Stock Review: United Phosphorus

 

The low stock valuation of United Phosphorus offers a great opportunity to investors given its strong growth prospects

   AFTER a gap of two years, United Phosphorus, the world's fifthlargest agrochemical player, has resumed its acquisition spree. This has coincided with food prices hitting an all-time high and global focus on improving farm output. Against this backdrop, the scrip's sharp slide, of late, after its uninspiring financial numbers offers a great opportunity for long-term investors to take exposure.

BUSINESS:

Mumbai-based United Phosphorus (UPL) is the country's largest agrochemicals manufacturer. Incorporated in 1969, It produces a vast range of crop protection products, intermediaries, speciality chemicals and other industrial chemicals. The company has 21 manufacturing plants in various countries including France, Spain, the UK, Vietnam, Argentina, Netherlands, Italy and China. Moreover, UPL serves a vast customer base spread across 86 countries.

   The company derives over three-fourth of its revenue from the international markets, of which, a fourth from North America, 30% from Europe and 27% from other countries. During the nine months period ended December 2010, domestic business recorded a substantial growth, while the overseas business hit by unfavourable weather conditions. Global size of the generic or off-patent agrochemicals is estimated at $29 billion, of which 61% is controlled by the top five players, including UPL.

   Between FY04 and FY08, the company made several acquisitions over-seas and India to expand product portfolio and geographic reach. The acquisition spree, which was put on hold during FY09 and FY10, has resumed once again during FY11.

GROWTH DRIVERS:

During FY11, the company has completed three acquisitions so far including DuPont's Mancozeb fungicide business and US-based RiceCo, which will strengthen the company's foothold in Latin America market and provide direct access to rice farmers across 20 countries, largely in the US.

   Its recent acquisition this year was a 50% stake buy in Brazil's Sipcam Isagro Brasil (SIB), which had over $110 million turnover in CY09 of which Isagro's share formed nearly 50%. With this acquisition, the company gained a significant foothold in $7-billion Brazilian agrochemicals market, which is one of the top five agrochemical markets in the world. All these acquisitions are likely to generate the required growth momentum for UPL in the coming years.

   Globally, high food prices ensure that the demand for agrochemicals will remain strong and growing in the coming years. Even in India, the government's focus towards improving farm yields was visible in the Union Budget for FY12, which made several specific provisions towards improving agricultural output.

FINANCIALS:

For the nine months ended December 2010, UPL's consolidated topline at 3,844 crore and bottomline at 348 crore have remained more or less stagnant compared to the year-ago period. The company's global business saw a 5% decline on account of unfavourable weather conditions and volatile exchange rate, while domestic business saw a 20% growth during this period. In spite of the flat performance, the company could improve its operating profit margin by 120 basis points to 19.3% in the same period.

   UPL's cash position stood at 1,900 crore at the end of the December 2010 quarter, which is likely to have come down marginally post the SIB deal. At a consolidated level, its debtequity ratio at 0.8 enables it to go ahead with its strategy to grow inorganically.

VALUATIONS:

At the current market price of 131.8, the stock is trading at 11.6 times its earnings for the trailing 123 months. In none of the past five financial years, the company's valuation stayed at such low levels for long. In the past three years, the scrip has been trading at a price-earnings multiple (P/E) on an average around 15-16.

   Currently, its peers like Rallis India and Bayer Cropscience are trading at P/E of 18-20. In view of the company's strong growth prospects, the current low valuations offer a great entry opportunity.