1. 1QFY2011 Result Update | Agrichemical
July 27 2010
United Phosphorus BUY
CMP Rs186
Performance highlights Target Price Rs228
Parameter (Rs cr) 1QFY11 1QFY10 % chg Angel est % diff Investment Period 12 months
Net Sales 1,469 1,638 (10.3) 1,801 (18.5)
Stock Info
EBITDA 289 304 (5.0) 324 (10.8)
Sector Agrichemical
EBITDA margin (%) 19.7 18.6 18.0
Market Cap (Rs cr) 8,196
Adj PAT 192 186 3.6 185 4.0
Beta 0.9
Source: Company, Angel Research
52 Week High / Low 200/133
United Phosphorus (UPL) for 1QFY2011 declared 10% yoy decline in revenues, Avg. Daily Volume 392347
while Adj PAT stood at Rs192cr, marginally higher than estimated. Overall, the Face Value (Rs) 2
results were in line with our estimates. At Rs179, the stock is quoting at attractive BSE Sensex 18,078
valuations of 11x FY2012E EPS. Hence, we maintain a Buy on stock. Nifty 5,431
Reuters Code UNPO.BO
Revenue growth remains a concern: UPL’s total revenues for the quarter fell 10%
Bloomberg Code UNTO@IN
yoy to Rs1,469cr as against our estimate of Rs1,801cr. Revenue decline was
primarily led by exchange variance (-7% yoy) and dip in realisations (-7% yoy).
Regionally, North America and Europe witnessed major erosion of 12% and 25%, Shareholding Pattern (%)
respectively. Promoters 27.9
MF / Banks / Indian Fls 29.3
Outlook and Valuation: Over FY2010-12E, we expect UPL to post 8% and 18%
FII / NRIs / OCBs 35.8
CAGR in sales and Adj PAT, respectively. UPL's profitability is set to perk up with
Indian Public / Others 7.0
EBITDA margins improving owing to stable raw material prices, pick up in
demand and restructuring of Cerexagri. We expect RoCE and RoE to improve
from 15% and 19% in FY2010 to 19% and 20% in FY2012E, respectively. At
Abs. (%) 3m 1yr 3yr
current valuations of 11x FY2012E EPS the stock is attractively valued. Hence, we
Sensex 2.2 17.6 18.7
maintain our Buy recommendation on the stock, with a Target Price of Rs228.
UPL 24.8 8.4 20.9
Key Financials (Consolidated)
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 4,931 5,460 5,830 6,406
% chg 35.4 10.7 6.8 9.9
Net Profit 468 556 651 771
% chg 19.8 19.0 17.0 18.5
EBITDA (%) 19.7 18.9 20.5 21.5
EPS (Rs) 10.6 12.7 14.8 17.6
P/E (x) 17.5 14.7 12.6 10.6
P/BV (x) 3.1 2.6 2.3 2.0
RoE (%) 19.0 19.3 19.5 19.9
RoCE (%) 17.1 15.0 16.3 19.0
Sageraj Bariya
EV/Sales (x) 2.0 1.6 1.6 1.4
40403800 extn 346
EV/EBITDA (x) 10.3 8.8 8.2 6.9 sageraj.bariya@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
2. United Phosphorus |1QFY2011 Result Update
Exhibit 1: Quarterly performance
Y/E March (Rs cr) 1QFY11 1QFY10 % chg FY2010 FY2009 % chg
Net Revenues 1,469 1,638 (10.3) 5,460 4,931 10.7
Raw material cost 765 955 (19.9) 2954 2451 20.5
Gross Profit 704 683 3.1 2506 2480 1.0
Gross margin 48 42 46 50
Employee Expenses 133 125 6.9 502 479
as % of sales 9 8 9 10
Other expenditure 281 253 11.0 1005 885
as % of sales 19 15 18 18
Total Expenditure 1179 1333 (11.5) 4461 3815
Operating Profit 289 304 (5.0) 999 1116 (10.5)
OPM (%) 20 19 18 23
Depreciation 47 50 215 193
EBIT 242 254 (4.8) 784 924 (15.1)
EBIT (%) 16 16 14 19
Other income 19 7 34 (21)
Interest 49 46 194 292
PBT (excl of Ext items) 211 215 625 611
Ext items (51) (12) 325.0 (27) 10 (365.1)
PBT (incl of Ext items) 160 203 598 621
Tax 16 27 81 27
Reported PAT 145 176 (17.9) 517 594 (13.0)
Minority & Associate 1 (3) 25 0
Net PAT 142 174 556 594
Adj PAT 192 186 3.6 556 594 (6.4)
Reported EPS (Rs) 3.3 4.0 (17.9) 11.8 13.5 (13.0)
Adj EPS (Rs) 4.4 4.2 3.6 12.7 13.5 (6.4)
Source: Company, Angel Research
Revenue growth remains a concern
UPL’s total revenues for the quarter fell 10% yoy to Rs1,469cr as against our
estimate of Rs1,801cr. Revenues fell primarily due to the exchange variance (-7%
yoy) and decline in realisation (-7% yoy). Regionally, North America and Europe
witnessed major dip of 12% and 25%, respectively. Overall volumes for the quarter
registered mere 2% yoy growth impacted by adverse weather conditions in the key
North American and European markets.
