united phosphorussmartinvestor.business-standard.com/bscms/pdf/...attractively valued vis-a-vis its...

Initiating Coverage | Agrichemical

Please refer to important disclosures at the end of this report

United Phosphorus (UPL) ranks among the Top-5 generic agrichemicalmanufacturers in the world. The US $40bn (CY2008) global Agrichemical industryis dominated by Top-6 Innovators with a large share of patented (28%) and offpatent market (32%), with the global Generic players accounting for the balance40%. Additionally, with patents for products worth US $3-4bn expiring during2009-14, global Generic players are likely to further benefit. We expect UPL topost 9% and 17% CAGR in Sales and PAT over FY2010-12E, respectively. At currentvaluations of 10.1x FY2012E EPS , the stock is attractively valued v/s its global(10.4x) and domestic peers (12.0x), and historic average (15.0x). We InitiateCoverage on the stock, with a Buy and Target Price of Rs226 valuing the stockat 13x FY2012E EPS.

Global Generic Play: With Innovators controlling US $13bn of total off-patentmarket worth US $29bn, we believe there is vast opportunity for the generic playersto increase their market share. Moreover, with patents for products worthUS $3-4bn expiring over 2009-14 there exists ample growth opportunity for thegeneric players. The Industry also has high entry barriers by way of investmentsevident from the fact that 84% of the market is controlled by the Top-11 players,while in the Generic space 61% is controlled by the Top-5 players including UPL.Amidst this scenario, we believe that UPL, an integrated global generic player, iswell placed to capitalise on the upcoming opportunity.

Improving Profitability + attractive Valuation = Good Value Buy: OverFY2010-12E, we expect UPL to post 9% and 17% CAGR in Sales and PAT, respectively.UPL's Profitability is set to improve with EBITDA Margins improving owing to stableraw material prices, pick up in demand and restructuring of Cerexagri. We expectRoCE and RoE to improve from 15% and 19% in FY2010 to 19% and 20% inFY2012E, respectively. At current valuations of 10.1x FY2012E EPS, the stock isattractively valued vis-a-vis its global (10.4x) and domestic peers (12.0x), andhistoric average (15.0x).

Sageraj Bariya+91 22 4040 3800 Ext: 346

Email: [email protected]

June 1, 2010

United Phosphorus BUY

A Premium Play CMP Rs175Target Price Rs226

Stock Info

Shareholding Pattern (%)

Sector Agrichemical

Market Cap (Rs cr) 7,709

Beta 1.0

52 Week High / Low 186/133

Avg. Daily Volume 385844

Face Value (Rs) 2

BSE Sensex 16,945

Nifty 5,086

Reuters Code UNPO.BO

Bloomberg Code UNTP@IN

Promoters 28.0

MF / Banks / Indian FIs 27.5

FII / NRIs / OCBs 37.4

Indian Public / Others 7.1

Abs. (%) 3m 1yr 3yr

Sensex 0.9 11.7 13.7

UPL 15.8 7.1 20.0

Investment Period 12 Months

Source: Company, Angel Research

Key Financials (Consolidated)Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E

Net Revenue 4,931 5,460 6,010 6,524

% chg 35.4 10.7 10.1 8.5

Adj Profit 468 556 622 765

% chg 19.8 19.0 11.7 23.1

Adj. EPS (Rs) 10.6 12.7 14.1 17.4

EBITDA Margin (%) 19.7 18.9 19.6 20.6

P/E (x) 16.5 13.9 12.4 10.1

RoE (%) 19.0 19.3 18.6 19.6

RoCE (%) 17.1 15.0 16.2 19.1

P/BV (x) 2.9 2.5 2.1 1.8

EV/Sales (x) 1.9 1.5 1.4 1.3

EV/EBITDA (x) 9.8 8.3 7.6 6.5

June 1, 2010 2

United Phosphorus | Initiating Coverage

Investment Arguments

Innovators dominant in Off-patent space - Generic players in sweet spot

The global Agrichem industry, valued at US $40bn (CY2008), is dominated by theTop-6 Innovators, viz. Bayer, Syngenta, Monsanto, BASF, DuPont and Dow, whichenjoy large market share of patented (28%) and off patent market (32%). Pertinently,the Top-6 Innovators also enjoy a large share of the Off-patent market due to thehigh entry barriers for the pure generic players. Thus, 1/3rd of the total pie worthUS $13bn (controlled by the Top-6 Innovators through proprietary off-patent products)provides high growth opportunity for larger integrated Generic players like UPL.

Category 2007 Sales (US $mn)

Herbicides 800

Insecticides 1,350

Fungicides 1,448

Other 50

Total 3,648

Exhibit 2: Products going off-patent 2009-2014

Source - NuFarm, MAI

Additional products going off-patent to boost growth

As per NuFarm and MAI, patents worth approx. US $3-4bn (Sales as on 2007) would

expire during 2009-2014, further widening the opportunity for the generic players.

