united phosphorus - myirisbreport.myiris.com/sihl/seachein_20110629.pdf · 6/29/2011 · united...

United Phosphorus 29th June 2011

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CMP Rs.157 Recommendation: BUY Target Price: Rs.193

Sector: Chemicals

Key Data Market Capital (Rs, cr) 7,243 Market Capital (US$ mn) 1,610 O/S Shares, cr 46.2 Face Value, Rs 2 2 wk avg Vol, NSE, lakh 6.9 52 wk High 219.7 52 wk Low 125.1 Rs/US$ 45.00 Bloomberg UNTP IN Reuters UNPO.BO NSE UNIPHOS BSE 512070

Shareholding Pattern %

Q4 FY 10 Q4 FY 11

Promoters 27.95 26.55 FII 34.87 35.53 Inst Inv. 19.05 17.24 Public 18.13 20.68

Siddharth Rajpurohit (Analyst) [email protected] Ameya Hardas (Head of Research) [email protected]

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Initiating Coverage

Reports strong Q4 FY11 growth and margin improvement UPL reported strong Q4 FY11 revenue growth of 23% YoY to Rs.1,882 cr. Robust growth was supported by a 49% YoY increase in Indian market and 59% growth in Rest of World region. Europe, UPL’s key market, witnessed a 17% decline in sales due to adverse weather conditions, but management expects demand to bounce back in FY12. Pricing has improved after two quarters, and this has resulted in EBITDA margin expanding by 20bps YoY and 166bps QoQ to 19.8%.

UPL’s Diversification a hedge against seasonal atrocities United Phosphorous (UPL) holds a diversified product portfolio with a strong presence in the various agrochemical segments viz. Insecticides, fungicides, herbicides, fumigants and rodenticides. Over the years, the company has expanded its business by diversifying across various regions and now has presence in more than 100 countries across the world. Both the product and regional diversification will act as a hedge for the company protecting the business against the seasonal atrocities.

$4 bn worth of agrochemical products to be off-patent by 2014 With close to $4 bn worth of agrochemical products to be off patent in next 3 to 4 years and relatively lower pace of introduction of new agrochemical products by innovator companies, we expect the generic agrochemical market will see higher than the agrochemical industry growth. This provides a huge opportunity for global generic players like Nufarm, Sumitomo Chemicals, UPL etc.

Large global business opportunity for agrochemicals The global agrochemical business is valued at around $38 bn, of this around 80% of the global agrochemical business is held by 6 large players. About 75% of the global agrochemical business is off patent (generic) business; this gives a good sales growth opportunity to the global generic players like Nufarm, Sunmitomo, UPL etc.

Strong entry barriers for new entrants The global agrochemical industry is highly consolidated with the top 6 players holding 80% market share. It is due to the high entry barriers of huge investments required to setup manufacturing facilities and high cost and prolonged period of product registration.

Valuation At current market price of Rs.157 the stock is trading at a PE of 9.8x its FY12E EPS of Rs.16 and 8.9x its FY13E EPS of Rs.17.6. We value the stock at PE of 12.1x the FY12E EPS of Rs.16 and 11x its FY13E EPS of Rs.17.6 and arrive at our target price of Rs.193.

We recommend BUY for UPL with upside potential of 23% and investment horizon of 12 months.

mailto:[email protected]�



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Table of Contents

1) Company Profile……………………………………………………………………………………

2) Industry Outlook……………………………………………………………………………………

3) Investment Rationale…………………………………………………………………………….

4) Peer Comparison…………………………………………………………………………………..

5) Valuation………………………………………………………………………………………………

6) Financials………………………………………………………………………………………………

7) Ratios……………………………………………………………………………………………………

8) Annexure……………………………………………………………………………………………..

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Company Profile

United phosphorus Ltd (UPL), incorporated in 1969, commenced its operation as a small scale unit to manufacture Red Phosphorus. With its well calibrated backward and forward integrations, it has today emerged as a leading global producer of crop protection products, intermediates, speciality chemicals and industrial chemicals. It is currently the India’s largest and world’s fifth largest generic agrochemical company.

