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United Phosphorus (UNTP IN; Mkt Cap USD1.5b, CMP Rs155, Buy)
UNTP's 3QFY11 operating performance was above estimates, with EBITDA margins of 19.8% and EBITDA of Rs2.48b . However MTM forex loss of ~Rs300m resulted in lower-than-expected PAT of Rs839b
Revenue grew by 7.8% to Rs12.48b driven by 15% volume growth. However, realizations were 3% lower and there was a 5% adverse forex impact.
The management has scaled down its revenue guidance to 5% revenue growth in FY11 (against 15% earlier), but maintained EBITDA margin guidance of 21%.
We are downgrading our EPS estimate for FY11 by 4.6% to Rs12.7 but maintain our FY12 EPS estimate of Rs17.3. Valuations of 8.9x FY12E EPS and 7.4x FY13E EPS, do not reflect growth potential (organic and inorganic). Maintain Buy with a target price of Rs208 (~10x FY13E EPS).
Volume growth, acquisition drive revenue growth
Consolidated revenues grew by 7.8% YoY to Rs12.48b, driven by 15% volume growth but
realizations were 3% lower and there was 5% adverse forex impact. Revenue grew
strongly in RoW markets (~36.5% YoY) and it was stable in India (~6.3% YoY). However,
volume was under pressure in the US (down ~4.4% YoY) and the EU (down ~24.4%
YoY). Organic growth, adjusting for seeds sale (~0%) and recently acquired Mancozeb
(2-3%), was 4-5%. Volume growth of 15% was driven mainly by RoW (over 30%), India
(12-15%) and the US (11-13%). However, volumes in Europe are under pressure.
Gross margins fall 110bp but EBITDA margins improve 220bp YoY
Gross margins fell 110bp YoY to 40%. However, EBITDA margins improved by 220bp
YoY (~20bp QoQ decline) to 19.8%, driven by higher operating leverage and benefit of
Cerexagri restructuring. Consequently, EBITDA grew 22% YoY (down ~3% QoQ) to
Rs2.48b. Interest costs were higher due to an MTM forex loss of Rs300m (against
Rs330m forex loss in 3QFY10). Higher contribution from Advanta (an associate company)
of Rs50m (against -Rs10m in 3QFY10) boosted PAT growth by 33.5% YoY to Rs839m.
Working capital up after bottoming out in 1QFY11
Working capital increased in 3QFY11 after substantial savings since 4QFY09. In 3QFY11,
working capital increased by 10 days QoQ to 77 days (against 80 days in December
2010). Its overall investment in working capital increased to Rs10.9b (against Rs11.4b in
3QFY10 and Rs9.6b in 2QFY11). The management indicated that the increase in working
capital in 3QFY11 was due to inventory build up (~109 days v/s 77 days in 2QFY11 and 91
days in 3QFY10) for peak demand from US and EU in 1HCY11.
Acquisitions of Mancozeb (June 2010), RiceCo (December 2010) to add
~US$100m a year to revenue
Its recent acquisition of Mancozeb (brand acquisition from Dow in June 2010) and RiceCo
(rice herbicide specialist acquired in December 2010) is expected to add ~US$100m a
year to revenue. These acquisitions strengthen its presence in these molecules and give it
access to markets (Latin America access due to Mancozeb) and the ability to cross-sell
(rice herbicides through RiceCo's network). While Mancozeb contributed 2-3% to revenue
in 3QFY11, RiceCo didn't add anything meaningful since it was acquired in mid-December.
FY11 revenue guidance cut to 5%, implying ~15% revenue growth in 4QFY11
The management has cut its FY11 guidance:
It has guided for FY11 revenue growth of 5% (against 15% earlier). Revenue growth
will be driven by India and RoW (20-25% growth), and the US and the EU will be
relatively subdued. Our estimates model in 6.7% revenue growth for FY11.
EBITDA margin of 21% (~200bp expansion). We model in EBITDA margin of 20.9%
and EBITDA growth of 18.5%.
The guidance implies ~15% growth in revenue and over ~30% in PAT in 4QFY11.
Valuation and view
The business environment for the agro-chemical industry has been improving gradually in
the operating environment from 3QFY11. While the long term outlook is positive, it would
benefit in the short term from integration benefits from Cerexagri. We are downgrading
our EPS estimates for FY11 by 4.6% to Rs12.7 but maintain our FY12 EPS of Rs17.3.
Valuations are at 8.9x FY12E EPS and 7.4x FY13E EPS and do not reflect growth potential
(organic and inorganic) for the company. Maintain Buy with a target price of Rs208
(~10x FY13E EPS).
United Phosphorus is a US$1.2b company with a strong
presence in crop protection and industrial chemicals. With
about 80% of its revenue coming from international markets,
United Phosphorus has emerged as the third largest generic
player in the world. Its growth strategy focuses on filing its
own registrations globally and acquiring tail-end brands of
global majors in regulated markets.
Key investment argument
One of the largest (and most competitive) global generic
players in crop protection – well poised to leverage the
increasing conversion to generics globally.
Improving cash flows gives it a war chest to scale up
new registrations and acquisitions.
Increasing share of global revenues (80% in FY10E)
to improve profitability and reduce dependence on the
volatile Indian market.
Key investment risks
Volatility in raw material prices, rupee appreciation could
subdue margins, if adequate price hikes cannot be taken.
Business is working capital intensive, thereby restricting
the free cash available to seed growth.
Recent developments
Acquired RiceCO, specialist in rice herbicide in
December 2010.
Valuation and view
Valuations at 8.9x FY12E EPS and 7.4x FY13E EPS
do not reflect growth potential (organic and inorganic)
for the company.
Maintain Buy with a target price of Rs208 (~10x FY13E
EPS).
Sector view
Short term business environment for the agro-chemical
industry is challenging, but long term potential intact.
High degree of consolidation in the market, strong entry
barriers and limited price erosion make the generics
opportunity very attractive for established players.
Companies that have achieved critical scale and
established strong relationships with major distributors
are expected to benefit the most
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