Stock Review: UNITED PHOSPHORUS

THE shares of India's biggest agrochemical company, United Phosphorus (UPL), gained nearly 4.2% last week on news of ChemChina's acquisition of Israel's MAI. The high valuation obtained by the Israeli agrochemical giant raised investor expectations about UPL's valuation on the bourses. However, the scrip corrected on Monday in an otherwise positive market. It seems the idea that valuations in an M&A deal — where a premium is given for management control — can be ascribed to an independently listed company, has not gone down well with investors.

   China-based ChemChina has proposed to acquire 60% in MAI, or Makhteshim Agan, valuing the company at $2.4 billion. This valuation is nearly 43 times the company's 2010 earnings and 23.4 times the estimated earnings for 2011, according to Bloomberg's analyst consensus. MAI is the world's seventh-largest agrochemical player with business model similar to that of UPL. However, despite being larger than MAI, UPL trades at less than 15 times its earnings for the trailing 12 months.

   Some analysts believe MAI's valuation sets a new benchmark for valuing agrochemical companies of UPL's size. UPL's valuations are at around 40% discount to MAI's deal price. We believe this significant valuation gap is likely to reduce in the long run, which in our view provides an opportunity to enter the UPL stock at the current price.

   However, UPL is facing its own set of problems. The 15% sales growth guidance that the company had given for FY11 appears difficult to achieve in view of the 3% dip in its top line in the first half of the current fiscal. The December quarter, too, has proved challenging for UPL due to unseasonal rains in India, abnormal weather in Latin America and severe cold in the northern hemisphere.

   Reports from research houses such as Nomura and Prabhudas Leeladhar have reduced UPL's growth forecasts for FY11 and FY12. The company, therefore, is considered attractive only due to its inexpensive valuations — historically as well as compared to its peers.

   The company plans to resume its inorganic growth efforts after a gap of two years; this could prove its only major growth driver in the near term. In 2010, it acquired DuPont's global mancozeb business and a US agrochemical firm, RiceCo. With a cash pile of . 2,000 crore, it is looking at more acquisitions. The company's valuations are likely to languish in view of its stagnant earnings till such acquisitions take place.