UNITED PHOSPHORUS Maintains guidance despite weaker quarter :: Edelweiss

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􀂄 Disappointing numbers due to weak revenue growth
United Phosphorus’ (UNTP) Q2FY11 results were disappointing. Revenue
(excluding other operating income) grew 10% Y-o-Y to INR 12.2 bn versus our
estimate of INR 15 bn; adjusted for Mancozeb acquisition, organic growth was 5%
Y-o-Y. Net profit (adjusted for forex loss) of INR 1.3 bn was lower than our
estimate of INR 1.64 bn as weak revenue growth offset better-than-expected
gross margins and lower fixed costs. Gross margins improved 300bps Y-o-Y to
52% versus our estimate of 48%, while fixed cost remained flat Q-o-Q, favorably
impacting operating margins. EBITDA margins, at 18.5%, improved 153bps Y-o-Y,
reaffirming management guidance of 200bps margin expansion in FY11.
􀂄 Currency pressures in EU/US offset higher growth in India region
Export market (EU/US) revenues, although seasonally low, declined 16% Y-o-Y and
37% Q-o-Q led by currency pressures (-11%/-9% impact in EU/US) and weaker
demand in Europe. Volume growth of 13% (10% ex-Advanta) was offset by adverse
currency impact of 3%, while pricing remained stable Y-o-Y. India growth remained
strong at 45% Y-o-Y to INR 4.5 bn led by higher commodity prices and all round
crop production driving demand in the region. Management expects strong demand
from rabi season and has guided 20-25% Y-o-Y growth for H2FY11. ROW markets
grew 23% Y-o-Y to INR 3.5 bn.
􀂄 Management guides for very strong H2FY11
We are revising down our FY11/FY12 earnings estimates by 1-5% to factor in
lower revenues during Q2FY11. UNTP has reiterated FY11 guidance of 10-15%
revenue growth, led by base business growth of 8-10% and acquisitions (~USD
60 mn) against a 1% decline in revenues in H1FY11. This implies 32% Y-o-Y
growth in H2FY11 (including Mancozeb contribution of ~INR 1.0-1.2 bn in
H2FY11), led by growth in Latam, India (20-25% growth), and higher growth
from regulated markets. We also note that UNTP should also benefit due to
negative base effect of price declines in H2FY10. However, overall sales growth is
likely be lower, hence, we forecast total sales growth of 9-10% in FY11.
􀂄 Outlook and valuations: Acquisition-led tailwind; maintain ‘BUY’
UNTP currently has INR 20 bn of cash on books to make a sizeable acquisition in
near term. However, we are unclear on margin impact of a potential large
acquisition on FY11 estimates. Challenges in key markets like US and EU are an
overhang on the stock, while management is confident of achieving overall
estimates for FY11. We maintain our target price of INR 225 and maintain ‘BUY’.