United Phosphorus - Strong Operational Quarter, Higher tax impacted PAT - Prabhudas Lilladher

United Phosphorus (UPL) came out with its Q3FY12 result. Net sales was ahead of our as well as consensus estimate, while PAT was lower than our expectation. Management is maintaining its FY12 revenue growth guidance of 35-40% YoY, with EBITDA (incl. other income) margin of 19-20%. We are downward revising our FY12/FY13 estimate by ~28%/21% considering higher depreciation/interest/tax rate on account of UPL's recent acquisitions. Also, we are downward revising our rating from 'BUY' to 'Accumulate', with a revised TP of Rs175 (earlier Rs199). We still prefer Rallis India (Rallis) over UPL on account of better management, strong balance sheet, better PAT FY11-14 CAGR and return ratios.

Strong operational performance during Q3FY12: UPL's net sales grew by 57.8% YoY to Rs19.3bn (PLe: Rs16.5bn), mainly on account of strong volume growth of 31% YoY. Further, it has been supported by price (rate) growth and exchange variation of 8% and 19% YoY, respectively. All the geographies have shown strong performance on YoY basis during Q3FY12. Company has acquired Rice CO LLC and DVA Agro business in the past 12 months that has contributed 31% to overall sales growth (i.e. 57.8% YoY). UPL's EBITDA grew by 57.5% to Rs3.5bn (PLe: Rs3.2bn). EBITDA margin stood at 18.1% (PLe:19.5%). Company's staff cost has gone by 50.2% YoY to Rs1.9bn (up 28.9% QoQ) because of recent acquisitions. DVA Agro has contributed for ~1.5months during Q2FY12 v/s three months in Q3FY12 and partially due to exchange variation.

Higher tax outgo affected PAT: UPL's depreciation has gone up 59.9% YoY to Rs0.8bn (up 9.2% YoY) on account of 15-20% YoY increase in gross block. Interest cost de-grew by 7.5% YoY to Rs0.8bn. Interest cost for the quarter includes Rs16.3m foreign exchange loss (v/s Rs280.7m in Q3FY11). UPL's tax rate stood at 31.6% (v/s 24.4% in Q3FY11 and PLe: 20%). UPL has indicated that it has gone up because company has amalgamated its 100% subsidiary UPL, Mauritius into UPL during the quarter.

Conference Call Highlights: Management is maintaining its FY12 revenue growth guidance of 35-40% YoY, with EBITDA (incl. other income) margin of 19-20%. UPL has indicated that annual capex would be Rs3-4bn, going forward. Company has gross debt of Rs39bn (v/s Rs40bn as on September 30, 2011) and cash of Rs14bn (v/s 18bn as on Sept 30, 2011) as on Dec2011. Company has giver higher consolidated tax rate guidance of 23-25% (earlier 18-20%). DVA Agro is making 28-30% gross profit at present and it is likely to improve at UPL's level (~45%) in the next 3-4 quarters.

Downgrade to 'Accumulate': We are downward revising our FY12/FY13 estimate by ~28%/21%, considering higher depreciation/interest/tax rate on account of UPL's recent acquisitions. Accordingly, we are downward revising our rating from 'BUY' to 'Accumulate', with the revised TP of Rs175 (earlier Rs199). We still prefer Rallis over UPL on account of better management, strong balance sheet, better PAT FY11-14 CAGR and return ratios despite having premium valuation.

Source : Equity Bulls

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