July 27 2010 2
3. United Phosphorus |1QFY2011 Result Update
Exhibit 2: Sales performance Exhibit 3: Growth break-up
1,800 26 30 3 2
1,500 2
1
1,200 15
6 0
Rs cr
900 2
%
0 (1)
600 0 (2)
%
(10) (3)
300
(4)
- (15)
(5)
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
(6)
(7)
(8) (7) (7)
Net Sales % YoY Exchange impact Realisation Volume
Source: Company, Angel Research Source: Company, Angel Research
Exhibit 4: Regional performance Exhibit 5: Regional mix
600 100%
500 80%
400 60%
Rs cr
300 40%
200 20%
100 0%
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
0
North America India EU RoW
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 North America India EU RoW
Source: Company, Angel Research Source: Company, Angel Research
Higher other expense restricts improvement in OPM
UPL’s top-line de-growth of 10% was below our expectation due to poor
performance in certain key geographies on account of adverse weather conditions
(that prevent germination of pest) and fluctuation in currency. However, UPL still
managed to record strong improvement of 600bp in gross margins though the
same did not percolate down fully to the EBITDA level due to the annual wage
revision and higher other expenses - staff and other expenses increased 7% and
11% yoy respectively, during the quarter.
July 27 2010 3
4. United Phosphorus |1QFY2011 Result Update
Exhibit 6: Margin trend Exhibit 7: Higher other expenses
50 21 300 22 25
48 20 19
48 19 17 20
47 280 15
46 46 17 15
Rs cr
260
%
%
%
44 10
44 15
240
42 13 5
41
40 11 220 0
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
Gross Margin (LHS) EBITDA Margin (RHS) Other cost % of sales
Source: Company, Angel Research Source: Company, Angel Research
Earnings growth in line with estimate
Total reported PAT for the quarter came in at Rs145cr (Rs176cr), a yoy decline of
18% mainly on account of forex losses and re-pricing of liabilities to the extent of
Rs50cr (Rs12cr). Adjusted PAT stood at Rs192cr (Rs186cr) v/s our estimate of
Rs185cr, 4% ahead of our estimate.
Exhibit 8: PAT trend
250 30
25
186 192
200 177 20
15
150 10
Rs cr
102 5
%
100 0
64 -5
50 -10
-15
0 -20
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
Adj PAT % YoY
Source: Company, Angel Research
Conference call – Key takeaways
• Management maintained its revenue guidance of 8-10% (organic) for the
full year and expansion of EBITDA margin of 200bp over FY2010.
• Management in its effort to restructure and reduce costs, recently shut
down its Spain plant, benefits of which would be visible from 2QFY2011
onwards.
• The company is targeting profit growth of 30% over the next 2-3 years;
expects to clock 20-25% growth in FY2011.
July 27 2010 4
5. United Phosphorus |1QFY2011 Result Update
Investment Arguments
Innovators dominant in Off-patent space - Generic firms in sweet spot
The global agrichem industry, valued at US $40bn (CY2008), is dominated by the
top-6 innovators, viz. Bayer, Syngenta, Monsanto, BASF, DuPont and Dow, which
enjoy large market share of patented (28%) and off-patent market (32%).
Pertinently, the top-6 innovators also enjoy a large share of the off-patent market
due to the high entry barriers for the pure generic players. Thus, 1/3rd of the total
pie worth US $13bn (controlled by the top-6 innovators through proprietary
off-patent products) provides high growth opportunity for the larger integrated
generic players like UPL.
