAP had much higher P than what was required. Now the farmer will take SSP, which gives lower P but in the right dose.
Moreover, DAP has to be imported, involving outgo of forex, which will be saved. Local manufacture of SSP will create employment.

Presently the price of Urea is Rs. 5.3/kg while that of SSP is Rs. 7.0/kg and DAP Rs.24/kg. While the difference between urea and SSP does not seem too large, that between SSP and DAP is wide enough. Hence to restore soil quality, the farmer will be willing to buy SSP (slightly expensive compared to urea – but far cheaper than DAP). If Urea prices are decontrolled, they are likely to become higher than those of SSP and farmers would consider shifting to SSP even more to enhance the quality of their land. The fertilizer ministry is likely to send the new urea policy proposing a hike in prices.

I think urea price hike or full/partial decontrol shouldn’t delay any further. This is also because of reasons other than over usage of urea like  the inordinately low prices of urea (it is now cheaper than common salt) have led to this manufactured product being diverted to other industrial and commercial uses but most of times for illegal uses. Urea is being used to adulterate milk, which is very harmful for our health. There have even been reports of the inexpensive and freely available urea being used by anti-national elements to fashion home-made explosives.

Prices of urea in neighbouring nations like Pakistan, Nepal, Bangladesh etc. are thrice that of india. Prices in USA are almost five times. Hence this price differential encourages smuggling of urea into countries such as Nepal and Bangladesh. The quantity of urea diverted into such unauthorized uses could stand at 5-6 million tonnes, a fifth of domestic consumption. 

This acquisition of Liberty Phosphate is a very smart move by the company. With it, it has added 10 lakh tonnes of SSP capacity. This also allows the Company to offer low P fertilizer to the farming community in the core SSP markets – Gujarat, Rajasthan, MP and UP.

Actually Indian fertilizer sector is a prime example of something where everything from conceptualization to resource planning and allocation has gone awry. It has been subjected to hit and trial approach mainly by those who understand nothing of agriculture ecology and economy but politics. Let’s try to comprehend it…

In the 1970’s when prices of fertilizers skyrocketed, government in a bid to provide farmers these at cheaper rates and to promote investment in the sector introduced Retention Price Scheme (RPS). Under this Govt fixes the selling price of fertilizer and also the Retention price of the producer. The difference between the higher retention price for the producer and the lower selling prices are paid to the producers by the government in the form of subsidies. Retention price was based on covering the variable cost and fixed costs and giving a post tax return of 12% on the networth. The retention price paid varies between plant to plant and depends on the feedstock used (whether naphtha, fuel oil, gas or coal) and takes into account the conversion costs, selling costs, interest on debt, depreciation and capacity utilization of 90% of the plant.

Hence anybody who understand the working of Indian companies can understand that companies at that time over state their capital cost and under rated their plant capacities (to get higher working utilizations).

And when subsidies got out of the roof for the government it brought out a new snake. Urea left controlled (and it still is) and Government provided fixed subsidies on other fertilizers Products not on fertilizers itself. Like it provided fixed (which is changed when needed) subsidy on DAP ( Phosphatic fertilizer) MOP (Potassium) and SSP (although subsidy amount was very less as compared to DAP as Govt ignored its sulphur content).

Hence farmer had very little choice of fertilizer and opted for those subsidized. This has led to comparatively higher usage of straight fertilizers (like urea, dap, mop) than complex fertilizers which agronomically are better products as they provide balance nutrition to the soil and are available in suitable customized forms. But even than subsidy quantum remained high.

And then to counter this Government in 2010 invented Nutrient based Subsidy scheme, NBS, which aims at providing subsidies to various products on the basis of their content ( Like N, P, K, S) not on the basis of product itself. This had the potential to promote the usage of complex fertilizers but here again Govt kept urea under control.

And when prices of DAP, MOP etc rose in international market, these and other complex fertilizers became costly for farmers and so they preferred urea over everything thinking it would care for everything which sadly and naturally it can’t.

As earlier there was no subsidy for sulphur in SSP, so SSP was costlier than DAP (per unit of Phosphorus, as DAP has 3 times more P than SSP) hence SSP was ignored by farmers. But equation has tilted in favour of SSP after NBS recognized the need of Sulphur for Indian soil. Hence I strongly feel that demand of sulphur will grow manifold in the future. At present only 6% of SSP is used of total phosphatic fertilizer used. This ratio is 93% in Egypt which grows almost thrice of per acre productivity of india of pulses, cereals and paddy.

So now there is no option left for government but to decontrol urea to clean all this nuisance. Coromandel will be the biggest beneficiary of this.

 It is also focusing big on its specialty nutrients business which deals with other micronutrients than NPKS (these are macro) like Zinc, Boron, calcium, iron etc. these are called micro not because these are not that much essential but because these are required in small quantities. But they are equally important as they perform different roles in plant growth just like vitamin A or E for humans. Coromandel is working on introducing newer products in this segment as sooner govt and farmer will shift its focus on micro nutrients also.

It also has big plans for rural retail. it operates around 700 rural retail stores under the names of Mana Gromor and Namma Gromor  in Andhra Pradesh and Karnataka, through which it markets its products and other products directly to the farmers. Somehow no one so far has succeeded in tasting the win in rural retail. DCM shriram tried through Hariyali kisan bazaar in a big way and then after huge losses closed them.

ITC through its Choupal Saagar and Godrej through Aadhar also tried but with no success.
It is because dynamics of retail in rural india are entirely different from urban. Indian companies are even finding difficult to succeed in urbal retail let alone rural. Poor infrastructure, high overhead costs, scale etc are some of the main hurdles. But most of all…it is very difficult to beat local Banya. Moreover organized rural retail should think beyond offering consumption based business. Their stores can be a source of income for farmers like they can buy products from farmers like vegetables, milk, handlooms, handicraft etc to boost their incomes so that they can spend that extra money in their stores.

Or they can offer products which aren’t available to them now through local Banya and which can boost their incomes like micronutrients after making them aware of its benefits, farm automation and mechanism products as farm automation is very low in india. Coromandel has tried for this by entering into a joint venture with Japanese companies, Yanmar & Co and Mitsui Trading, for manufacturing and marketing farm machinery. Coromandel and Yanmar will hold 40 per cent each and Mitsui 20 per cent in the joint venture, which will initially manufacture the Yanmar brand of mini-harvesters, planters and rotavators for paddy cultivation. The joint venture will later expand its range to include equipment for other crops, including sugarcane and vegetables.

Right now I can’t say anything about its retail venture as I am yet to study its model fully. But its main business and other non subsidy based business are poised for a strong growth.
Coromandel is a concept stock and its extraordinary success will depend upon the elimination of policy bottlenecks.

Prices of other SSP fertilizers producers like Rama Phosphates and Khaitan chemicals are also at multi year lows. They can also be a good option but they are yet to be studied. Rallis india (earlier recommended at 110 is at 230) can also be a great buy.

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)


  1. gurpreet Singh sir, I was blown away by the way u showed the situation of Indian framers by above lines..!