Rating Rationale

Strengths:
* Robust position in India's phosphatic fertiliser market:
The company is the second-largest player in the phosphatic-fertiliser industry in India with a market share of around 17%. Its market position is underpinned by an entrenched and leading position in Andhra Pradesh and Telangana - India's largest complex-fertiliser market - and a wide product portfolio. The company has also been gradually increasing the sale of non-subsidy-based products, including crop protection, speciality nutrients (secondary and micro-nutrients [sulphur, zinc, calcium, and boron], water-soluble fertilisers, and compost), and gypsum (a by-product from the manufacture of phosphoric acid). During April 2018, it also acquired the bio-pesticides business of E.I.D. Parry India Ltd ('CRISIL AA-/Stable/CRISIL A1+'), along with the latter's wholly owned subsidiary, Parry America, Inc, USA, which has further diversified the product profile under the crop protection business. The company's brand, Gromor, has strong recall among customers and commands a premium in its key markets. It also has its own retail outlets, Mana Gromor Centres, through which it sells fertilisers, crop protection chemicals, speciality nutrient products, seeds, sprayers, veterinary products, and others. It has around 800 stores in Andhra Pradesh, Telangana, Karnataka, and Maharashtra.

* Strong operating efficiency:
Operations derive benefits from economies of scale, assured raw material procurement due to an established relationship with suppliers, captive production of phosphoric acid, superior plant infrastructure, and low handling and transportation costs. Expansion of the phosphoric acid capacity of the Vishakhapatnam plant has been completed in October 2019, thus making this unit self-sufficient. The operating efficiency is also supported by the ability to adjust the product mix (between di-ammonium phosphate and other complex fertilisers).

Increasing share of non-subsidy-based products, such as specialty nutrients, crop protection, and retail business has also reduced vulnerability of profits to changes in the government's subsidy policies. The EBITDA (earnings before interest, tax, depreciation, and amortisation) margin remained healthy during fiscal 2019 at 10.7% as against 11.2% in the previous fiscal. The margin has improved further to 13.2% in the first half of fiscal 2020 and is expected to remain healthy over the medium term as well.

* Strong financial risk profile:
The debt protection metrics are comfortable and the capital structure healthy. The interest coverage and net cash accrual to total debt ratios were at 5.79 times and 0.20 time, respectively, in fiscal 2019, as against 7.20 times and 0.18 time, respectively, in fiscal 2018. Absence of any long-term debt, and any capital expenditure (capex) or acquisition being funded through internal cash accruals, have kept the gearing below 1 time (0.89 time as on March 31, 2019). Further, all the borrowings are for working capital, largely to fund subsidy delays, inventory, and market receivables.

The gearing is expected to remain comfortable at below 1 time over the medium term, in the absence of any long-term debt and despite higher working capital requirement to fund any delay in government subsidy receivables. Any larger-than-expected debt-funded capex or acquisition, or higher working capital borrowing, adversely impacting the financial risk profile, will remain a key monitorable.

Weakness:
* Exposure to the regulated nature of the fertiliser industry and volatility in raw material prices:
The fertiliser industry is strategic, but highly controlled, with fertiliser subsidy being an important component of profitability. The phosphatic fertiliser industry was brought under the nutrient-based subsidy (NBS) regime from April 1, 2010. Under this scheme, the Government of India fixes the subsidy payable on nutrients for the entire fiscal (with an option to review this every six months), while retail prices are market-driven. Manufacturers of phosphatic fertilisers are dependent on imports for their key raw materials, such as rock phosphate and phosphoric acid. The cost of raw materials accounts for about 70% of the operating income. The regulated nature of the industry and susceptibility of complex fertiliser players (including Coromandel) to raw material price volatility under the NBS regime continues to be a key rating sensitivity factor. Additionally, any delay in disbursement of subsidy under the direct benefit transfer scheme may lead to significant reliance on short-term working capital borrowing, leading to high interest costs; this too remains a key rating sensitivity factor.