United Phosphorus (UPL): SPREADING WINGS

A steadily growing business and a ready war chest for acquisitions make United Phosphorus an attractive bet for long-term investors

AFTER spending over two years in consolidating its earlier acquisitions, India’s agrochemical leader United Phosphorus has given strong indications of renewed appetite for further takeovers. While a geographically spread-out business ensures a stable growth, possibility of growthaccelerating buyouts makes it an attractive buy for long-term investors.

BUSINESS :United Phosphorus (UPL) was incorporated in 1969. The company, which is one of the largest generic agrochemicals manufacturers in the world, has 21 manufacturing sites with its customer base spread across 86 countries. The company manufactures a wide range of generic agrochemicals, industrial chemicals and other specialty products.
During FY10, more than threefourth of the company’s total revenue came from international sales - 22% from North America, 29% from Europe and 27% from other countries. Of these, Europe’s share in the total sales saw a slump while other parts of the world saw the highest growth of 26% in the previous year. The remaining one-fourth of the revenue came from domestic sales.
To expand its product portfolio and market reach, the company acquired a number of companies between FY04 and FY08, which helped it in gaining product registrations and access to regulatory data in various parts of the world. Starting with US-based AG Value buyout for $36 million in November 2004, it has bought Spanish company Cequisa, Shaw Wallace Agrochemicals in India and Reposo in Agentina in 2005. Dutch seed manufacturer Advanta, South African Crop Serve and French company Cerexagri were acquired in 2006. It acquired Argentina-based ICONA in 2007 and Colombia-based Evofarms in 2008. After a gap of two years, the company in Jnue 2010 acquired DuPont’s mancozeb fungicide business, including inventory, formulation plant in Colombia, brands, trademarks and registrations.

GROWTH DRIVERS: The company’s recent acquisition of DuPont’s mancozeb business hints at the revival of its appetite to go for inorganic growth. The company also has readied a war chest of over Rs 1,800 crore for this purpose and the management is actively scouting for suitable candidates.
Last couple of years has seen agricommodity prices soaring to very high levels due to demand growth outpacing supply. The increasing need to improve farm yields globally has become one of the major drivers of demand for agrochemicals. At the same time high prices are enabling farmers to spend greater amount on pesticides the world over. UPL enjoys the benefits of a global presence, which enables it to safeguard its revenue flows from vagaries of weather or pest attacks in individual regions. Besides, it is taking continuous efforts to backward integrate so as to safeguard its operating margins.

FINANCIALS: The consolidated bottom line of the company grew at a CAGR of 28% over the past five years with the net profit for FY10 being Rs 529.6 crore, a 10% increase over the previous year. During the year, the company reported a 10% increase in its net sales to Rs 5,290 crore primarily due to the improved performance in sales from Latin America. According to the company, 1% of its sales growth came from rupee depreciation, while a 14% jump in volumes was partially negated by 5% fall in prices. Operating margin weakened by 110 bps to 18.4% owing to high raw material costs, which as a percentage of net sales, increased 470 bps to 55.8% compared to the previous year. An exceptional cost of Rs 26.7 crore towards the restructuring of two of its plants also affected the company’s annual profit.The company’s borrowing in FY10 increased 13% to Rs 2,382 crore. It has FCCBs worth nearly $67.9 million issued in FY06 that are waiting to be converted.

VALUATION: At the current market price of Rs 189.2, the scrip is trading at 15.8 times its earnings for the year ended March 2010. We expect the company’s existing business to end FY11 with an EPS of Rs 13.2, which discounts the current price by 14.5 times. Its peers like Bayer Cropscience and Rallis India are currently trading at P/E of 20-24. Relatively cheaper valuation and strong possibility of inorganic growth make United Phosphorus an attractive bet for long term.