| Summary of Contents STOCK IDEAS United Phosphorus
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs225
Current market price: Rs163
A global agrochemical play Key points - Wide product portfolio, diversified target markets: United Phosphorous Ltd (UPL)’s diversified product portfolio, strong distribution network and presence across geographies make it a good investment play in the agrochemical space. UPL derives its revenues from various geographies across the world, with India contributing around one-fifth of the revenues. Such well-diversified client markets act as a natural hedge for the company during times of slowdown or drought in any particular region.
- Huge opportunities for crop protection products: Globally, the agrochemical industry is divided into products protected by patents and generic products. With a significant number of agrochemicals going off patent in the next couple of years, opportunities for global generic players like UPL are likely to be immense. UPL has a strong pipeline of products in the generic crop protection space. Domestically too, in view of the increasing focus on improving productivity and the lower penetration of agrochemicals in the country, the demand for crop protection products is likely to remain buoyant going forward.
- Margin expansion to boost earnings: UPL has achieved a stupendous 37% revenue growth (CAGR) over FY2005-09, though we expect its revenue growth to moderate in future (13% CAGR during FY2009-11E) due to lower average realisations globally. However, we expect the OPM to improve by 80 basis points on the back of a lower raw material cost and improved profitability of the recently acquired entity, Cerexagri. Moreover, UPL plans to take advantage of its low-cost base in India and shift home some of the global manufacturing processes from its high-cost manufacturing destinations like Australia and Argentina. As a result, the net profit is estimated to grow at a CAGR of 28% during FY2009-11.
- Stock at discount to its average multiple: Despite its strong positioning in the crop protection market and the healthy growth in its earnings, UPL trades at a huge discount to its one-year forward average EV/EBITDA multiple of 9.4x, leaving scope for substantial upside. Moreover, we have not factored in any possible upside from its seed business that is currently margin dilutive but is expected to witness improvement in profitability. At the current market price of Rs163, the stock is discounting its FY2010E and FY2011E EPS at 10.7x and 8.8x respectively. We initiate coverage on UPL with a Buy recommendation. We arrive at a price target of Rs225 after valuing the company at 8.5x its FY2011E EV/EBITDA, which is at ~10% discount to its historical average.
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