United Phosphorus - Capital Markets Day confirms our positive outlook - Prabhudas Lilladher

UPL hosted its 'Capital markets Day' last Friday. The Management Team of UPL, including the Regional Business Heads, explained the regional agri trends & UPL's strategy over the medium-term. Post interaction with the management, we remain fairly confident about UPL's growth path ahead. Robust earnings growth during Q4FY13, improvement in margins and working capital despite growing share of Brazil, increased interaction with the investor community and improved disclosures are likely to bring back investor confidence gradually. Management remained fairly confident of achieving its revenues growth guidance of 12-15% YoY during FY14E, along with margin improvement of 100bps YoY. We believe consistent earnings growth combined with improvement in Balance Sheet and return ratios is likely to trigger re-rating. Reiterate 'BUY' with target price of Rs185.

- Brilliant climax to FY13: Q4FY13 results turned out to be a pleasant surprise, both on the profitability as well as Balance Sheet front. EBITDA margins improved by 70bps YoY to 19.0%. Consistent pricing increase (nine consecutive quarters of YoY positive price increases), shift in product mix, rationalization of costs, turnaround in DVA are gradually gaining momentum and we believe, margins are likely to improve by 50bps YoY in FY14E. Management is targeting margin improvement of 300-400bps in DVA over the next two years. Working capital days reduced to 90 at the end of FY13 driven primarily by increase in creditor days (management has guided for working capital days in the range of 90-100 for FY14E). UPL generated FCF of Rs6.2bn in FY13.

- New product launches integral to growth: India, RoW & Brazil are likely to drive growth over the medium term. In India, UPL plans to launch nine new products over the next two years. UPL has identified five mega brands domestically which have the potential to generate annual turnover in the vicinity of Rs1bn each. UPL plans to launch over 15 new products in Brazil over the next 3-4 years and aims to be counted amongst the top 5 companies in Brazil over the next 5 years. While current revenues in Brazil are in the vicinity of US$200m, UPL aims to achieve revenues of US$800-900m over the next five years. However, management highlighted that though they are chasing growth in Brazil, they do not want to compromise on margins.

- Reiterate BUY with target price of Rs185: With sustainable earnings growth, improvement in working capital and free cash flow generation, we believe stock is likely to get re-rated. Improved disclosures and increased interaction with investors are likely to bring back investor confidence gradually. We value UPL at 9x FY14E earnings of Rs 21.2 and reiterate 'BUY' with target price of Rs185.

Source : Equity Bulls

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