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Acquires RICECO, USA
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.
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, which enjoy
large market share of patented (28%) and off-patent market
(32%). 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.
A global generic play: UPL figures among the top-5 global
generic agrichemical players with a presence across major
Event Update
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. 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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