Buy United Phosphorus - CMP: Rs.124, TP: Rs.170 - Prabhudas Lilladher

Higher share of revenues from high growth markets: UPL generates ~60% of its revenues collectively from high growth markets of Asia Pacific & Latin America, which is the highest, compared to the likes of global giants Syngenta (42%), MAI (40%) and Nufarm (56%). Higher exposure to these emerging economies positions UPL well to ride the next growth boom in these markets which are growing at a higher rate of 12-15% annually compared to global agrochemicals market growth rate of 4-5%.

EBITDA margins likely to improve driven by turnaround in DVA, shift in product mix: We expect UPL's EBITDA margins to improve by 60bps over the next two years to 18.2%. EBITDA margin improvement is likely to be driven by shift in product mix, rationalization of costs and turnaround of DVA. We expect DVA Agro's margins to improve by 250-300bps over the medium term driven by consolidation of supply chain in Latin America, improved product profile and better customer mix.

Working Capital unlikely to deteriorate further: Despite increasing contribution of Brazil, we do not expect working capital to deteriorate further from the current levels. On the contrary, we expect working capital to improve marginally by three days over the next two years as there is room for improvement in receivables/inventory across multiple geographies.

Earnings growth, combined with improvement in return ratios, to trigger re-rating: We expect UPL to register 12.5%/14% CAGR in revenues/PAT over FY12-15E. We expect RoE/ROCE to improve by ~150bps to 17.8%/12.6% from FY13E- FY15E. Sustainable earnings growth, DVA turnaround and marginal improvement in working capital over the next two years are likely to re-rate the stock. At CMP, UPL trades at 6.5x FY14 earnings which is a discount of ~50% to industry average and 30% discount to its 3-year average. We recommend 'BUY' with target price of Rs 170.

Source : Equity Bulls

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