Over 1998-2006, while Industry

registered CAGR of 3%, the Generic

players outpaced industry posting

CAGR of 6% during the mentioned

period

Generic Segment market share to increase

The Generic players have been garnering high market share, increasing from32% levels in 1998 to 40% by end 2006. Over 1998-2006, while Industry registeredCAGR of 3%, the Generic players outpaced industry posting CAGR of 6% during theperiod. Going ahead, given the opportunities and drop in rate of new moleculeintroduction by the Innovators, we expect the Generic players to continue to outpaceindustry growth and increase their market share in the overall pie. Historically, theglobal Agrichem has been logging in-line growth with global GDP. Going ahead,over CY2009-11E, the global economy is expected to grow at around 3-4%. Assumingthis trend plays out in terms of growth for the Agrichem Industry and the same rate ofGenericisation occurs, the Agrichemical Generic Industry can log in growth of 6-8%during the period and garner market share of 44-45%.

1/3rd of the total global Agrichemindust ry p ie worth US $13bn(controlled by the Top-6 Innovatorsthrough their proprietary off-patentproducts) provides substantial growthopportunity for the larger integratedGeneric players like UPL

Source: Industry, Company, Bloomberg, Angel Research

Exhibit 1: Global Agrichemical Market (US $40bn)

June 1, 2010 3


High Investments - Formidable entry barrier

The global Agrichemical industry is highly consolidated primarily due to the high

entry barriers of significant and upfront investments required for product registration

and to set up manufacturing facilities. As a result, price competition is limited due to

the substantial investments involved. Moreover, unlike in the Pharmaceutical Sector

where bioequivalence of molecule can help a company get the permission to sell

medicines, in the Agrichemical Sector companies have to compulsorily undergo field

trials for each molecule and in each geography where the products would be marketed.

Field trials are carried out by independent agencies across crops and seasons, which

could take anywhere between 2-5 years depending on the market (US, EU, etc) and

government regulations. Thus, the process requires high investments both monetary

and time thereby restricting competition.

New entrants are also faced with another challenge of gaining entry into the existing

distribution network. In most markets, agrichemical sales and distribution have evolved

to become organised businesses and are controlled by few players. For instance,

Tenkoz Inc is the largest agrichemical distributor in the USA, with combined purchases

representing 25% of the US Agrichemical market. Hence, to enter this market a new

player needs to have a basket of products to gain shelf space. But, a large product

offering entails substantial investments in terms of time and money. This is evident

Price war is limited due to the huge

investments involved

Exhibit 4: Marketshare of Generic

Source: Phillips McDougall

Exhibit 3: Drop in rate of new Molecule Introductions

Source: Phillips McDougall

Exhibit 5: Agrichem v/s Pharma Sector - Registeration Process


June 1, 2010 4


UPL well placed to leverage the opportunity

A Global Generic Play

UPL figures among the Top-5 generic agrichemical players in the world, with a presence

across major markets like the US, EU, Latina America and India. Total off-patent

market is worth US $29bn, of which a mere US $16bn is currently being catered to by

the generic players. Furthermore, 61% of the same is controlled by the five largest

generic players including UPL. Further, given the high entry barriers by way of high

investments, entry of new players is also restricted. Thus, amidst this scenario and on

account of having a low cost base, we believe that UPL enjoys an edge over competition

and is placed in sweet spot to leverage the upcoming opportunities in the global

Generic space.

UPL figures among the Top-5 generic

agrochemical players in the world

from the fact that 53% of the Generic market (1/3rd of the Agrichem Industy) iscontrolled by the four largest generic players including UPL. In all, around 81% of theindustry is controlled by few players making Agrichemicals a highly consolidatedsector.


Exhibit 7: Key Agrichemical players (2008)

Source: Industry, Company, Bloomberg, Angel Research. Note: Top-4 comprising of MAI, NuFarm,Sumitomo Chem and UPL

Exhibit 6: Market share of Top-4 players in US$16bn Generic segment

June 1, 2010 5


Sound M&A moves driving growth

UPL has been one of the fastest growing global agrichemical company compared to

its larger MNC peers like Makhteshim-Agan Industries, Sumitomo Chemical and

Nufarm Ltd . During 2005-2009, the three largest generic agrichemical companies

grew at an average CAGR of 9% v/s UPL, which registered CAGR of 31% during the

mentioned period.

UPL has been one of the fastest growing

global agr ichemical company

compared to its larger MNC peers

Acquisitions at right price

UPL's two-fold acquisition strategy has been primarily responsible for such stupendous

growth. The company's strategy entails:

Acquiring original brands from the Innovators - Innovators have been selling out

old brands to focus on new brands (molecules) with higher growth opportunities and

higher margins.

Acquiring small/ regional players - Acquires small players dominant in a

region/single product/small product portfolios but lacking scale and capability to

become a global player.

UPL also targets a 3-4 year payback period at the time of the acquisition.

UPL has a sound strategy in place tobolster growth through acquisitions

Exhibit 9: One of the fastest growing Agrichemical companies

Source: Industry, Company, Bloomberg, Angel Research

Exhibit 8: Sales trend of Top-3 generic players

Source: Bloomberg, Angel Research. Top-3 comprises of MAI, NuFarm,Sumitomo Chem. Sumitomo sales also contains contribution of fertiliser.

