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UNITED PHOSPHORUS
Margin execution drives earnings growth
Execution on margin front; revenue growth muted
United Phosphorus’ (UNTP) Q3FY11 results illustrate continued challenges in key
geographies of the US and Europe, which impacted overall revenue growth.
Earnings, however, remain strong. Adjusted PAT (adj. for forex loss of INR 355
mn) of INR 1.18 bn grew 20% Y-o-Y, in line with our estimates of INR 1.09 bn.
Revenue, at INR 12.2 bn, grew 6% Y-o-Y (5% below estimate) with strong
performance in ROW markets, offset by de-growth in the US and Europe. EBITDA
margin of 18.1% was in line with our estimates, as UNTP continues to benefit
from lower raw material costs and Cerexagri restructuring.
Strong ramp-up in ROW markets offset decline in US/EU
Revenue growth of 6% Y-o-Y was largely led by volume growth of 14%, though
offset by adverse currency impact (-5% Y-o-Y) and pricing de-growth (-3% Y-o-
Y). Adj. for Advanta and Mancozeb (2-3% of sales), organic growth was 4% Y-o-
Y. ROW surprised positively with strong growth of 37% Y-o-Y (20% volume
growth), largely led by growth in Latin America and incremental Mancozeb sales.
India grew 6% Y-o-Y, to INR 3.3 bn. EU/US (-16% Y-o-Y) continue to de-grow
due to weak demand in Europe and adverse currency pressures.
Revise down estimates to reflect muted base business growth
Management has revised down revenue guidance to 5% Y-o-Y growth from 15%
earlier (8-10% organic growth and USD 60 mn acquisitions), reflecting muted
growth in 9mFY11. We, thus, reduce our revenue estimates by 3-4% in FY11/12E.
We expect revenue growth to pick up in FY12 (14% Y-o-Y), led by volume growth
(12% Y-o-Y) and higher sales from acquisitions. Savings from Cerexagri
restructuring will drive higher EBITDA margins in FY12.
Outlook and valuations: EU/US overhang; maintain ‘BUY’
While UNTP has lacked execution on the revenue front (flat Y-o-Y in 9mFY11) due
to pricing pressures, unfavourable weather conditions and currency impact, it
remains focused on margins and is on track to deliver 16% growth in earnings in
FY11. Further, completion of Cerexagri restructuring would be accretive to EBITDA
margins (50-60 bps) in FY12. UNTP has corrected 23% over last month, and is
currently trading at 8x FY12 EPS estimates, lower than average range of 10-12x),
which caps further downside risk, in our view. However, muted base business
growth and non-visibility on turnaround in the US and Europe are key overhang
on valuations. We, thus, value the stock at lower end of the average valuation
range (10-12X) and revise down TP to INR 180 (INR 225 earlier). We maintain
‘BUY’ on the stock
Execution on margin front; revenue growth muted
UNTP’s Q3FY11 results illustrate continued challenges in key geographies of the US and
Europe, which impacted overall revenue growth. Earnings, however, remain strong.
Revenue, at INR 12.2 bn, grew 6% Y-o-Y, but was 5% below estimate. ROW markets
depicted strong growth of 37% Y-o-Y, offset by 16% decline in US and Europe, while
India grew at 6% Y-o-Y.
EBITDA margin of 18.1% expanded 110 bps Y-o-Y and was in line with our estimates, as
the company continues to benefit from lower raw material costs and savings from partial
Cerexagri restructuring (Spain). YTD, the company EBTIDA margins (excl. other income)
has improved to 18.8% versus 17.7% in 9mFY10, reaffirming management focus on
margin expansion. EBITDA grew 13% Y-o-Y, to INR 2.2 bn, versus our estimate of INR
2.3 bn.
Reported net profit, at INR 840 mn, was adversely impacted from INR 355 mn of
derivative losses from reprising of Yen liabilities; adj. for forex loss, PAT was at INR 1.18
bn, up 20% Y-o-Y, in line with our estimates of INR 1.09 bn. YTD, adjusted net profit
(excluding INR 1,284 mn forex loss) has depicted growth of 18% Y-o-Y. Tax rate of 18%
was in line with our estimate, while increase in debt (INR 4.5 bn) has led to higher
interest costs (up 103%Y-o-Y) of INR 538 mn versus INR 492 mn in Q2FY11.
