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United Phosphorus’ 4QFY11 operating performance was below our expectations. EBITDA margin was 20.8%, lower
than our estimate of 22.3% due to higher raw material (RM) cost. However, forex gain and lower tax boosted adjusted
PAT to Rs2.32b (v/s our estimate of Rs2.27b).
Key highlights
Revenue grew 23% to Rs18.8b (v/s our estimate of Rs18.5b), driven by 20% volume growth and 3% price rise.
Revenue growth was strong across regions, except in the European Union (EU), where it witnessed 17% decline.
Gross margin was flat at 37.8%, despite 200bp increase in RM cost. However, operating leverage and reduction in
fixed overheads drove 20bp expansion in EBITDA margin to 20.8%.
Marked-to-market (MTM) forex gain of ~Rs140m and lower tax boosted adjusted PAT to Rs2.32m.
For FY12, the management has guided revenue growth of 12-14%, EBITDA margin of 21% (60-80bp expansion), and
tax rate of 15-17%, implying PAT growth of over 20%.
The board has declared a dividend of Rs2/share (v/s Rs2/share in FY10).
Valuation and view
We are marginally downgrading our EPS estimates to Rs17 for FY12 and to Rs20.4 for FY13. Valuations at 9x FY12E
EPS and an EV of 5.2x FY12E EBITDA do not adequately reflect the company’s growth potential (both organic and
inorganic). We maintain Buy, with a target price of Rs204 (~10x FY13E EPS).
SIB acquisition boosts Brazilian operations; expect payback period of 3-4
years
United Phosphorus has acquired 50% stake in Sipcam Isagro Brazil (SIB) from Isagro.
SIB is a 50:50 JV between Sipcam-Oxon group and Isagro (both are Italian agro-chemical
groups). Isagro is exiting this JV to focus on its core competency of R&D and reduce its
financial gearing. SIB specializes in manufacturing (through one plant in Brazil) and
distribution of formulations, with strengths in insecticides and fungicides. It has 191
employees.
The acquisition of SIB strengthens United Phosphorus’ presence in the US$7b Brazilian
agro-chemical market, where it has nascent operations. SIB had posted revenue of
~US$113m and PBIT margin of 9-10% in CY09 (16-17% PBIT margin in CY08). The
management indicated that SIB broke even at PBT level in CY10. SIB does not have
significant long-term debt; however, it would have US$35m of working capital loans. This
acquisition would add ~US$45m-50m to United Phosphorus’ revenue in FY12 (for 50%
stake) or drive 3-4% of revenue growth in FY12. More importantly, it strengthens its
presence in Brazil, one of the most important agro-chemical markets in the world, where
it had very limited presence. In the long-term, we believe this acquisition has the potential
to drive consolidated performance, as it leverages United Phosphorus’ product portfolio.
Guides 12-14% revenue growth; implied PAT growth of over 20% in FY12
For FY12, the management has guided revenue growth of 12-14%, EBITDA margin
of 21% (60-80bp expansion) and tax rate of 15-17%, implying PAT growth of over
20%.
The revenue growth guidance is based on the assumption of 12% volume growth and
stable pricing and forex. Further, of the 12-14% revenue growth, 6-7% would be
organic and the balance 6-7% would be driven by the acquisition of RiceCo, Mancozeb
and SIB. It expects all regions to do well, with the EU returning to growth in FY12.
It has witnessed higher costs (as RM is derivative of crude oil) in 4QFY11, the full
impact of which would be realized in 1QFY12. Its EBITDA margin guidance is based
on cost stabilizing at current levels. In the event of any further cost inflation, the
management believes the business environment is conducive to pass on the higher
costs.
Valuation and view
The business environment for the agro-chemical industry is witnessing gradual
improvement. While long-term outlook remains positive, United Phosphorus would
benefit in the short-term from the integration of Cerexagri and SIB.
We are downgrading our EPS estimates by 2% each to Rs17 for FY12 and to Rs20.4
for FY13. Valuations at 9x FY12E EPS and an EV of 5.2x FY12E EBITDA do not
adequately reflect the company’s growth potential (both organic and inorganic). We
maintain Buy, with a target price of Rs204 (~10x FY13E EPS).
Company background
United Phosphorus is a US$1.2b company with a strong
presence in crop protection and industrial chemicals. With
around 80% of its revenue coming from international
markets, the company has emerged as the third largest
generic player in the world. United Phosphorus’ growth
strategy is built around 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 50% stake in Sipcam Isagro Brazil (SIB) from
Isagro, a manufacturer and distributor of formulations
in Brazil.
Has opened two Unimart centers in India; targets to
open another 8 by December 2011. Unimart centers
offer farm advisory services and sell seeds, agrochemicals,
micro-nutrients and fertilizers.
Valuation and view
Valuations at 9x FY12E EPS and an EV of 5.2x FY12E
EBITDA do not adequately reflect the company’s
growth potential (both organic and inorganic).