June 1, 2010 6


Low-cost India advantage + Superior integration skills = Enhancesefficiencies of acquired companies

Overall, UPL has a sound strategy in place to bolster growth through acquisitions, asthough the US and EU markets are developed and offer high margins, they havesignificant entry barriers by way of the registration norms. Post an acquisition, UPLshifts work (manufacturing or administrative) of the acquired company to low-costdestinations like India in its bid to derive cost efficiencies and better profitability forthe acquired company. Moreover, with UPL being vertically integrated in operations,manufactures large amount of intermediates (low-cost raw material) that are suppliedto the acquired company, in turn enhancing the latter's Margins. In case of the smallerplayers, UPL scales up their operations and enhance sales using its own network.

Even on higher working capital we

expect Net Debt:Equity of mere 0.2x,

offering ample opportunity to leverage

and further enhance inorganic growth

UPL's superior acquisition strategy is also visible from the better performance registeredby the target companies (by way of increased revenues, improvement in margins)and reasonable acquisition costs (minimal equity dilution and stable Debt-Equity).

Under-leveraged Balance Sheet provides headroom for further acquisitions

UPL's overall working capital touched a peak of 87 days in 2009. However, the

company's agile model managed to trim the same to 68 days in FY2010. We believe

that better working capital management was the key reason for the drop in Net

Debt:Equity from 0.6x in FY2009 to 0.2x in FY2010. Nevertheless, going ahead,

even on higher working capital days we expect the company's Net Debt:Equity to

remain at comfortable levels of mere 0.2x due to better free cashflow generation,

offering ample opportunity to leverage and further enhance growth through inorganic

route.

Company/ Year of Remarks

Brand acquisition

Reposo 2005 Revenues improved from US $11mn in 2005 to US $21mn in 2008

SWAL 2006 Revenues improved from Rs70cr in 2006 to Rs212cr in 2009

Cerexagri 2007 EBITDA Margin improved from 5% in 2007 to 10% in 2008


Exhibit 10: Track record of acquired companies


Exhibit 11: Working capital trend


Exhibit 12: Under-leveraged Balance Sheet

June 1, 2010 7


Financials

Recovery from FY2011E onwards - India, RoW to outperform

Realisations stabilised in FY2010 on account of the decline in Raw Material prices.

Management has guided for 8-10% growth in FY2011E excluding acquisitions, and

10-15% including acquisitions. We estimate Sales to record CAGR of 9% over

FY2010-12E (excluding acquisitions). The US and EU markets are expected to recover

from FY2011E onwards with the global scenario expected to look up following which

dealers are expected to begin re-stocking inventory. The developed markets of US

and EU are likely to register moderate growth going ahead, while India and the Rest

of the World (RoW) are expected to outperform these developed markets.

Stabilising Raw Material Prices...

OPM contracted in FY2010 due to decline in realisation and high-cost inventory.

Management has guided for 21% OPM in FY2011. However, we have factored in

Margins of 20% and 21% for FY2011E and FY2012E, respectively. Key factors resulting

in the improvement of OPM include: a) Pickup in demand as economic recovery

gathers pace and retailers/distributors start re-stocking, b) Stabilisation of raw material

prices, and (c) Restructuring at Cerexagri.

UPL to record CAGR of 9% over

FY2010-12E

We est imate EBITDA Margins to

improve by 100bp each in FY2011E

to 20% and FY2012E to 21%


Exhibit 13: Geographic revenue mix

Source: Bloomberg, Angel Research

Exhibit 14: Rock Phosphate price trend Exhibit 15: Sulphur price trend

Source: Bloomberg, Angel Research

Rs cr FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E CAGR (%)

FY2010-12E

North America 628 927 1,175 1,234 1,283 1,335 4.0

% YoY 47.7 26.7 5.0 4.0 4.0

India 679 801 1,033 1,198 1,378 1,584 15.0

% YoY 18.0 29.0 16.0 15.0 15.0

EU 619 1,146 1,587 1,573 1,636 1,669 3.0

% YoY 85.1 38.5 -0.9 4.0 2.0

RoW 545 887 1,179 1,490 1,714 1,936 14.0

% YoY 62.8 32.9 26.4 15.0 13.0

Total 2,471 3,762 4,974 5,495 6,010 6,524 9.0

% YoY 52.2 32.2 10.5 9.4 8.5

June 1, 2010 8


...Cerexagri restructuring to improve overall Margins

UPL acquired Cerexagri in 2007 for US $145mn. In 2006, Cerexagri registered

Revenues of US $260mn and EBITDA Margins of around 5%, which doubled to 10%

in 2008 on the back of restructuring. Going ahead, management has announced

restructuring operations of another Cerexagri plant, which should further boost its

Margins to 18-20% by FY2012E.

