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UBS Investment Research
United Phosphorus Limited -In line Q3, FY11 guidance cut
Adjusted Q3 earnings in line
UNPH reported Q3 PAT at Rs839mn, up 33.5% YoY. Adjusted for forex losses of
Rs355m, adjusted Q3 earnings at Rs1.1m was marginally ahead of ours and in line
with street estimates. This was driven by 6.3% yoy increase in revenues and
110bps improvement in EBITDA margins (18.1% compared to 17.0% in Q3FY10)
Strong volumes muted by adverse pricing; EU weak and Latam strong
Revenues were in line with our and consensus estimates. Volumes were up 15%
YoY but partly muted by adverse pricing (down 3% YoY) and exchange rates
(down 5% YoY). EU sales were down 24% YoY due to adverse weather. ROW
sales were strongly up 37% YoY driven by Latam.
FY11 guidance lowered to 5% YoY growth in revenues
Given the muted 1% YoY increase in 9M FY11 revenues, management has
lowered revenue guidance from earlier 10-15% (including inorganic) to 5% now.
Margin guidance of 200bps improvement was however maintained. We expect
recovery in crop protection demand cycle in EU and USA in 2011.
Valuation: Maintain Buy; downgrade target price to Rs200/share
We downgrade estimates by 10-12% for FY11-13E, to reflect revised management
guidance and lower base for revenue growth. We accordingly cut our price target
to Rs200. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool.
Other key takeaways from conference call
Quarterly results were limited by adverse prices and exchange rates. Net
volume increase was 15% YoY. ROW sales were strongly up 37% YoY
driven by Latam. EU sales were down 24% YoY. Europe disappointed on
adverse rate movement (11.4% negative), and lower volumes/pricing. Lower
European volume was due to lower institutional sales on higher earlier
inventories and weather related challenges. US sales declined 4.4% YoY as
early double digit volume growth was more than offset by adverse pricing
and exchange rate movement. In India, extended monsoons and late
harvesting (like cotton) and hence late sowing of next crop, limited sales.
India sales increased 6.1% YoY. Also weather was particularly challenging
in the South. Advanta contribution was same as last quarter.
Contribution from Mancozeb in Q3 FY11 was few percentage points of sales.
Management indicated ~US$140-150m spent on RiceCo and Mancozeb
acquisitions and expect about US$100mn of revenue contribution going
forward.
Q4FY11 should likely be more profitable as it is seasonally a stronger
quarter for Europe and North America. Management seems positive on
volume growth. However, weather will be a driving factor for sales. Implied
Q4FY11 revenues growth for meeting their new guidance is 18-19%YoY
and margins at 20% plus
Management did not give specific guidance on M&A, but highlighted that
they are constantly evaluating opportunities. Cash surplus will be used to pay
debt, organic and inorganic opportunities.
US$148m FCCB was converted and rest US$2m was redeemed. Gross debt
as at end Q3 FY11 was Rs28-29bn and net debt was Rs9bn. Cost of debt has
increased. Other income was higher on higher cash surplus. On inventories,
management expects it to normalise from 109 days to 90 days, as it enters a
seasonally stronger quarter.
Revising estimates; downgrade TP to Rs 200/share
We have lowered our estimates for FY11 by 10.6%, as management has lowered
full year guidance from 10-15% sales growth to now 5%. Also, we adjust for the
higher forex related losses on advances/liabilities and derivatives in our FY11
estimate. Our estimates for FY12-13 are revised lower by 11-12%, as we adjust
for revenue growth on smaller base. On average, we expect 11.4% revenue
growth in FY12 and FY13, as we estimate 7-8% growth from acquisitions like
Mancozeb and RiceCo. Rest 3-4% we assume as organic growth. We
downgrade our price target from Rs230 to Rs 200. Our target price is based on a
DCF-based methodology, assuming a WACC of 12.2% and a 3% terminal
growth rate. We explicitly forecast long-term valuation drivers using UBS’s
VCAM tool.
VCAM is an economic profit model and a DCF
VCAM is based on the established principles of discounted cash flow (DCF) and
economic profit analysis (EPA) This framework reconciles DCF and EPA
valuation methodologies by calculating economic profit along with free-cash
flow for each year. The accompanying economic profit forecasts reveal whether
or not free-cash flow is value-added. It is economic profit growth that justifies
an intrinsic value greater than the worth of a company's current earnings valued
in perpetuity.