Strong ramp-up in ROW markets offset decline in US/EU
Revenue growth of 6% Y-o-Y was largely led by volume growth of 14%, offset by
adverse currency impact (-5% Y-o-Y) and pricing de-growth (-3% Y-o-Y). Adj. for
Advanta and Mancozeb (2-3% of sales), organic growth was 4% Y-o-Y.
ROW markets surprised positively with strong growth of 37% Y-o-Y (20% volume
growth) versus our estimates of 15% Y-o-Y, largely led by growth in Latin America and
incremental sales from Mancozeb acquisition. Excluding Mancozeb business, ROW
markets grew 27% Y-o-Y. India grew 6% Y-o-Y, to INR 3.3 bn, lower than our estimate
of INR 3.7 bn. This miss was due to unfavorable weather conditions leading to delay in
harvests and lower-than-expected sales in technical and specialty chemical sales, as per
the company.
US sales remained weak with de-growth of 4% Y-o-Y during quarter, while Europe
declined 24% Y-o-Y on the back of adverse currency/pricing pressures and weaker
demand. FY11 (9m) has depicted continued de-growth in these key geographies, which
historically contribute higher margins to overall business. We believe that currency and
pricing pressures could alleviate by FY12; however slow pick-up in volumes and
increasing competitive pressures could remain key concerns for the business in these
markets. We expect US and Europe to grow by 8% and 12%, respectively, in FY12.
Revise down FY11/12 earnings to reflect muted base business growth
Management has revised down revenue guidance to 5% Y-o-Y growth from 15% earlier
(8-10% organic growth and USD 60 mn acquisitions), reflecting muted growth in
9mFY11 (0.1% Y-o-Y). We, thus, revise down our revenue and earnings estimates for
FY11 by 4%. We revise down our FY12 earnings estimates by 6% to INR 17.6 per share
to factor in lower sales growth in FY11 and higher tax rate of 17% (16% earlier).
We estimate revenue growth of 14% Y-o-Y in FY12, led by volume growth of 12% Y-o-Y
and incremental sales from acquisitions (USD 80 mn), while we expect pricing to remain
stable and remain neutral on forex. Management expects threshold volume growth to
remain stable during the rest of FY11, and normalcy in the US and Europe to drive higher
growth in FY12. As highlighted in the table below, significant ramp-up in Brazil and India
has enabled company to maintain higher volume growth (14-15%) in Q3FY11, despite
weakness in the US and Europe. Further, we expect savings form Cerexagri restructuring
(Spain and Rotterdam) to drive higher margins in FY12 (50-60 bps expansion). We, thus,
estimate earnings to grow at 22% CAGR (FY10-12), to INR 17.6 per share, in FY12.
Outlook and valuation; EU/US overhang; maintain ‘BUY’
Although pricing pressures (-4% Y-o-Y), unfavourable weather conditions and currency
impact (-5% Y-o-Y) have led to muted growth in revenue (flat Y-o-Y for 9m FY11), the
company is likely to deliver 16% Y-o-Y growth in earnings in FY11. Further, EBITDA
margins are expected to be favourably impacted by 50-60bps from completion of
Cerexagri restructuring in FY12. UNTP has corrected 23% over last month and is
currently trading at 8x FY12 EPS estimates (lower than average band of 10-12x), which
caps further downside risk, in our view. However, lack of execution on base business
growth and non-visibility on turnaround in the US and Europe remain overhang on
valuations. We, thus, value the stock at the lower end of average valuation range (10-
12X) and revise down TP to INR 180 (INR 225 earlier). We maintain ‘BUY’ on the stock.
Other key highlights
• Net working capital (days) at 77 days in 9mFY11 versus 81 days in 9mFY10.
• Gross debt of INR 28-29 bn, net debt of INR 9 bn and cash of INR 20 bn by end Q2FY11.
• Cash balance at INR 20 bn, enhancing financial capability for large acquisitions.
Company Description
UNTP, incorporated in 1969, is a global player in the agro-chemicals industry with strong
presence in off-patent market of US and Europe. UNTP ranks among the Top 5 generics
agro-chemicals companies in the world. Agrochemicals comprise ~80% of its revenues,
while the rest of business includes industrial chemicals and intermediaries. UNTP has
acquired seed business of Advanta to augment its presence across various agri-inputs.
