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Sowing Seeds of Growth

A diversified portfolio and presence across geographies is a United Phosphorus strength

Profile

United Phosphorus Limited (UPL) was incorporated in 1969. The company is one of the world’s leading producers of crop protection products, intermediates, specialty chemicals and other industrial chemicals.

India’s largest agrochemical producer, UPL’s product basket comprises insecticides, fungicides, herbicides, fumigants, PGR and rodenticides. The company boasts of 21 manufacturing facilities around the globe, with nine of them in India. R&D is one of UPL’s major strengths, with ultramodern facilities and centres. UPL ranks amongst the top five post-patent agrochemical manufacturers of the world.

Promoters

Indian promoters have a 26 per cent stake in the company while foreign promoters have a one per cent stake. Demuric Holdings’  stakehold is approximately 12 per cent.  In addition, the promoter group has pledged 5 per cent of their holdings.

Investment Rationale
Diversified Portfolio & Presence

One of UPL’s strongest points is its diversified business model, in terms of both geographies and products. The company recently acquired Advanta Netherlands Holdings BV, which introduced seeds in its product portfolio. UPL now sells Advanta’s products through its distribution network. In terms of target markets, UPL’s presence across the globe enables it to generate revenues from different countries. India contributes to only one-fifth of its total revenues. Such diversification provides an ample hedge against unfavourable conditions in any particular region.

Opportunities In Crop Protection

Being one of the top five players in the global agrochemical and crop protection market has helped UPL immensely, particularly with a significant number of products going off-patent in a couple of years. Furthermore, the industry is highly regulated via separate registration processes in different countries which makes entry into this space tough for new companies which in turn helps  established players like UPL. As the government is focusing on improving agricultural output, the domestic front offers huge opportunities to explore.

Margin Expansion, A Booster

UPL’s bottom line is expected to grow at a CAGR of 28 per cent during FY09-11. This growth would be driven by the expansion in the company’s operating profit margin through lower raw material costs, lower restructuring expenses and benefits of integration of  Cerexagri, which was acquired recently.

Inorganic Growth Strategy

UPL has adopted an inorganic growth strategy, acquiring 21 companies in the past 20 years. Its acquisitions of Cerexagri and Advanta have allowed it to expand, enter newer regions and introduce more products. Furthermore, with a sizeable amount of cash in its balance sheet and a comfortable leverage position (net debt to equity of 0.6x), the company can still go for further expansion. This could be the potential trigger for the next upmove in its stock.

Risk & Concerns
Rupee Appreciation

UPL derives a majority of its revenues from its overseas subsidiaries. Hence, it runs the risk of sharp currency fluctuations, which are likely to affect its revenues. A significant appreciation in the rupee could hamper the company’s top line growth.

Monsoon Delay May Affect Demand

The company caters to the agriculture sector, which is highly dependent on the rains in India as well as globally. A weaker monsoon in India could threaten domestic demand, thereby affecting UPL’s India-specific revenues. However, India contributes only around one-fifth of the company’s total revenues and has a limited impact on its financial performance.

High Acquisition Costs

UPL is currently scouting for more acquisition opportunities. As on 31 March 2009, the company had comfortable net debt-to-equity position of 0.6x at the consolidated level. However, a high-cost acquisition may lead the company to excessively leverage its balance sheet.

Fall In Agro Commodity Prices

A sharp fall in agro commodity prices domestically as well as globally may hamper the demand for crop protection products, thereby affecting the company’s top line.

Valuation

Despite its strong positioning in the crop protection market and the healthy growth in its earnings, UPL trades at a substantial discount to its one-year forward average enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) multiple of 9.4x, leaving scope for substantial upside. At the CMP of Rs 169, the stock is discounting its FY10E and FY11E earnings per share (EPS) at 10.7x and 8.8x respectively.

The article has appeared in the September issue of Wealth Insight magazine.