VCAM assumes: Company DCF Value = Current earnings [NOPAT] valued in
perpetuity +present value of all future incremental economic profit. One of the
key assumptions in the VCAM model is the value creation horizon (VCH),
which refers to the number of future years a company is expected to generate
incremental economic profits. At the end of the VCH, we value the NOPAT into
perpetuity to calculate terminal value. The major subjective drivers of our
VCAM price targets are long-term margin assumptions and the weighted
average cost of capital (WACC). The summary tables come from VCAM and
clients are free to modify the data and/or use their own assumptions on our
website (www.ubs.com/investment research). The site also has a number of
tools including sensitivity analysis, long-term trends, and a goal seeker.
Key industry updates
We take excerpts from our analyst Ramoun Lazar’s Nufarm note dated 26
November 2010 and analyst Thomas Gilbert’s Syngenta update dated 06
January 2011.
Recovery in crop protection: We see overall improving prospects for the
global crop protection industry, supported by significantly stronger soft
commodity prices. Recent results from Nufarm’s major global competitors
showed a continuing strong recovery in ag chem volumes through the Sep-qtr
and more stability in pricing as channel inventories normalized.
Higher crop prices are also supportive: Soft commodity prices have
strengthened considerably since mid-year with corn and wheat currently trading
close to multi-year highs. This is supportive of grower margins, which should in
our view help stabilise demand for crop protection chemicals, and lead to a
return to low single digit price increases.
Agrium indication on inventories: On their last conference call, Agrium stated
that, while herbicide inventories had normalized, there was still some excess in
the channel for fungicides (in the US) and for seed care products (as farmers
returned treated seed). Consequently Agrium’s outlook for agrochemical pricing
for 2011 is muted/mixed.
Chinese competition: As to competitive behaviour, the Chinese government
has set itself a target to reach a 40-50% market share in agrochemicals over the
medium-term. This is not an issue short-term of course, although we note that
ChemChina has been aggressively bidding for stakes in generic agchem
producers (Nufarm unsuccessful, MA Industries looks like it will go through).
Update on Glyphosate prices: They have stabilised as some Chinese
competitors have shut down capacity upon removal of the 9% export tax rebate
and rising input prices (phosphorous prices on the rise due rise in electricity
prices and strong demand from the phosphate fertiliser industry).
Positive on the generic opportunity: According to industry research compiled
by Phillips McDougall, generic company share of total ag chemical industry
sales has increased from c.20% in 1995 to c.30% in 2009. A major factor
driving the sector over the past 10 years is the US patent expiry over glyphosate
in 2002. Excluding this impact sees generic company share of sales closer to
c.20%. We classify crop chemicals into three groups, comprising: 1) Proprietary
- relates to sales of patented active ingredients, which have typically been on the
market for <15 years; 2) Proprietary Off Patent – relates to sales of products that
are off-patent, but where the original introducing company continues to hold
>90% share; and 3) Generic - relates to off-patent products where total sales for
the introducing company are now <90%. The share of generic products as a
percentage of total industry sales is now c.50% of market turnover. A key factor
driving the growth of generic products has been the continued commoditisation
of proprietary off-patent products, whereby the share of sales for the introducing
company falls below 90%. This is reflected in data showing that in 2009 only
25% of ag chem. sales were owing to patented products, with c.75% from offpatent
and generic products. We expect the influence of generic companies to
continue to grow as more nonproprietary products move into the generic
category. There is currently 200 active ingredients classified as generic, while
another c.180 remain in the non-proprietary category.
United Phosphorus Limited
United Phosphorus Limited (UPL) is the largest producer of crop protection
products in India with a range of products that include fumigants, fungicides,
insecticides, rodenticides and herbicides. The company's main business is
agrochemicals and industrial & specialty chemicals. Earlier this year, UPL made
its largest acquisition to date by acquiring Cerexagri, which has a significant
presence in the US and Europe. Post this acquisition, UPL is the 12th largest
agrochemical and 3rd largest generic agrochemical company globally. UPL has
fully owned subsidiaries in the US, UK, China, Australia, and Russia.
