United Phosphorus Ltd - Drought in US, deficient Indian monsoon impact growth; Maintain 'Buy' - Sunidhi

United Phosphorus reported just 5% revenue growth for Q2FY13 due to de-growth in India and USA geographies. EBIDTA remained flat on YoY basis as margins declined to 17.6% compared to 18.3% YoY, while on QoQ basis; margins went up by 12 bps. Bottom line grew by 108% as Q2FY12 had forex loss of Rs.1113 million, which had impacted PAT during that quarter.

USA witnessed severe drought while India too had erratic and delayed monsoon

The drought of 2012 in US is one of the worst in last few decades. Corn prices remained strong and hence area under corn remained healthy while Rice crop got significantly impacted (as it needs much more water). UPL had acquired RiceCo in 2011, which strengthened its position in USA, especially in Rice as RiceCo is single product (rice herbicide) company and had ~$30 million revenues in 2011. With area under Rice significantly impacted, it posted 9% de-growth in North Amrica on YoY.

Operating margins improves 12 bps QoQ, expect improvement in 2HFY13

Brazil has become very important in UPL's business. Q1FY13 is seasonally weakest quarter in Brazil while it's peak season is from Aug - Feb each year. Due to this seasonality, fixed costs in Brazilian business are apportioned on lower revenues leading to pressure on margins in Q1FY13. Operating conditions in USA and India were challenging. Despite that, margins improved 12 bps QoQ as Brazil's contribution in topline is much more in Q2 compared to Q1.

Topline growth guidance maintained at 15%

UPL had guided for 15% topline growth in FY13 at the beginning of the year at INR:USD of 51. The management maintains the guidance of 15% growth in INR terms at exchange rate of 51. If INR remains at current levels of 53 - 54 throughout the year, growth should be much higher on account foreign exchange variation. Growth in RoW & Europe is expected to be higher due to high organic growth and acquisition of SD Agrichem respectively.

Investments in acquisitions to decline going forward

UPL management indicated that following the Brazilian acquisitions in FY12 which is largest and fast growing market, its global platform is now in place and investments in acquisitions will decline. UPL will now reinforce investments in research and development that strengthens process efficiencies on one hand and product pipeline on the other, which will translate into enhanced margins and ROCE.

Fair value of Rs.171/share (Upside of 45%), Maintain "Buy"

UPL is proxy play to global generic agrochemical markets. Weather is key risk to its business with unpredictable crop seasons across geographies such as draught in USA, delayed monsoon in India and very wet season in Europe in the season gone by. UPL is banking very high on Rest of the World markets, especially Brazil. Any weather related issues in this market may impact growth significantly. It is trading at attractive valuations though deterioration in margins, working capital is a concern. It has lower ROAE's compared to smaller Indian peers due to asset heavy model with presence across the globe that includes markets with low margin, higher credit cycles. Despite that, It's ROaE has been 15% - 16% and Net D/E is comfortable at 0.6x. At CMP of Rs.118, UPL is trading at P/E of 8.1x and 6.9x for FY13E and FY14E EPS. We maintain estimates and target price at Rs.171 based on P/E of 10x for FY14E EPS. Maintain 'Buy'.

Source : Equity Bulls

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