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United Phosphorus Limited
Strong Double-digit Organic Revenue, Re-rating Outlook Good
We see an attractive risk-reward balance in UPL (a
global generic crop protection company) amongst our
Indian agri coverage universe. High crop commodity
prices and high farm incomes are key lead indicators
for crop protection products demand. Management
revenue guidance implies organic growth of ~18% in
F12 (ex Rice Co and DVA Agro) and this guidance
calls for a re-rating in the stock.
Key Catalysts: High crop commodity prices, high farm
incomes, rising input costs, and compelling valuations are key
stock catalysts. Strong macro environment for agri
commodities bodes well for volume growth.
Key Investor Debates:
Debate #1: Visibility of Revenue Growth:
Market View: Consensus seems to be skeptical on revenue
growth.
Our view: High agricultural commodities prices globally (e.g.,
corn, wheat, soybean, and cotton) bodes well for revenue
growth over the next 12 months, in our view.
Debate #2: Operating Margin expansion
Market View: Rise in raw material costs is likely to pressure
margins. Hence, scope for margin expansion is limited.
Our view: We expect margin expansion of 110bp by F2014
driven by a combination better absorption of fixed costs and
benefits from Cerexagri restructuring (shutdown of Rotterdam
manufacturing facility). Contrary to perception, we believe that
an environment of modest cost inflation augurs well for
earnings progression.
Risks to our Call: 1) Sharp decline in agri commodity prices
globally could lead to lower revenues; however, our MS team
is bullish on agri commodities. 2) Weather-driven demand
destruction in key markets. 3) Intense competition results in
higher rebates (discounts), resulting in worse-than-expected
operating margins.
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