Statement of Risk
The chief risks facing United Phosphorus are execution risk in integration of its
various acquisitions, regulatory risk in different markets, currency risk and
weather related risk.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
United Phosphorus Limited -In line Q3, FY11 guidance cut
Adjusted Q3 earnings in line
UNPH reported Q3 PAT at Rs839mn, up 33.5% YoY. Adjusted for forex losses of
Rs355m, adjusted Q3 earnings at Rs1.1m was marginally ahead of ours and in line
with street estimates. This was driven by 6.3% yoy increase in revenues and
110bps improvement in EBITDA margins (18.1% compared to 17.0% in Q3FY10)
Strong volumes muted by adverse pricing; EU weak and Latam strong
Revenues were in line with our and consensus estimates. Volumes were up 15%
YoY but partly muted by adverse pricing (down 3% YoY) and exchange rates
(down 5% YoY). EU sales were down 24% YoY due to adverse weather. ROW
sales were strongly up 37% YoY driven by Latam.
FY11 guidance lowered to 5% YoY growth in revenues
Given the muted 1% YoY increase in 9M FY11 revenues, management has
lowered revenue guidance from earlier 10-15% (including inorganic) to 5% now.
Margin guidance of 200bps improvement was however maintained. We expect
recovery in crop protection demand cycle in EU and USA in 2011.
Valuation: Maintain Buy; downgrade target price to Rs200/share
We downgrade estimates by 10-12% for FY11-13E, to reflect revised management
guidance and lower base for revenue growth. We accordingly cut our price target
to Rs200. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool.
Other key takeaways from conference call
Quarterly results were limited by adverse prices and exchange rates. Net
volume increase was 15% YoY. ROW sales were strongly up 37% YoY
driven by Latam. EU sales were down 24% YoY. Europe disappointed on
adverse rate movement (11.4% negative), and lower volumes/pricing. Lower
European volume was due to lower institutional sales on higher earlier
inventories and weather related challenges. US sales declined 4.4% YoY as
early double digit volume growth was more than offset by adverse pricing
and exchange rate movement. In India, extended monsoons and late
harvesting (like cotton) and hence late sowing of next crop, limited sales.
India sales increased 6.1% YoY. Also weather was particularly challenging
in the South. Advanta contribution was same as last quarter.
Contribution from Mancozeb in Q3 FY11 was few percentage points of sales.
Management indicated ~US$140-150m spent on RiceCo and Mancozeb
acquisitions and expect about US$100mn of revenue contribution going
forward.
Q4FY11 should likely be more profitable as it is seasonally a stronger
quarter for Europe and North America. Management seems positive on
volume growth. However, weather will be a driving factor for sales. Implied
Q4FY11 revenues growth for meeting their new guidance is 18-19%YoY
and margins at 20% plus
Management did not give specific guidance on M&A, but highlighted that
they are constantly evaluating opportunities. Cash surplus will be used to pay
debt, organic and inorganic opportunities.
US$148m FCCB was converted and rest US$2m was redeemed. Gross debt
as at end Q3 FY11 was Rs28-29bn and net debt was Rs9bn. Cost of debt has
increased. Other income was higher on higher cash surplus. On inventories,
management expects it to normalise from 109 days to 90 days, as it enters a
seasonally stronger quarter.
Revising estimates; downgrade TP to Rs 200/share
We have lowered our estimates for FY11 by 10.6%, as management has lowered
full year guidance from 10-15% sales growth to now 5%. Also, we adjust for the
higher forex related losses on advances/liabilities and derivatives in our FY11
estimate. Our estimates for FY12-13 are revised lower by 11-12%, as we adjust
for revenue growth on smaller base. On average, we expect 11.4% revenue
growth in FY12 and FY13, as we estimate 7-8% growth from acquisitions like
Mancozeb and RiceCo. Rest 3-4% we assume as organic growth. We
downgrade our price target from Rs230 to Rs 200. Our target price is based on a
DCF-based methodology, assuming a WACC of 12.2% and a 3% terminal
growth rate. We explicitly forecast long-term valuation drivers using UBS’s
VCAM tool.
VCAM is an economic profit model and a DCF
VCAM is based on the established principles of discounted cash flow (DCF) and
economic profit analysis (EPA) This framework reconciles DCF and EPA
valuation methodologies by calculating economic profit along with free-cash
flow for each year. The accompanying economic profit forecasts reveal whether
or not free-cash flow is value-added. It is economic profit growth that justifies
an intrinsic value greater than the worth of a company's current earnings valued
in perpetuity.