From 10% levels in 2008, we estimate

Cerexagri’s Margins to improve to

18-20% by FY2012E

Profitability to improve

Return Ratios were under pressure in FY2010 due to lower EBITDA Margins. Going

ahead, we expect Margins to improve following stabilisation in Raw Material prices,

pickup in demand and benefits arising from restructuring at Cerexagri. Thus, RoCE

and RoE will improve to 19% and 20% in FY2012E from 15% and 19% in FY2010.

RoCE and RoE is estimated improve to

19% and 20% in FY2012E from 15%

and 18% in FY2010

Exhibit 16: EBITDA Margins Trend


Exhibit 17: Improving Profitability


June 1, 2010 9


Risks

Expensive Acquisitions: Growth through acquisitions has been UPL's key strategy.

Going ahead, any acquisitions done at expensive valuations could lead to value

destruction for shareholders. Further, acquisitions result in Earnings volatility and

come with their own set of integration challenges. However, given UPL's long track

record of successful acquisitions and integration, we perceive this risk to be minimal.

Genetically Modified Crops: Genetically modified (GM) crops are made with in-

built immune system that reduces dependence on usage of agrichemicals. Hence,

growth and acceptance of GM crops by farmers may adversely affect UPL's core

business. However, given UPL's presence in the Seeds business through Advanta,

increased usage of GM seeds would be capitalised by the company.

Regulatory risks: Internationally, Agrichemical is a highly regulated industry. Every

product launch, new or generic, have to go through field trials, which are expensive

and time consuming.

Forex: Around 80% of UPL's Revenues are denominated in currencies other than the

Rupee. Hence, any volatility in the exchange rate could adversely impact the company's

Revenues and Profit.

Weather: Agrichemicals are the last input in any agricultural process, which are used

to protect the crop. Therefore, seasonal vagaries could affect the demand for

agrichemicals and in turn impact our estimates.


Parameter FY2009 FY2010E FY2011E FY2012E

EBITDA / Sales (%) 19.7 18.9 19.6 20.6

Sales / Total Asset (x) 1.1 1.0 1.1 1.2

PBT / EBITDA (x) 0.5 0.6 0.7 0.7

PAT / PBT (x) 0.9 0.9 0.8 0.8

Total Asset / Net Worth (x) 1.8 1.8 1.6 1.4

RoE (%) 19.0 19.3 18.6 19.6

Exhibit 18: DuPont Analysis

June 1, 2010 10


Outlook and Valuation

The Agriculture Sector, in the last few years, has been rejuvenating globally on the

back of rising food prices. Food security is also top priority for most governments,

while reducing food loss is one of the easiest ways to boost food inventory. As per a

Government of India estimate of 2002, value of crop losses caused due to

non-usage of pesticides was around Rs90,000cr. Thereon, assuming losses grew at

an average 2%, total losses would have amounted to Rs101,355cr in FY2009, a

staggering 2.2% of India's GDP. Pertinently, usage of Pesticides or Agrichemicals can

reduce the loss of food production. Hence, we believe that the Agrichemical companies

would continue to do well in wake of heightened food security risks and strong demand

is likely to be witnessed across the world. Overall, we expect the global Agrichemical

industry to perform well from hereon. However, Generics are expected to register

healthy growth on account of: a) increasing penetration and wresting market share

from Innovators, and b) Patent expiries worth US $3-4bn (2007) during 2009-14.

We expect UPL to emerge a key beneficiary of such favourable developments. From

being a purely India-centric player, UPL has evolved to become a global entity

particularly on the back of its inorganic initiatives complimented by the right acquisition

price and strong management integration capability. Thus, we believe that UPL is well

placed to capitalise on the available opportunities given its strong track record.

Restructuring at subsidiary Cerexagri is expected to result in improvement in EBITDA

Margins in FY2011E and FY2012E. We expect UPL to post EBITDA Margin of 20%

and 21% in FY2011E and FY2012E in line with the historic levels of 18-22% over

FY2007-10 (22-28% FY2005-07). Thus, the company’s Profitability is set to improve

with RoCE and RoE expected to touch 19% and 20% levels in FY2012E from lows of

15% and 19% in FY2010E.

On the valuation front, historically UPL has traded in the range of 6-29x one-year

forward PE band with an average P/E of 15x. Over the six-year period of

FY2004-10, UPL traded at an average discount of 10% to the Sensex P/E. Applying

similar discount to Angel’s Fair Target multiple of 17x one-year forward Earnings for

Sensex, the stock would trade at a multiple of 15x, which is in line with its historic

average. At current levels of 10.1x FY2012E Earnings, the stock is trading inexpensive

vis-a-vis its global (10.4x) and domestic peers (12x). We believe that UPL should

trade at a premium on account of better Profitability compared to global peers and

being a larger player compared to its domestic peers.

Over the past 10 months, the UPL stock has been underperforming other agrichemical

players like Rallis, Nagarjuna Agrichem (NACL) and Bayer CropScience India (BCS),

which provides good risk-adjusted returns to investors. We have conservatively valued

the stock at 13x FY2012E EPS, as against its historic average of 15x one-year forward

earning, which provides adequate margin of safety. Further, we have not factored in

any value of Advanta India in our valuation for UPL. We Initiate Coverage on the

stock with a Buy recommendation and Target Price of Rs226, valuing the stock at

13x FY2012E Earnings.