Historically, the company has managed to deliver high growth rates (35% CAGR during
FY05-09) based on its strategy to acquire small agro-chemical companies and tail-end
brands of big players in US and Europe.
Investment Theme
United Phosphorus is a direct proxy for increase in demand for food crops due to rising
commodity prices, high population growth and high demand for bio-fuel. UNTP has
historically focused on acquisitions of smaller companies and brands to achieve higher
growth than the market (36% CAGR growth for FY05-09). We expect revenue growth of
10% over FY11/12E and earnings growth of 22% over in FY11/12E, reflecting strength in
the base business and potential for margin expansion. Moreover potential large
acquisitions, post ‘Mancozeb/RiceCo’, provide further upside to our estimates.
Key Risks
Demand concerns due to cyclical and seasonal effects
The agro-chemical industry, in general, is cyclical with demands for some products
seasonal in nature. Seasonal usage follows varying agricultural seasonal patterns,
weather conditions and pest related pressures. This volatility impacts the overall demand
for agro chemicals. This seasonality risk is somewhat mitigated for UNTP, given its
geographic reach and non-dependence on any one geography for sales.
Volatility in input prices and company’s limited ability to pass on costs
The company operates broadly under the concept of ‘pass-through’, where lower raw
material costs benefits are passed on to consumers as lower prices and vice versa. High
volatility in prices of raw materials for agro chemicals, leads to lower price realization
and can cause margin pressures given that the average holding period of inventory is 3-
4 months.
Increase in GM crops usage negative for agro chemicals
Growth in GM crops (biotech products) poses a structural risk to agro-chemicals usage,
as GM crops have more resistance to pests and diseases relative to non-GM crops. This
could typically lead to reduction in pesticide usage.
Forex risk
UNTP, like most companies with a large export interface, faces risks from an appreciating
INR. Further at the operational level company has higher exposure to EUR (given the
large exposure from Cerexagri operations) which has been recently been volatile. Most of
the forex liabilities are in USD. However, the company has a natural hedge on its imports
and on manufacturing done at its international locations.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UNITED PHOSPHORUS
Margin execution drives earnings growth
Execution on margin front; revenue growth muted
United Phosphorus’ (UNTP) Q3FY11 results illustrate continued challenges in key
geographies of the US and Europe, which impacted overall revenue growth.
Earnings, however, remain strong. Adjusted PAT (adj. for forex loss of INR 355
mn) of INR 1.18 bn grew 20% Y-o-Y, in line with our estimates of INR 1.09 bn.
Revenue, at INR 12.2 bn, grew 6% Y-o-Y (5% below estimate) with strong
performance in ROW markets, offset by de-growth in the US and Europe. EBITDA
margin of 18.1% was in line with our estimates, as UNTP continues to benefit
from lower raw material costs and Cerexagri restructuring.
Strong ramp-up in ROW markets offset decline in US/EU
Revenue growth of 6% Y-o-Y was largely led by volume growth of 14%, though
offset by adverse currency impact (-5% Y-o-Y) and pricing de-growth (-3% Y-o-
Y). Adj. for Advanta and Mancozeb (2-3% of sales), organic growth was 4% Y-o-
Y. ROW surprised positively with strong growth of 37% Y-o-Y (20% volume
growth), largely led by growth in Latin America and incremental Mancozeb sales.
India grew 6% Y-o-Y, to INR 3.3 bn. EU/US (-16% Y-o-Y) continue to de-grow
due to weak demand in Europe and adverse currency pressures.
Revise down estimates to reflect muted base business growth
Management has revised down revenue guidance to 5% Y-o-Y growth from 15%
earlier (8-10% organic growth and USD 60 mn acquisitions), reflecting muted
growth in 9mFY11. We, thus, reduce our revenue estimates by 3-4% in FY11/12E.
We expect revenue growth to pick up in FY12 (14% Y-o-Y), led by volume growth
(12% Y-o-Y) and higher sales from acquisitions. Savings from Cerexagri
restructuring will drive higher EBITDA margins in FY12.
