United Phosphorous: Green As Ever

United Phosphorous needs to be in the portfolio of every longterm investor, as the agrochemicals industry is set to gain from an agricultural boom

One-year beta 0.78

Institutional holding 55.61%

Current dividend yield 1.0%

Current P/E 13.5

Current m-cap Rs 6555.9 cr

Current market price Rs 149.15

UNITED Phosphorous (UPL), with its wide product portfolio and worldwide presence, appears well placed to benefit from a boom in agriculture over the next few years. Long-term investors should consider including this evergreen stock to their portfolio.

Business: Incorporated in 1969, United Phosphorous today is among top five generic agrochemicals manufacturers in the world. It has 23 manufacturing sites (nine in India, four in France, two in Spain, one each in UK, Vietnam, Argentina, Netherlands, Italy, Colombia and China) with a customer base spread across 86 countries. The company manufactures a wide spectrum of generic agrochemicals and specialty chemicals.
During FY09, the company derived 22% of its sales from North America, 21% from India, 32% from Europe and 25% from other countries, with all the regions reporting double-digit growth.
It has a wide domestic and global distribution network for the sale of its products worldwide and boasts of the largest agrochemical product portfolio in India. The company carried out a series of big-ticket buyouts during FY05 and FY08 to expand its geographical reach and product portfolio. In November 2004, it bought US-based AG Value for $36 million, followed by Spanish company Cequisa and Indian Shaw Wallace Agrochemicals in Jun 05. In Nov 05 it bought Argentinean Reposo and Dutch seed manufacturer Advanta in Feb 06. Acquisition of South African Crop Serve was followed by French company Cerexagri in Nov 06. The Argentina-based ICONA in July 07 and Colombia-based Evofarms in Feb 08 were its recent most acquisitions. UPL has also purchased various agrochemical products from a number of global leaders such as Bayer, Dow Agrosciences and Du Pont.

Growth Drivers: After several years of aggressive inorganic growth, UPL has settled into consolidation. In FY09, the company didn’t make any significant buy-outs and is not likely to go in for one in FY10 either. At a time when the growth in demand for food has outstripped the growth in supply, the pressure on agriculture has increased to improve farm yields the world over. Higher commodity prices have also resulted in higher liquidity in the hands of farmers, increasing their ability to invest in agriculture. This augurs well for the global agrochemicals industry, which after several years of singledigit growth, witnessed over 10% of real growth in FY09. In fact, the global economic slowdown is unlikely to take a toll on agriculture. United Phosphorous, with a wide product portfolio and expansive geographical reach, is well placed to benefit in this scenario. The company has a healthy track record of sales and profit growth, while maintaining strong operating margins over the past five years. The company has been regularly introducing new products to its various markets and has earmarked a capex of Rs 300 crore for FY10 on plant expansions and new product registrations.

Financials: During the FY09, UPL reported a 37% spurt in its net sales to Rs 4,802 crore, out of which 8% was from rupee depreciation, 15% due to higher prices and 14% due to an increase in quantity.
The company’s borrowing in FY09 increased by Rs 504 crore to Rs 2,073 crore as on March 31, 2009 mainly due to loans given to group company Advanta, repricing of forex loans and rise in working capital. To fund its inorganic growth, the company had raised $225 million through the issue of FCCBs in FY05 and FY07. Of these, FCCBs worth $157.1 million have been converted into equity shares and $67.9 million are outstanding.

Valuation: At the current market price of Rs 149.15, the scrip is trading at 13.5 times its earnings for the year ended March 2009. We expect the company to end FY10 with an EPS of Rs 13.1, which discounts the current price by 11.4 times. Its peers like Bayer Cropscience and Rallis India are currently trading at P/E of 11-13.