VCAM assumes: Company DCF Value = Current earnings [NOPAT] valued in
perpetuity +present value of all future incremental economic profit. One of the
key assumptions in the VCAM model is the value creation horizon (VCH),
which refers to the number of future years a company is expected to generate
incremental economic profits. At the end of the VCH, we value the NOPAT into
perpetuity to calculate terminal value. The major subjective drivers of our
VCAM price targets are long-term margin assumptions and the weighted
average cost of capital (WACC). The summary tables come from VCAM and
clients are free to modify the data and/or use their own assumptions on our
website (www.ubs.com/investment research). The site also has a number of
tools including sensitivity analysis, long-term trends, and a goal seeker.
Key industry updates
We take excerpts from our analyst Ramoun Lazar’s Nufarm note dated 26
November 2010 and analyst Thomas Gilbert’s Syngenta update dated 06
January 2011.
Recovery in crop protection: We see overall improving prospects for the
global crop protection industry, supported by significantly stronger soft
commodity prices. Recent results from Nufarm’s major global competitors
showed a continuing strong recovery in ag chem volumes through the Sep-qtr
and more stability in pricing as channel inventories normalized.
Higher crop prices are also supportive: Soft commodity prices have
strengthened considerably since mid-year with corn and wheat currently trading
close to multi-year highs. This is supportive of grower margins, which should in
our view help stabilise demand for crop protection chemicals, and lead to a
return to low single digit price increases.
Agrium indication on inventories: On their last conference call, Agrium stated
that, while herbicide inventories had normalized, there was still some excess in
the channel for fungicides (in the US) and for seed care products (as farmers
returned treated seed). Consequently Agrium’s outlook for agrochemical pricing
for 2011 is muted/mixed.
Chinese competition: As to competitive behaviour, the Chinese government
has set itself a target to reach a 40-50% market share in agrochemicals over the
medium-term. This is not an issue short-term of course, although we note that
ChemChina has been aggressively bidding for stakes in generic agchem
producers (Nufarm unsuccessful, MA Industries looks like it will go through).
Update on Glyphosate prices: They have stabilised as some Chinese
competitors have shut down capacity upon removal of the 9% export tax rebate
and rising input prices (phosphorous prices on the rise due rise in electricity
prices and strong demand from the phosphate fertiliser industry).
Positive on the generic opportunity: According to industry research compiled
by Phillips McDougall, generic company share of total ag chemical industry
sales has increased from c.20% in 1995 to c.30% in 2009. A major factor
driving the sector over the past 10 years is the US patent expiry over glyphosate
in 2002. Excluding this impact sees generic company share of sales closer to
c.20%. We classify crop chemicals into three groups, comprising: 1) Proprietary
- relates to sales of patented active ingredients, which have typically been on the
market for <15 years; 2) Proprietary Off Patent – relates to sales of products that
are off-patent, but where the original introducing company continues to hold
>90% share; and 3) Generic - relates to off-patent products where total sales for
the introducing company are now <90%. The share of generic products as a
percentage of total industry sales is now c.50% of market turnover. A key factor
driving the growth of generic products has been the continued commoditisation
of proprietary off-patent products, whereby the share of sales for the introducing
company falls below 90%. This is reflected in data showing that in 2009 only
25% of ag chem. sales were owing to patented products, with c.75% from offpatent
and generic products. We expect the influence of generic companies to
continue to grow as more nonproprietary products move into the generic
category. There is currently 200 active ingredients classified as generic, while
another c.180 remain in the non-proprietary category.
United Phosphorus Limited
United Phosphorus Limited (UPL) is the largest producer of crop protection
products in India with a range of products that include fumigants, fungicides,
insecticides, rodenticides and herbicides. The company's main business is
agrochemicals and industrial & specialty chemicals. Earlier this year, UPL made
its largest acquisition to date by acquiring Cerexagri, which has a significant
presence in the US and Europe. Post this acquisition, UPL is the 12th largest
agrochemical and 3rd largest generic agrochemical company globally. UPL has
fully owned subsidiaries in the US, UK, China, Australia, and Russia.
Statement of Risk
The chief risks facing United Phosphorus are execution risk in integration of its
various acquisitions, regulatory risk in different markets, currency risk and
weather related risk.
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