Maintain Buy, with a target price of Rs204 (~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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Phosphorus’ 4QFY11 operating performance was below our expectations. EBITDA margin was 20.8%, lower
than our estimate of 22.3% due to higher raw material (RM) cost. However, forex gain and lower tax boosted adjusted
PAT to Rs2.32b (v/s our estimate of Rs2.27b).
Key highlights
Revenue grew 23% to Rs18.8b (v/s our estimate of Rs18.5b), driven by 20% volume growth and 3% price rise.
Revenue growth was strong across regions, except in the European Union (EU), where it witnessed 17% decline.
Gross margin was flat at 37.8%, despite 200bp increase in RM cost. However, operating leverage and reduction in
fixed overheads drove 20bp expansion in EBITDA margin to 20.8%.
Marked-to-market (MTM) forex gain of ~Rs140m and lower tax boosted adjusted PAT to Rs2.32m.
For FY12, the management has guided revenue growth of 12-14%, EBITDA margin of 21% (60-80bp expansion), and
tax rate of 15-17%, implying PAT growth of over 20%.
The board has declared a dividend of Rs2/share (v/s Rs2/share in FY10).
Valuation and view
We are marginally downgrading our EPS estimates to Rs17 for FY12 and to Rs20.4 for FY13. Valuations at 9x FY12E
EPS and an EV of 5.2x FY12E EBITDA do not adequately reflect the company’s growth potential (both organic and
inorganic). We maintain Buy, with a target price of Rs204 (~10x FY13E EPS).
SIB acquisition boosts Brazilian operations; expect payback period of 3-4
years
United Phosphorus has acquired 50% stake in Sipcam Isagro Brazil (SIB) from Isagro.
SIB is a 50:50 JV between Sipcam-Oxon group and Isagro (both are Italian agro-chemical
groups). Isagro is exiting this JV to focus on its core competency of R&D and reduce its
financial gearing. SIB specializes in manufacturing (through one plant in Brazil) and
distribution of formulations, with strengths in insecticides and fungicides. It has 191
employees.
The acquisition of SIB strengthens United Phosphorus’ presence in the US$7b Brazilian
agro-chemical market, where it has nascent operations. SIB had posted revenue of
~US$113m and PBIT margin of 9-10% in CY09 (16-17% PBIT margin in CY08). The
management indicated that SIB broke even at PBT level in CY10. SIB does not have
significant long-term debt; however, it would have US$35m of working capital loans. This
acquisition would add ~US$45m-50m to United Phosphorus’ revenue in FY12 (for 50%
stake) or drive 3-4% of revenue growth in FY12. More importantly, it strengthens its
presence in Brazil, one of the most important agro-chemical markets in the world, where
it had very limited presence. In the long-term, we believe this acquisition has the potential
to drive consolidated performance, as it leverages United Phosphorus’ product portfolio.
Guides 12-14% revenue growth; implied PAT growth of over 20% in FY12
For FY12, the management has guided revenue growth of 12-14%, EBITDA margin
of 21% (60-80bp expansion) and tax rate of 15-17%, implying PAT growth of over
20%.
The revenue growth guidance is based on the assumption of 12% volume growth and
stable pricing and forex. Further, of the 12-14% revenue growth, 6-7% would be
organic and the balance 6-7% would be driven by the acquisition of RiceCo, Mancozeb
and SIB. It expects all regions to do well, with the EU returning to growth in FY12.
It has witnessed higher costs (as RM is derivative of crude oil) in 4QFY11, the full
impact of which would be realized in 1QFY12. Its EBITDA margin guidance is based
on cost stabilizing at current levels. In the event of any further cost inflation, the
management believes the business environment is conducive to pass on the higher
costs.
Valuation and view
The business environment for the agro-chemical industry is witnessing gradual
improvement. While long-term outlook remains positive, United Phosphorus would
benefit in the short-term from the integration of Cerexagri and SIB.
We are downgrading our EPS estimates by 2% each to Rs17 for FY12 and to Rs20.4
for FY13. Valuations at 9x FY12E EPS and an EV of 5.2x FY12E EBITDA do not
adequately reflect the company’s growth potential (both organic and inorganic). We
maintain Buy, with a target price of Rs204 (~10x FY13E EPS).
Company background
United Phosphorus is a US$1.2b company with a strong
presence in crop protection and industrial chemicals. With
around 80% of its revenue coming from international
markets, the company has emerged as the third largest
generic player in the world. United Phosphorus’ growth
strategy is built around 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 50% stake in Sipcam Isagro Brazil (SIB) from
Isagro, a manufacturer and distributor of formulations
in Brazil.
Has opened two Unimart centers in India; targets to
open another 8 by December 2011. Unimart centers
offer farm advisory services and sell seeds, agrochemicals,
micro-nutrients and fertilizers.
Valuation and view
Valuations at 9x FY12E EPS and an EV of 5.2x FY12E
EBITDA do not adequately reflect the company’s
growth potential (both organic and inorganic).
Maintain Buy, with a target price of Rs204 (~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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