Outlook and valuations: EU/US overhang; maintain ‘BUY’
While UNTP has lacked execution on the revenue front (flat Y-o-Y in 9mFY11) due
to pricing pressures, unfavourable weather conditions and currency impact, it
remains focused on margins and is on track to deliver 16% growth in earnings in
FY11. Further, completion of Cerexagri restructuring would be accretive to EBITDA
margins (50-60 bps) in FY12. UNTP has corrected 23% over last month, and is
currently trading at 8x FY12 EPS estimates, lower than average range of 10-12x),
which caps further downside risk, in our view. However, muted base business
growth and non-visibility on turnaround in the US and Europe are key overhang
on valuations. We, thus, value the stock at lower end of the average valuation
range (10-12X) and revise down TP to INR 180 (INR 225 earlier). We maintain
‘BUY’ on the stock
Execution on margin front; revenue growth muted
UNTP’s Q3FY11 results illustrate continued challenges in key geographies of the US and
Europe, which impacted overall revenue growth. Earnings, however, remain strong.
Revenue, at INR 12.2 bn, grew 6% Y-o-Y, but was 5% below estimate. ROW markets
depicted strong growth of 37% Y-o-Y, offset by 16% decline in US and Europe, while
India grew at 6% Y-o-Y.
EBITDA margin of 18.1% expanded 110 bps Y-o-Y and was in line with our estimates, as
the company continues to benefit from lower raw material costs and savings from partial
Cerexagri restructuring (Spain). YTD, the company EBTIDA margins (excl. other income)
has improved to 18.8% versus 17.7% in 9mFY10, reaffirming management focus on
margin expansion. EBITDA grew 13% Y-o-Y, to INR 2.2 bn, versus our estimate of INR
2.3 bn.
Reported net profit, at INR 840 mn, was adversely impacted from INR 355 mn of
derivative losses from reprising of Yen liabilities; adj. for forex loss, PAT was at INR 1.18
bn, up 20% Y-o-Y, in line with our estimates of INR 1.09 bn. YTD, adjusted net profit
(excluding INR 1,284 mn forex loss) has depicted growth of 18% Y-o-Y. Tax rate of 18%
was in line with our estimate, while increase in debt (INR 4.5 bn) has led to higher
interest costs (up 103%Y-o-Y) of INR 538 mn versus INR 492 mn in Q2FY11.
Strong ramp-up in ROW markets offset decline in US/EU
Revenue growth of 6% Y-o-Y was largely led by volume growth of 14%, offset by
adverse currency impact (-5% Y-o-Y) and pricing de-growth (-3% Y-o-Y). Adj. for
Advanta and Mancozeb (2-3% of sales), organic growth was 4% Y-o-Y.
ROW markets surprised positively with strong growth of 37% Y-o-Y (20% volume
growth) versus our estimates of 15% Y-o-Y, largely led by growth in Latin America and
incremental sales from Mancozeb acquisition. Excluding Mancozeb business, ROW
markets grew 27% Y-o-Y. India grew 6% Y-o-Y, to INR 3.3 bn, lower than our estimate
of INR 3.7 bn. This miss was due to unfavorable weather conditions leading to delay in
harvests and lower-than-expected sales in technical and specialty chemical sales, as per
the company.
US sales remained weak with de-growth of 4% Y-o-Y during quarter, while Europe
declined 24% Y-o-Y on the back of adverse currency/pricing pressures and weaker
demand. FY11 (9m) has depicted continued de-growth in these key geographies, which
historically contribute higher margins to overall business. We believe that currency and
pricing pressures could alleviate by FY12; however slow pick-up in volumes and
increasing competitive pressures could remain key concerns for the business in these
markets. We expect US and Europe to grow by 8% and 12%, respectively, in FY12.
Revise down FY11/12 earnings to reflect muted base business growth
Management has revised down revenue guidance to 5% Y-o-Y growth from 15% earlier
(8-10% organic growth and USD 60 mn acquisitions), reflecting muted growth in
9mFY11 (0.1% Y-o-Y). We, thus, revise down our revenue and earnings estimates for
FY11 by 4%. We revise down our FY12 earnings estimates by 6% to INR 17.6 per share
to factor in lower sales growth in FY11 and higher tax rate of 17% (16% earlier).