Generic segment market share to increase
The generic players have been garnering high market share, increasing from 32%
levels in 1998 to 40% by end 2006. Over 1998-2006, while industry registered
CAGR of 3%, generic players outpaced industry, posting CAGR of 6% during the
period. Going ahead, given the opportunities and drop in rate of new molecule
introduction by the innovators, we expect the generic players to continue to
outpace industry growth and increase their market share in the overall pie.
Historically, the global agrichem players have been logging in-line growth with
global GDP. Going ahead, over CY2009-11E, the global economy is expected to
grow at around 3-4%. Assuming this trend plays out in terms of growth for the
agrichem industry and the same rate of genericisation occurs, the agrichemical
generic industry could log in 6-8% yoy growth during the period and garner
market share of 44-45%.
A global generic play
UPL figures among the top-5 global generic agrichemical players, with a presence
across major markets including the US, EU, Latina America and India. Given the
high entry barriers by way of high investments, entry of new players is also
restricted. Thus, amidst this scenario and on account of having a low cost base, we
believe that UPL enjoys an edge over competition and is placed in sweet spot to
leverage the upcoming opportunities in the global generic space.
Outlook and Valuation
The agriculture sector, in the last few years, has been rejuvenating globally on the
back of rising food prices. Food security is also top priority for most governments,
while reducing food loss is one of the easiest ways to boost food inventory. Hence,
we believe that the agrichemical companies would continue to do well in wake of
heightened food security risks and strong demand is likely to be witnessed across
the world. Overall, we expect the global agrichemical industry to perform well
from hereon. However, generics are expected to register healthy growth on
account of: a) increasing penetration and wresting market share from innovators,
and b) patent expiries worth US $3-4bn (2007) during 2009-14.
Given the lower-than-expected sales growth and higher-than-expected EBITDA
margins, we have marginally revised our sales estimates downwards to factor in
the lower-than-estimated top-line growth in 1QFY2011. However, due to the
improvement in EBITDA margin we have marginally revised our PAT numbers
upwards.
July 27 2010 5
6. United Phosphorus |1QFY2011 Result Update
Exhibit 9: Change in estimates
Old New % chg
Parameter (Rs cr) FY11E FY12E FY11E FY12E FY11E FY12E
Sales 6,235 6,758 5,830 6,406 (6.5) (5.2)
EBITDA 1,185 1,352 1,158 1,339 (2.2) (0.9)
EBITDA margin (%) 19.5 20.5 20.5 21.5 100bp 100bp
Adj PAT 641 771 651 771 1.6 0.1
Source: Company, Angel Research
Over FY2010-12E, we expect UPL to post 8% and 18% CAGR in sales and Adj
PAT, respectively. UPL's profitability is set to improve with EBITDA margins
improving owing to stable raw material prices, pick up in demand and
restructuring of Cerexagri. We expect RoCE and RoE to improve from 15% and
19% in FY2010 to 19% and 20% in FY2012E, respectively. At current valuations of
11x FY2012E EPS, the stock is trading attractively. Hence, we maintain a Buy on
the stock, with a Target Price of Rs228.
Exhibit 10: Key Assumption
Geographic sales growth (%) FY11E FY12E Comment
North America 1.0 5.0 Adverse weather conditions impacting demand and volume growth
India 17.0 15.0 Robust volume growth on account of normal monsoon
EU (0.8) 4.0 Adverse weather conditions impacting demand and volume growth
RoW 7.5 15.0 Drying up of distributor inventory to boost demand
Total 6.1 9.9
EBITDA margin 20.5 21.5 stable raw material prices and realisations coupled with restructuring to improve margins
Tax rate 18 21
Source: Angel Research
Exhibit 11: Peer Valuation
Company Reco Mcap CMP TP Upside P/E (x) EV/Sales (x) EV/EBITDA (x) RoE (%) CAGR (%)
(Rs cr) (Rs) (Rs) (%) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E Sales PAT
Rallis Neutral 2,414 1,238 - - 16.8 13.1 2.1 1.7 10.8 9.1 30.4 32.1 21.3 36.5
Bayer CropScience Neutral 3,190 808 - - 18.1 15.6 1.5 1.3 12.0 10.0 27.7 25.5 15.3 22.9
United Phosphorus Buy 8,196 186 228 23 12.6 10.6 1.6 1.4 8.2 6.9 19.5 19.9 8.3 17.8
Nagarjuna Agrichem NA 484 325 - - 7.3 5.9 0.7 0.6 3.8 3.0 29.0 28.0 13.8 17.0
Source: Company, Angel Research
July 27 2010 6
12. United Phosphorus |1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement United Phosphorus
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 27 2010 12