June 1, 2010 11

United Phosphorus | Initiating CoverageM

kt C

apSa

les

EBIT

DA

(%

)Ro

E (%

)P/

E (x

)P/

B (x

)EV

/EBI

TDA

(x)

EV/S

ales

(x)

FY20

11FY

2012

FY20

11FY

2012

FY20

11FY

2012

FY20

11FY

2012

FY20

11FY

2012

FY20

11FY

2012

FY20

11FY

2012

(US$

mn)

Glo

bal

- In

nova

tors

Baye

r* 4

5,29

4 4

1,85

2 4

3,68

121

.522

.115

.616

.110

.89.

71.

91.

86.

66.

21.

41.

4

BASF

* 4

7,39

9 7

1,40

6 7

4,93

117

.217

.618

.118

.011

.210

.02.

11.

95.

45.

00.

90.

9

Dow

Che

mic

al*

30,

940

53,

540

56,

692

13.7

14.7

11.2

15.2

15.8

10.4

1.7

1.6

7.7

6.7

1.0

1.0

DuP

ont*

32,

146

30,

213

32,

192

17.1

17.2

30.7

29.0

13.7

12.1

4.3

3.7

7.7

7.2

1.2

1.2

Syng

enta

* 2

1,14

5 1

1,51

8 1

2,14

122

.923

.720

.920

.612

.611

.22.

62.

38.

67.

91.

91.

9

Mon

sant

o^ 2

9,76

6 1

1,01

6 1

1,97

028

.730

.515

.917

.519

.515

.82.

82.

010

.18.

62.

42.

4

Ave

rage

20

.22

1.0

18

.71

9.4

13

.91

1.5

2.6

2.2

7.7

6.9

1.5

1.5

Glo

bal

- G

ener

ics

NuF

arm

# 1

,212

1,9

49 2

,089

12.0

14.1

6.3

8.9

14.1

10.7

0.8

0.8

10.5

8.5

1.2

1.2

MA

I* 1

,688

2,3

61 2

,509

15.4

16.2

8.1

10.4

13.5

10.1

1.1

1.0

6.7

6.0

1.0

1.0

Ave

rage

13

.71

5.1

7.2

9.7

13

.81

0.4

1.0

0.9

8.6

7.3

1.1

1.1

(Rs

cr)

Indi

a G

ener

ics

Baye

r C

ropS

cien

ce 2

,842

2,0

33 2

,286

13.3

13.5

26.5

24.3

14.2

12.4

3.4

2.7

8.7

7.6

1.2

1.0

Ralli

s 2

,032

1,0

61 1

,272

19.1

18.4

30.7

30.4

14.2

11.5

3.9

3.1

9.3

7.8

1.8

1.4

Ave

rage

16

.21

6.0

28

.62

7.4

14

.21

2.0

3.7

2.9

9.0

7.7

1.5

1.2

UPL

7

,70

9 6

,01

0 6

,52

41

9.6

20

.61

8.6

19

.61

2.4

10

.12

.11

.87

.66

.51

.41

.3

Exh

ibit

19

: Pee

r V

alu

atio

ns

Sour

ce:

Bloo

mbe

rg,

Ang

el R

esea

rch;

Not

e: *

For

CY2

010

and

CY2

011,

^Ye

ar E

nd A

ugus

t, #

Year

End

Jul

y. B

ayer

Indi

a nu

mbe

rs a

djus

ted

for

land

val

ue o

f Rs

100/

per

shar

e, p

ost d

isco

unt

of 5

0%;

Pric

es a

s on

Jun

e 1,

201

0.

June 1, 2010 12


Valuation

Relative Performance of UPL

Source: C-line, Angel Research

Exhibit 25: UPL vs Sensex


Exhibit 24: UPL v/s Peers


Exhibit 23: Average 1-year forward Premium to Sensex


Exhibit 22: One-year Forward EV/ Sales Band


Exhibit 21: One-year Forward P/B Band


Exhibit 20: One-year Forward P/E Band

June 1, 2010 13


Company Background

UPL is a leading global player in the Agrichemical Industry. UPL ranks among the

Top-5 post patent agrichemical manufacturers in the world and has a manufacturing

facilities spread across the world in India, France, Spain, UK, Vietnam, Argentina,

Netherlands, Italy and China that cater to its markets efficiently. UPL operates in

major markets like USA, EU, Latina America and India, which helps in diversifying its

Revenue stream along with mitigating the risks arising from operating in a single

country or region. EU continues to be the largest contributor to the company's Revenues

at 32%. North America, the world's largest market, contributes 22%, while India stands

at 21%. RoW primarily comprising the Latin American market contributed 26%. UPL’s

fairly diversified geographic Revenue mix helps in maintaining its steady growth pace.

UPL has expansive product portfolio which helps in further diversifying its Revenue

mix. UPL's product portfolio comprises: (a) Pre-harvesting crop protection, (b) Post

harvesting crop protection and (c) Non-crop protection.