We estimate revenue growth of 14% Y-o-Y in FY12, led by volume growth of 12% Y-o-Y
and incremental sales from acquisitions (USD 80 mn), while we expect pricing to remain
stable and remain neutral on forex. Management expects threshold volume growth to
remain stable during the rest of FY11, and normalcy in the US and Europe to drive higher
growth in FY12. As highlighted in the table below, significant ramp-up in Brazil and India
has enabled company to maintain higher volume growth (14-15%) in Q3FY11, despite
weakness in the US and Europe. Further, we expect savings form Cerexagri restructuring
(Spain and Rotterdam) to drive higher margins in FY12 (50-60 bps expansion). We, thus,
estimate earnings to grow at 22% CAGR (FY10-12), to INR 17.6 per share, in FY12.
Outlook and valuation; EU/US overhang; maintain ‘BUY’
Although pricing pressures (-4% Y-o-Y), unfavourable weather conditions and currency
impact (-5% Y-o-Y) have led to muted growth in revenue (flat Y-o-Y for 9m FY11), the
company is likely to deliver 16% Y-o-Y growth in earnings in FY11. Further, EBITDA
margins are expected to be favourably impacted by 50-60bps from completion of
Cerexagri restructuring in FY12. UNTP has corrected 23% over last month and is
currently trading at 8x FY12 EPS estimates (lower than average band of 10-12x), which
caps further downside risk, in our view. However, lack of execution on base business
growth and non-visibility on turnaround in the US and Europe remain overhang on
valuations. We, thus, value the stock at the lower end of average valuation range (10-
12X) and revise down TP to INR 180 (INR 225 earlier). We maintain ‘BUY’ on the stock.
Other key highlights
• Net working capital (days) at 77 days in 9mFY11 versus 81 days in 9mFY10.
• Gross debt of INR 28-29 bn, net debt of INR 9 bn and cash of INR 20 bn by end Q2FY11.
• Cash balance at INR 20 bn, enhancing financial capability for large acquisitions.
Company Description
UNTP, incorporated in 1969, is a global player in the agro-chemicals industry with strong
presence in off-patent market of US and Europe. UNTP ranks among the Top 5 generics
agro-chemicals companies in the world. Agrochemicals comprise ~80% of its revenues,
while the rest of business includes industrial chemicals and intermediaries. UNTP has
acquired seed business of Advanta to augment its presence across various agri-inputs.
Historically, the company has managed to deliver high growth rates (35% CAGR during
FY05-09) based on its strategy to acquire small agro-chemical companies and tail-end
brands of big players in US and Europe.
Investment Theme
United Phosphorus is a direct proxy for increase in demand for food crops due to rising
commodity prices, high population growth and high demand for bio-fuel. UNTP has
historically focused on acquisitions of smaller companies and brands to achieve higher
growth than the market (36% CAGR growth for FY05-09). We expect revenue growth of
10% over FY11/12E and earnings growth of 22% over in FY11/12E, reflecting strength in
the base business and potential for margin expansion. Moreover potential large
acquisitions, post ‘Mancozeb/RiceCo’, provide further upside to our estimates.
Key Risks
Demand concerns due to cyclical and seasonal effects
The agro-chemical industry, in general, is cyclical with demands for some products
seasonal in nature. Seasonal usage follows varying agricultural seasonal patterns,
weather conditions and pest related pressures. This volatility impacts the overall demand
for agro chemicals. This seasonality risk is somewhat mitigated for UNTP, given its
geographic reach and non-dependence on any one geography for sales.
Volatility in input prices and company’s limited ability to pass on costs
The company operates broadly under the concept of ‘pass-through’, where lower raw
material costs benefits are passed on to consumers as lower prices and vice versa. High
volatility in prices of raw materials for agro chemicals, leads to lower price realization
and can cause margin pressures given that the average holding period of inventory is 3-
4 months.
Increase in GM crops usage negative for agro chemicals
Growth in GM crops (biotech products) poses a structural risk to agro-chemicals usage,
as GM crops have more resistance to pests and diseases relative to non-GM crops. This
could typically lead to reduction in pesticide usage.
Forex risk
UNTP, like most companies with a large export interface, faces risks from an appreciating
INR. Further at the operational level company has higher exposure to EUR (given the
large exposure from Cerexagri operations) which has been recently been volatile. Most of
the forex liabilities are in USD. However, the company has a natural hedge on its imports
and on manufacturing done at its international locations.
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