Report Date: July 26, 2008
Company Name: United Phosphorus (UPL)
Recommendation: BUY
CMP – Rs. 336.95
Target Price – Rs. 425/-
Mkt. Cap. Rs. 7,401.1 crore
Investment Rationale
Ø UPL, the only Indian play in the global generic crop protection space, has reported excellent performance for Q1 FY 2009. Consolidated Net Sales soared up by 54.3% to Rs. 1299.31 crore led by 40% volume growth (owing to robust demand from farmers as farm produce prices have gone up significantly) and balance was value growth. This was because Raw material prices have been going up and company has been passing on a lot of this to customers. While domestic revenues jumped by 76% to Rs. 286 crore (Rs. 163 crore), exports (contributing 78%
of revenues) grew @ 51% to Rs. 1,028 crore (Rs. 683 crore).
Despite impressive topline growth, OPM% declined slightly to 19.3%, mainly because of high raw material costs, which continues to be a cause for concern for the rest of the year as well. Sharp rise in Other income of Rs. 14.74 crore (as company had cash balance of Rs. 150-200 crore) was more than negated by almost doubled finance cost of Rs. 63.43 crore (includes FE loss of Rs 22.94 crore arising on revaluation of outstanding foreign currency borrowings & advances as against FE gain of Rs 34.66 crore). Depreciation declined by 25.2% to Rs. 37.76 crore
(as amortisation has come down on account of merger). In nutshell, PBT shot up by 88.5% to Rs. 164.47 crore. Lower average tax rate of 11.6% further led to doubling of PAT to Rs. 147.67 crore.
Ø UPL is the leading Indian agrochemical player and among the top three generic players globally in this industry. It is engaged in research, manufacture and distribution of agrochemicals and specialty chemicals worldwide. It also has presence in seeds space through 49% stake in Advanta, which could emerge as key growth & valuation driver over long term.
Ø Company has built strong presence in highly consolidated market with high entry barriers through series of strategic acquisitions (Evofarms – Columbia, Icona – Argentina, Cerexagri, Europe, etc.) in niche markets across the globe. Through acquisitions, strategic alliances and network of subsidiaries, UPL has built marketing network across the globe and its international revenues account for > 78% of its total revenue. It exports to over 100 countries, primary markets being Europe and North America with high expectations of growth in Latin America.
Ø Agricultural scenario in India and abroad has reached very crucial stage. Increasing shortfall of key food & commercial crops, rising pressure to step up farm productivity (Indian yield of most crops are far below global averages) and economics of adopting high yielding seed varieties for the farmer are demand drivers for high yielding seeds and agro chemicals. UPL, being leading agrochemical player, is set to grab the maximum share of this growing market.
Ø UPL’s longer term prospects appear bright in view of positive outlook on crop protection sector, potential synergies from Cerexagri acquisition as well as scale up of international registrations. Besides, company’s growing cash flows gives it ability to step up growth initiatives – both organic (plans to spend Rs. 2.6-3 billion in two years on increasing plant capacity and registrations) and inorganic.
Valuation
Ø At CMP, the share (Rs.2/-) is trading at 15.4 times FY 2009 expected consolidated EPS of Rs. 21.9 and 8 times FY 2010 expected consolidated EPS of Rs. 41.9. In view of excellent future prospects, we recommend to BUY the share at CMP.
