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United Phosphorus (UNTP)
Others
Much-awaited Brazilian acquisition materializes—marginally positive. UPL has
entered into a pact to acquire Isagro’s 50% stake in Sipcam Isagro Brazil (SIB). In
CY2008-09, SIB reported (1) revenues of US$115/130 mn with (2) EBITDA margin of
2/17% and (3) debt of US$70 mn, mainly for working capital. We view the acquisition
as marginally positive as (1) it helps UPL enter the high-growth Brazilian market, adding
US$65 mn to its top line and (2) we believe the acquisition cost is reasonable. However,
risks remain as the acquisition is (1) margin dilutive—17% in CY2008 versus UPL’s 19%
in 9MFY11, (2) receivables cycle in Brazil is longer (>200 days) and (3) JV has significant
debt (3X debt/EBITDA). We leave estimates unchanged and await closure of the deal.
Maintain BUY with a target price of Rs220.
UPL enters Brazil, revenue addition of US$65 mn
UPL has entered into an agreement to acquire Isagro’s 50% stake in its 4-year-old Brazilian JV—
Sipcam Isagro Brazil (SIB). SIB derives 100% of its revenues from Brazil, producing and distributing
agchem products across the three key crop protection segments. SIB also has a formulation facility
in Brazil and our discussion with UPL reveal that it has no plans to downsize plant operations.
According to the agreement, SIB will continue to distribute products by erstwhile JV partner Isagro.
SIB enjoys strong market shares in the Brazilian market in two crops—46% in cotton and 4% in
soybean.
Why Brazil—high-growth market where UPL had minimal presence
UPL had less than 10% exposure to the high-growth Latin American agchem market with a limited
presence in Brazil on account of: (1) credit practices prevalent in the Brazilian market and (2)
longer registration timelines saddled by bureaucratic delays. Despite this, the country remains a
promising market for agchem companies given (1) Brazil comprises 13-15% of global agchem
sales and 2/3
rd
of US$7.6 bn Latin American market, (2) Latin America is the fastest-growing
agchem market in the world, registering growth of 9% in CY2009 in nominal terms, (3) Brazil is
one of the few countries witnessing expansion in acreage under crop cultivation, (4) the market is
dominated by few key crops—soybean (45%), corn (13%), sugar (9%) and cotton (8%) and (5)
the market is dominated by off-patent molecules which enjoy a market share of 55% in CY2008
versus 48% in CY2004.
Acquisition marginally positive; we leave estimates unchanged and await closure of deal
We view this acquisition as marginally positive. However, risks remain as it is (1) margin dilutive—
17% in CY2008 versus UPL’s 19% in 9MFY11, (2) receivables cycle in Brazil is longer (>200 days),
(3) JV has significant debt (3X debt/EBITDA), mainly for working capital, and (4) while Sipcam is an
established Italian agchem firm (US$465 mn sales), the Brazilian JV was formed in CY2006.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Phosphorus (UNTP)
Others
Much-awaited Brazilian acquisition materializes—marginally positive. UPL has
entered into a pact to acquire Isagro’s 50% stake in Sipcam Isagro Brazil (SIB). In
CY2008-09, SIB reported (1) revenues of US$115/130 mn with (2) EBITDA margin of
2/17% and (3) debt of US$70 mn, mainly for working capital. We view the acquisition
as marginally positive as (1) it helps UPL enter the high-growth Brazilian market, adding
US$65 mn to its top line and (2) we believe the acquisition cost is reasonable. However,
risks remain as the acquisition is (1) margin dilutive—17% in CY2008 versus UPL’s 19%
in 9MFY11, (2) receivables cycle in Brazil is longer (>200 days) and (3) JV has significant
debt (3X debt/EBITDA). We leave estimates unchanged and await closure of the deal.
Maintain BUY with a target price of Rs220.
UPL enters Brazil, revenue addition of US$65 mn
UPL has entered into an agreement to acquire Isagro’s 50% stake in its 4-year-old Brazilian JV—
Sipcam Isagro Brazil (SIB). SIB derives 100% of its revenues from Brazil, producing and distributing
agchem products across the three key crop protection segments. SIB also has a formulation facility
in Brazil and our discussion with UPL reveal that it has no plans to downsize plant operations.
According to the agreement, SIB will continue to distribute products by erstwhile JV partner Isagro.
SIB enjoys strong market shares in the Brazilian market in two crops—46% in cotton and 4% in
soybean.
Why Brazil—high-growth market where UPL had minimal presence
UPL had less than 10% exposure to the high-growth Latin American agchem market with a limited
presence in Brazil on account of: (1) credit practices prevalent in the Brazilian market and (2)
longer registration timelines saddled by bureaucratic delays. Despite this, the country remains a
promising market for agchem companies given (1) Brazil comprises 13-15% of global agchem
sales and 2/3
rd
of US$7.6 bn Latin American market, (2) Latin America is the fastest-growing
agchem market in the world, registering growth of 9% in CY2009 in nominal terms, (3) Brazil is
one of the few countries witnessing expansion in acreage under crop cultivation, (4) the market is
dominated by few key crops—soybean (45%), corn (13%), sugar (9%) and cotton (8%) and (5)
the market is dominated by off-patent molecules which enjoy a market share of 55% in CY2008
versus 48% in CY2004.
Acquisition marginally positive; we leave estimates unchanged and await closure of deal
We view this acquisition as marginally positive. However, risks remain as it is (1) margin dilutive—
17% in CY2008 versus UPL’s 19% in 9MFY11, (2) receivables cycle in Brazil is longer (>200 days),
(3) JV has significant debt (3X debt/EBITDA), mainly for working capital, and (4) while Sipcam is an
established Italian agchem firm (US$465 mn sales), the Brazilian JV was formed in CY2006.
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