CRISIL has reaffirmed its ratings on the bank facilities and debt programme of Coromandel International Ltd (Coromandel; formerly, Coromandel Fertilisers Ltd) at ?AA+/Stable/P1+?. The reaffirmation follows Coromandel?s announcement that it plans to acquire 42.22 per cent equity shares of Sabero Organics Gujarat Ltd (Sabero) for Rs.2.84 billion; Coromandel also has plans to acquire an additional 31 per cent of Sabero?s equity shares from Sabero?s shareholders. The total cost of acquisition is expected to be around Rs.4.50 billion. In CRISIL?s view, the acquisition is in line with Coromandel?s strategy to increase its focus on sale of non-subsidy products, and also expand its product offerings to the farmer community. CRISIL believes that the acquisition would strengthen Coromandel?s market position in the agro-chemicals industry, and complement its portfolio of plant-protection products. While Coromandel is an established player in the formulations market in India, Sabero is established in the export markets, deriving more than 50 per cent of its revenues from exports. CRISIL also believes that the acquisition would increase Sabero?s capacity utilisation, thereby resulting in improvement in Sabero?s operating efficiencies over the medium term. The reaffirmation is also underpinned by the fact that the Coromandel?s financial risk profile will not be adversely affected by the acquisition, as it would be funded by the company?s cash and cash equivalents and internal accruals.

*Interchangeable with working capital demand loans
**Interchangeable with bank guarantees

The ratings continue to reflect Coromandel?s robust market position in India?s phosphatic-fertiliser market, strong operating efficiencies, and healthy financial risk profile, marked by low gearing. These rating strengths are partially offset by the Coromandel?s exposure to risks related to the highly regulated nature of India?s fertiliser industry and to volatility in raw material prices.

Coromandel is the second largest player in the phosphatic-fertiliser industry in India, with a market share of 17 per cent. The company?s market position is underpinned by its entrenched and leading position in Andhra Pradesh(India?s largest complex-fertiliser market(and its wide product portfolio. Moreover, Coromandel has strong operating efficiencies because of the economies of scale it enjoys in raw material procurement, established relationships with raw material suppliers, captive production of phosphoric acid, superior plant infrastructure, and low handling and transportation costs, leading to improved profitability, especially over the past two years. Coromandel?s operating efficiencies are also supported by the company?s ability to adjust its product-mix to suit the prevailing raw material prices and subsidy regime. The company?s profit before tax (PBT) improved to Rs.7.08 billion and Rs.8.73 billion in 2009-10 (refers to financial year, April 1 to March 31) and 2008-09 respectively from Rs.3.33 billion in 2007-08. Coromandel was also well-positioned under the nutrient-based subsidy (NBS) regime (which became effective on April 1, 2010) because of its strong business risk profile. The company reported a PBT of Rs.9.86 billion for 2010-11 (including prior period income of Rs.2.3 billion).

Under the NBS regime, the concession on complex fertiliser is fixed, while the players are allowed to increase the retail prices of the fertilisers. CRISIL believes that Coromandel?s dominant market position and strong brands will enable the company to increase the retail price of its products, thereby mitigating the impact of the risk of sharp increase in raw material prices. This, coupled with strong operating efficiencies, will result in healthy cash accruals for the company over the medium term. Coromandel?s focus on gradually increasing the share of non-subsidy-based products, including pesticides, speciality nutrients (secondary and micro-nutrients, water-soluble fertilisers, and compost) and gypsum, in its portfolio, will also continue to drive its profitability over the medium term.

Coromandel has maintained its healthy financial risk profile over the past few years. Though the company?s overall gearing was at 0.85 times as on March 31, 2011 (1.30 times as on March 31, 2010), the gearing, net of fertiliser bonds, was 0.63 times as on March 31, 2011 (0.73 times as on March 31, 2010). The company also had healthy liquidity, supported by its healthy cash accruals and cash equivalents of Rs.9.60 billion, as on March 31, 2011. CRISIL believes that Coromandel?s financial risk profile will remain healthy over the medium term, as the company has no major capital expenditure (capex) plans, besides increase in phosphatic-fertiliser capacity to 4.0 million tonne per annum (mtpa) from the current 3.25 mtpa.

Given the Government of India?s (GoI?s) thrust on self-sufficiency in food grain production, fertiliser is a strategic, but a highly controlled, industry. CRISIL believes that, given the regulated nature of the fertiliser industry, the profitability of players in this industry will remain susceptible to changes in government policy. GoI, in November 2010, had announced NBS rates for 2011-12, which were significantly lower than in 2010-11 and the then prevailing raw material prices. However, in March 2011, GoI notified an increase in NBS rates for 2011-12, taking into account the increase in international prices for di-ammonium phosphate and for key raw materials from the second half of 2010-11. However, since the international prices did not reduce, GoI, in April 2011, again revised the NBS rates applicable for 2011-12. Furthermore, profitability of players in this industry also remains susceptible to volatility in raw material prices.

Outlook: Stable

CRISIL believes that Coromandel will generate healthy cash flows over the medium term on the back of its strong operating efficiencies. The company?s capital structure is also expected to remain healthy over the medium term. The outlook may be revised to ?Positive? if Coromandel increases its scale of operations and strengthens its market share, and further improves its profitability on a sustained basis. Conversely, the outlook may be revised to ?Negative? if Coromandel undertakes a large, debt-funded capex or acquisition programme, or if there is an adverse change in GoI?s concession policy.