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United Phosphorus- Event Update
Angel Broking upgrades United Phosphorus from Accumulate to Buy with a Target Price of Rs198.
About the deal: United Phosphorus (UPL) has announced acquisition of RICECO
(RC) LLC of USA. We believe that the estimated acquisition cost of `225cr is in
line with UPL’s historic average of 2x EV/Sales. Given UPL’s strong cash position
(~`2,000cr at the end of 2QFY2011), the acquisition would be funded through
the same.
RICECO: RC, a key pesticides player for the rice crop in the US, is beefed up with
a strong herbicides product portfolio. USA contributes a major 70-80% of its
sales, while the balance comes from the EU, Lat-Am and RoW. RC, a
profit-making entity at the net level, clocked revenues of US $25-30mn in
CY2009. RC is also a debt-free company.
UPL’s India sales suffering: Prolonged rainfalls extending into October-November
across key agriculture states has resulted in crop destruction in the country. As a
result, we expect UPL’s 3QFY2011 performance to take a knock.
Estimates pruned: We have pruned our sales and margin estimates to factor in
the likely lower sales from India in 3QFY2011. However, the acquisition of
Mancozeb products from DuPont and RICECO are likely to cushion the sales.
Outlook and Valuation: We estimate UPL to post 8.8% and 13.3% CAGR in sales
and PAT respectively, over FY2010-12. At current levels, post the recent correction
the stock is trading at attractive valuations of 10.1x FY2012E EPS. Hence, we
upgrade the stock from Accumulate to Buy with a revised Target Price of `198
(`228).
Outlook and Valuation
Over the last few years, the global agriculture sector has been rejuvenating 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.
We estimate UPL to post 8.8% and 13.3% CAGR in sales and PAT respectively,
over FY2010-12. At current levels, post the recent correction the stock is trading at
attractive valuations of 10.1x FY2012E EPS. Hence, we upgrade the stock from
Accumulate to Buy with a revised Target Price of `198 (`228).
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
offpatent 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, Latin 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
Over the last few years, the global agriculture sector has been rejuvenating 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.
We estimate UPL to post 8.8% and 13.3% CAGR in sales and PAT respectively,
over FY2010-12. At current levels, post the recent correction the stock is trading at
attractive valuations of 10.1x FY2012E EPS. Hence, we upgrade the stock from
Accumulate to Buy with a revised Target Price of `198 (`228).
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