Pre-harvesting crop protection is basically adopted by the farmers to avert, destroy

or control pests or unwanted type of plants or animals that cause harm to crops or

hampers the normal growth process of crops. Crop protection is done prior to crops

getting harvested. UPL derives maximum of its Revenue from the Farm Crop Protection

Segment - further classified into insecticides, herbicides and fungicides, which aids

further diversification of Revenues.

Post harvesting crop protection, as the name suggests, is done post the crops are

harvested and stored. Pertinently, crops can be completely destroyed during

transportation or storage by pests. But, adoption of crop protection methods (usage

of agrichemicals) post harvesting minimises crop loss and increases food availability.

Non-Crop Protection Segment entails protecting turfs and ornamental lawns,

nurseries at home and office, and domestic and industrial pest management. These

segments contribute the least to the company’s Total Revenues.


Exhibit 26: Geographically diverisfied revenue mix

June 1, 2010 14


In line with UPL’s acqusition strategy, it has acquired 21 companies/brands across the

world over the last 15 years and at reasonable costs.


Exhibit 27: Business Mix (FY2009)


Exhibit 28: Diversified Product Mix (FY2009)

Acquisition Country Year

1 MTM Agrochemicals Ltd UK 1994

2 Agrodan A/S Denmark 1996

3 Devrinol USA 1996

4 Devrinol RoW RoW (Ecl Japan & USA) 1997

5 Devrinol Japan Japan 2000

6 Surflan USA 2004

7 Ultra Brazer Worldwide 2004

8 Lenacil, Cloradizon Europe 2004

9 Ag Value Inc. USA 2005

10 Cequisa Europe 2006

11 SWAL Corporation India 2006

12 Reposo S.A. Argentina 2006

13 Advanta B.V. Netherlands 2006

14 Corpserve (Pty) Limited South Africa 2006

15 Asulam, Trichlorfon & ODM Worldwide with exception 2006

16 Bensulfuron-methyl Worldwide (excl Asia Pacific) 2006

17 Propanil Worldwide 2006

18 Cerexagri Worldwide 2007

19 Supertin, Vendex Worldwide 2007

20 Icona Argentina 2007

21 Evofarm Colombia 2008

Exhibit 29: Acquisition history


June 1, 2010 15


Advanta India

Globally, all the agrochemical companies have ventured into the Seed business as a

strategy to diversify and further boost revenues. The global Seeds business is estimated

to be worth US$40bn and has registered CAGR of 9% over past 10 years. Global

Seed Industry is dominated by the same Top-5 innovator companies that are also

leaders in the Agrichemical space.

In order to offer farmers a complete package of seed and agrichemical, UPL acquired

100% stake in the Netherland-based Advanta Seeds in 2006 for a consideration of

Euro100mn (approx Rs560cr). Later through an IPO, UPL diluted its stake in the

company to 49.9%. Advanta is in the business of hybrid seeds and operates in

geographies like Americas (USA, Argentina), Australia and Asia (India, Thailand).

Advanta's key offering pertains to crops like rice, cotton, sunflower, sorghum, corn,

canola and vegetables. For CY2009, the company posted Revenues of Rs696cr and

Net Profit of Rs27cr. Post UPL's takeover of Advanta, the latter’s Sales registered CAGR

of 21% till CY2009 since acquisition.

Exhibit 30: Key FinancialsRs cr FY2006 CY2006* CY2007 CY2008 CY2009

Net Sales 48.3 298.0 456.9 640.5 698.4

EBITDA 9.0 50.9 59.7 74.5 52.7

EBITDA % 18.5 17.1 13.1 11.6 7.5

PAT 4.5 49.4 44.5 48.8 25.2Source : C-line, Angel Research. Note: * result for nine months

June 1, 2010 16


Profit & Loss Statement (Consolidated) Rs croreY/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

