United Phosphorus - Enriched growth - Edelweiss

We recently met the United Phosphorus (UPL) management to get an update on the company's business and a sense on the industry scenario. The company anticipates new product launches, label extension and coverage of newer crops to propel growth going forward. Management maintained FY14 sales growth guidance at 12-15% YoY considering constant currency assumption of INR54-55/USD. It is confident that a tighter leash on costs and better supply management will translate into 100bps YoY expansion in FY14E EBITDA margin. In view of attractive valuation, we maintain 'BUY'.

Robust season in India to offset lackluster US sales in FY14

UPL continues to maintain its FY14 sales growth guidance of 12-15% YoY considering constant currency assumption of INR54-55/USD. We believe FY14 revenue may surprise positively considering the recent INR depreciation. It is worth highlighting that 55% of the company's manufacturing facilities are in India and it earns ~INR22bn (FY13) through export. UPL anticipates a robust season in India during FY14 to compensate the loss of US sales due to delayed planting (sales declined 23.2% in Q1FY14). On account of the delayed US planting, channel inventories are quite high and expected to moderate only in next season.

Cost control, better supply chain to propel FY14 EBITDA margin

Management is confident that internal cost control initiatives and better supply management will boost EBITDA margin 100bps YoY in FY14E (FY13 EBITDA margin: 18%); on conservative basis, we estimate 40bps YoY EBITDA margin expansion. UPL expects working capital (WC) days to stabilise at 95-100 going forward (89 days in FY13) despite higher growth in Brazil which is a WC intensive market.

Outlook and valuations: Attractive; maintain 'BUY'

UPL's diversified agricultural business model cements our confidence in the company. At current valuation, the stock is trading at a discount to global as well as domestic peers, despite being bestowed with superior earnings growth. The stock continues to trade at attractive valuation of 6.2x and 5.3x consolidated P/E for FY14E and FY15E, respectively. We maintain 'BUY' with a target price of INR185 based on 7x FY15E EPS.

Source : Equity Bulls

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