Investors dumped Coromandel International Ltd’s shares on Tuesday even before its June quarter earnings were released. The firm’s earnings could reinforce the trend when the markets open on Wednesday.
Net sales at the consolidated level increased just 2% from a year ago in the June quarter. If you strip off sales of subsidiaries, revenue fell by about 6%. True, the first quarter is usually a lean season for agriculture input providers, but the company was not even able to match sales in the previous year when the operating environment was worse.
Timely onset of monsoon and early crop sowing had sparked hopes of a better fertilizer offtake this year. But excess inventories in its retail network weighed on Coromandel’s sales. “Excessive pipeline inventory of DAP (diammonium phosphate) and complex fertilizer has impacted sales volume and profitability during the quarter,” Kapil Mehan, managing director of Coromandel International said in a statement.
According to a report by Prabhudas Lilladher Pvt. Ltd that was released last week, Coromandel’s fertilizer volumes have fallen by as much as 18% so far in the current fiscal. Lower sales have adversely impacted the economies of scale.
Operating margin at a stand-alone level halved to around 5% as depreciating rupee escalated the costs and operating profit plunged 59%. This weak performance, along with a decrease in investment income, led to an 88% drop in net profit. Profit after tax at the consolidated level fell 81% to Rs.21.42 crore, missing analysts’ estimates compiled by Bloomberg.
While this raises the possibility of shares sliding further, the management is confident about sales gaining momentum in the current quarter owing to healthy rainfall in the company’s key markets.
That said, like other fertilizer firms, the firm faces the gargantuan task of managing rupee volatility. The sharp depreciation in rupee is driving up the costs of all agriculture input providers. Coromandel imports majority of its raw materials. Even though input costs are being passed on in a phased manner, analysts fear that volume may get impacted if the companies resort to frequent price hikes.
Prabhudas Lilladher adds, “Though price hikes are essential to offset the negative impact of rupee depreciation, however it again raises demand concerns. Previously, we have witnessed that demand has been severely impacted in case of windfall increase in prices of complex fertilizer. In certain grades, where prices have not been increased, companies have to bear the brunt of rupee depreciation.”