Net Sales 2,311 3,516 4,802 5,290 5,835 6,343

Other operating income 80 126 129 170 175 181

Total operating income 2,392 3,641 4,931 5,460 6,010 6,524

% chg 34.8 52.3 35.4 10.7 10.1 8.5

Total Expenditure 1,883 3,025 3,987 4,461 4,868 5,219

Net Raw Materials 1,182 1,815 2,451 2,954 3,005 3,229

Other Mfg costs 431 692 885 1,005 1,082 1,174

Personnel 190 402 479 502 541 587

Other 80 117 172 - 240 228

EBITDA 509 616 945 999 1,142 1,305

% chg 10.2 21.1 53.2 5.8 14.3 14.3

(% of Net Sales) 22.0 17.5 19.7 18.9 19.6 20.6

Depreciation& Amortisation 166 152 193 215 249 267

EBIT 343 464 752 784 893 1,038

% chg 6.8 35.2 62.0 4.3 13.8 16.3

(% of Net Sales) 14.9 13.2 15.7 14.8 15.3 16.4

Interest & other Charges 48 80 292 194 184 129

Other Income 23 31 42 34 59 38

(% of PBT) 7 7 8 5 8 4

Recurring PBT 318 416 502 625 769 948

% chg 26.9 30.7 20.8 24.4 23.0 23.3

Extraordinary Exp/(Inc.) 8 114 10 27 - -

PBT (reported) 310 301 492 598 769 948

Tax 53 42 27 81 160 196

(% of PBT) 16.5 10.2 5.4 13.0 20.8 20.6

PAT (reported) 258 259 465 517 609 752

Add: Share of earnings of asso. 24 22 20 19 19 19

Less: Minority interest (MI) 0 1 2 6 6 6

Prior period items - 23 27 - - -

PAT after MI (reported) 258 258 463 511 603 746

ADJ. PAT 291 390 468 556 622 765

% chg 34.2 34.1 19.8 19.0 11.7 23.1

(% of Net Sales) 12.6 11.1 9.7 10.5 10.7 12.1

Basic EPS (Rs) 7.8 8.9 10.6 12.7 14.1 17.4

Fully Diluted EPS (Rs) 7.8 8.9 10.6 12.7 14.1 17.4

% chg 33.9 14.5 19.8 19.0 11.7 23.1

June 1, 2010 17


Balance Sheet (Consolidated) Rs crore

Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

SOURCES OF FUNDS

Equity Share Capital 38 44 88 88 88 88

Preference Capital - - - - - -

Reserves& Surplus 1,458 2,194 2,585 3,012 3,505 4,116

Shareholders Funds 1,495 2,238 2,673 3,100 3,593 4,204

Minority Interest 5 6 10 10 10 10

Total Loans 1,959 1,568 2,067 2,400 1,680 1,176

Deferred Tax Liability 74 112 101 101 101 101

Total Liabilities 3,534 3,924 4,850 5,611 5,384 5,491

APPLICATION OF FUNDS

Gross Block 2,448 2,113 2,487 3,012 3,223 3,448

Less: Acc. Depreciation 1,047 1,125 1,235 1,450 1,699 1,966

Net Block 1,401 988 1,252 1,562 1,524 1,482

Capital Work-in-Progress 75 142 124 181 193 207

Goodwill / Intangilbles 397 469 473 473 473 473

Investments 391 743 433 433 433 433

Current Assets

Cash 460 509 554 1,835 711 380

Loans & Advances 407 365 676 706 779 852

Other 1,649 1,998 2,888 2,327 3,118 3,406

Current liabilities 1,250 1,347 1,626 2,013 1,992 1,913

Net Current Assets 1,266 1,525 2,491 2,855 2,616 2,726

Others 3 57 77 107 145 169

Total Assets 3,534 3,924 4,850 5,611 5,384 5,491

June 1, 2010 18


Cash Flow Statement (Consolidated) Rs crore


Profit before tax 318 416 502 598 769 948

Depreciation 136 10 468 408 433 395

Change in Working Capital 414 (378) (758) 874 (936) (479)

Less: Other income - - - - - -

Direct taxes paid (48) 26 (83) (81) (160) (196)

Cash Flow from Operations 820 74 129 1,799 106 669

(Inc.)/ Dec. in Fixed Assets (562) (340) (414) (581) (223) (239)

(Inc.)/ Dec. in Investments (739) (183) (36) - - -

Inc./ (Dec.) in loans and advances - - -

Other income - - - - - -

Cash Flow from Investing (1,301) (523) (450) (581) (223) (239)

Issue of Equity - 1,138 - - - -

Inc./(Dec.) in loans 725 (328) 476 334 (720) (504)

Dividend Paid (Incl. Tax) (45) (1) (51) (77) (103) (129)

Others (104) (161) (259) (194) (184) (129)

Cash Flow from Financing 575 647 166 63 (1,006) (761)

Inc./(Dec.) in Cash 95 198 (155) 1,281 (1,124) (331)

Opening Cash balances 416 511 709 554 1,835 711

Closing Cash balances 511 709 554 1,835 711 380

June 1, 2010 19


Key Ratios


Valuation Ratios (x)

P/E (on FDEPS) 22.6 19.7 16.5 13.9 12.4 10.1

P/CEPS 14.4 14.2 11.7 10.0 8.9 7.5

P/BV 4.4 3.4 2.9 2.5 2.1 1.8

Dividend yield (%) 0.3 0.6 0.9 1.1 1.4 1.7

EV/Sales 3.4 2.4 1.9 1.5 1.4 1.3

EV/EBITDA 15.8 14.2 9.8 8.3 7.6 6.5

EV / Total Assets 2.3 2.2 1.9 1.5 1.6 1.5

Per Share Data (Rs)

