Buy: United Phosphorus: Kotak Sec

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Buy: United Phosphorus: Kotak Sec



Positive news in global agchem sector lifts UPL’s share price. After a subdued
1H2010 marked by negative news from the global agchem sector, we welcome positive
news—(1) ChemChina is in discussions to acquire Makhteshim for US$2.7 bn, implying
valuation of 22X 2011E Bberg consensus earnings. UPL trades at 11X FY2012E earnings
est., lower than FY2012E PE multiple of MAIN of 16X and (2) MAIN provides preliminary
sales growth est. of 20% for 3Q2010, we estimate 10% for UPL in 2QFY11E. We think
indications of stronger demand pick-up in 2QFY11E will lead to upgrade in our 2HFY11E
estimates. Maintain BUY with PT of Rs225 (13X FY2012E est.).


UPL’s YTD price performance subdued on account of negative news from global agchem sector
We believe UPL’s YTD stock price performance was subdued on account of negative news from
global generic agchem space. #2 generic agchem company, Nufarm, slashed its operating profit
estimate in July 2010 by half for year ending Sep ’ 10. Certain factors (see inside) behind this
downgrade have also affected UPL’s YTD performance (UPL delivered a poor 2% volume growth
in 1QFY11). However, YTD UPL has outperformed stock price performance of global generic
companies (see inside).
Two recent developments are positive for the sector
We welcome positive news from the sector—(1) ChemChina in discussions to acquire Makhteshim
(MAIN) at a valuation of US$2.7 bn, implying valuation of 22X 2011E Bberg consensus earnings.
UPL trades at 11X FY2012E earnings est., lower than current FY2012E PE multiple of MAIN of
16X, we therefore see scope for multiple expansion for UPL and (2) MAIN provides preliminary
sales growth est. of 20% for 3Q2010, we estimate 10% for UPL in 2QFY11E.
Consolidation underway in the global generic agchem sector—UPL to emerge as an acquirer
We think the last has not been heard on consolidation in this sector. As per press reports, the #2
global generic (20% owned by Sumitomo of Japan) may also be a target. With the recent
upheaval at Nufarm, MAIN, we think UPL is positioned to emerge as a much stronger player over
the long term in the generic agchem space.
We expect 2HFY11E to be stronger for UPL, upward revision likely if 2QFY11E beats est.
We expect 2HFY11E to be stronger for UPL due to (1) minimal price decline and (2) stable currency
movement. We estimate 10% sales growth for UPL in 2QFY11E. We believe stronger demand
pickup in 2QFY11E will lead to upgrade in our 2HFY11E estimates.