EPS (Basic) 7.8 8.9 10.6 12.7 14.1 17.4

EPS (fully diluted) 7.8 8.9 10.6 12.7 14.1 17.4

Cash EPS 12.2 12.3 15.0 17.5 19.8 23.5

DPS 0.6 1.0 1.5 2.0 2.5 3.0

Book Value 39.9 50.9 60.8 70.5 81.7 95.6

Dupont Analysis

EBIT margin 14.9 13.2 15.7 14.8 15.3 16.4

Tax retention ratio 83.5 89.8 94.6 87.0 79.2 79.4

Asset turnover (x) 1.0 1.4 1.5 1.5 1.6 1.5

ROIC (Post-tax) 12.8 16.1 22.4 19.5 19.2 19.1

Cost of Debt (Post Tax) 5.1 6.9 8.1 7.5 7.1 7.1

Leverage (x) 0.8 0.7 0.5 0.4 0.2 0.2

Operating ROE 19.0 22.3 29.8 23.9 22.0 21.8

Returns (%)

ROCE (Pre-tax) 11.2 12.4 17.1 15.0 16.2 19.1

Angel ROIC (Pre-tax) 13.2 18.3 20.1 24.8 22.1 23.2

ROE 21.0 20.9 19.0 19.3 18.6 19.6

Turnover ratios (x)

Asset Turnover (Gross Block) 1.2 1.6 2.1 2.0 1.9 2.0

Inventory / Sales (days) 125 111 105 93 110 110

Receivables (days) 79 74 76 81 81 81

Payables (days) 152 119 94 106 105 105

Working cap cycle (ex-cash) (days) 161 123 143 134 126 150

Solvency ratios (x)

Net debt to equity 1.0 0.5 0.6 0.2 0.3 0.2

Net debt to EBITDA 2.8 1.7 1.6 0.6 0.8 0.6

Interest Coverage (EBIT / Interest) 3.6 3.4 4.9 4.0 4.9 8.1

United Phosphorus

Disclaimer

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investmentdecision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should makesuch investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companiesreferred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits andrisks of such an investment.

Angel Securities Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investmentdecisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document arethose of the analyst, and the company may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and tradingvolume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable sourcesbelieved to be true, and is for general guidance only. Angel Securities Limited has not independently verified all the information containedwithin this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contentsor data contained within this document. While Angel Securities Limited endeavours to update on a reasonable basis the informationdiscussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributedor passed on, directly or indirectly.

Angel Securities Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or otheradvisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.

Neither Angel Securities Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or inconnection with the use of this information.

Note: Please refer to the important ̀ Stock Holding Disclosure' report on the Angel website (Research Section).

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Ratings (Returns) :

Disclosure of Interest Statement United Phosphorus

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.

United Phosphorus

Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059.Tel : (022) 3952 4568 / 4040 3800

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

Research Team

Fundamental:

Sarabjit Kour Nangra VP-Research, Pharmaceutical [email protected]

Vaibhav Agrawal VP-Research, Banking [email protected]

Vaishali Jajoo Automobile [email protected]

Shailesh Kanani Infrastructure, Real Estate [email protected]

Anand Shah FMCG , Media [email protected]

Deepak Pareek Oil & Gas [email protected]

Puneet Bambha Capital Goods, Engineering [email protected]

Sushant Dalmia Pharmaceutical [email protected]

Rupesh Sankhe Cement, Power [email protected]

Param Desai Real Estate, Logistics, Shipping [email protected]

Sageraj Bariya Fertiliser, Mid-cap [email protected]

Viraj Nadkarni Retail, Hotels, Mid-cap [email protected]

Paresh Jain Metals & Mining [email protected]

Amit Rane Banking [email protected]

Rahul Jain IT, Telecom [email protected]

Jai Sharda Mid-cap [email protected]

Sharan Lillaney Mid-cap [email protected]

Amit Vora Research Associate (Oil & Gas) [email protected]

V Srinivasan Research Associate (Cement, Power) [email protected]

Aniruddha Mate Research Associate (Infra, Real Estate) [email protected]

Mihir Salot Research Associate (Logistics, Shipping) [email protected]

Chitrangda Kapur Research Associate (FMCG, Media) [email protected]

Vibha Salvi Research Associate (IT, Telecom) [email protected]

Pooja Jain Research Associate (Metals & Mining) [email protected]

Technicals:

Shardul Kulkarni Sr. Technical Analyst [email protected]

Mileen Vasudeo Technical Analyst [email protected]

Derivatives:

Siddarth Bhamre Head - Derivatives [email protected]

Jaya Agarwal Derivative Analyst [email protected]

Sandeep Patil Jr. Derivative Analyst [email protected]

Institutional Sales Team:

Mayuresh Joshi VP - Institutional Sales [email protected]

Abhimanyu Sofat AVP - Institutional Sales [email protected]

Nitesh Jalan Sr. Manager [email protected]

Pranav Modi Sr. Manager [email protected]

Sandeep Jangir Sr. Manager [email protected]

Ganesh Iyer Sr. Manager [email protected]

Jay Harsora Sr. Dealer [email protected]

Meenakshi Chavan Dealer [email protected]

Gaurang Tisani Dealer [email protected]

Production Team:

Bharathi Shetty Research Editor [email protected]

Dharmil Adhyaru Assistant Research Editor [email protected]

Bharat Patil Production [email protected]

Dilip Patel Production [email protected]

united phosphorussmartinvestor.business-standard.com/bscms/pdf/...attractively valued vis-a-vis its...

Documents