The company has 21 manufacturing plants located globally including France, Spain, UK, Vietnam, Argentina, Netherlands, Italy and China. Moreover, UPL serves a vast customer base spread across 86 countries.

UPL is the largest producer of crop protection products in India, with a wide range of products that include fumigants, fungicides, insecticides, rodenticides and herbicides. It has established a broad product line that caters to the crop protection needs of a plant during all stages of growth. This broad product range has given the company a competitive edge in terms of market penetration. Also the company is introducing new products in almost every year in response to the specific needs of a changing market. UPL has developed more than 100 insecticides, fungicides, herbicides, fumigants and rodenticides for every stage of the growing cycle.

Over the years, the company has expanded its business by diversifying across various regions and now has presence in more than 100 countries across the world. In FY08 the largest contributor was Europe but the continuous diversification drive has changed the regional mix for the company. In FY11 Europe contributed 20.8%, North America 21.7%, India 25.3% and Rest of World 32.2%.

Exhibit 1: Geographical sales distribution

Source: Company, SIHL Research

Raw material: Largely crude derivatives The company uses a vast range of raw materials such as Phosphorus compounds, Organic chemicals, Pesticide intermediates, Solvents, Technical pesticides, Emulsifiers, and Inorganic chemicals. The various raw materials consumed are largely crude derivatives, hence significant changes in the crude oil prices will have indirect and partial impact on the raw material prices but with a lag effect, as the suppliers of the company follow a quarterly price revision mechanism. The company either manufactures its raw material intermediaries or procures them from its suppliers globally depending on the cost benefit analysis.

To diversify from a pure crop protection company to an integrated bioscience company, UPL acquired Advanta a Netherland based company for €100 mn in 2006 through its Mauritius subsidiary. Advanta India is the world’s largest Sorghum seed research and marketing company. Sorghum is the fifth most important cereal grain crop grown in the world after corn, wheat, rice, and barley.

24.6% 23.6% 22.5% 21.7%

21.3% 20.8% 21.8% 25.3%

30.5% 31.9% 28.6% 20.8%

23.6% 23.7% 27.1% 32.2%

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FY08 FY09 FY10 FY11

North America India Europe Rest of World


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Industry Outlook

Agrochemicals have long played a significant role in the global chemical industry. According to estimates by research group Phillips McDougall, global agrochemical sales (excluding fertilizers) totalled $38 bn in 2010. The largest product group, herbicides, accounted for 46 percent, with fungicides and insecticides each claiming a share of about 25%. The global agrochemical market is highly consolidated and top 6 players constitute 80% market share.

India is the fourth largest producer of agrochemicals globally, after United States, Japan and China. The agrochemicals industry is a significant industry for the Indian economy. The Indian agrochemicals market which was at $1.36 bn in 2009 is estimated to be a $1.7 bn market by 2012. India’s agrochemicals consumption is one of the lowest in the world with per hectare consumption of just 0.58 Kg compared to US 4.5 Kg and Japan 11 Kg. In India, paddy accounts for the maximum share of pesticide consumption, around 28%, followed by cotton (20%).

Indian population is increasing and the per capita size of land is decreasing, the use of pesticides in India needs to improve further. Currently cost of crops lost due to lack of use of pesticides is estimated to be around $17 bn every year. Besides increasing in domestic consumption, the exports by the Indian agrochemicals industry can be doubled in the next four years if proper strategies and sophisticated technologies are adopted by the industry.

India due to its inherent strength of low-cost manufacturing and qualified low-cost manpower is a net exporter of pesticides to countries such as USA and some European & African countries.

Most of the domestic pesticide (insecticide) usage is biased towards cotton crop. With growing acceptance for the Bt cotton, the insecticide demand will be affected going forward. Globally, genetically modified (GM) seeds usage has been spreading to other crops like soyabean, maize, canola, etc. These developments make it imperative for companies to focus on other crops besides cotton, and allied agricultural products like seeds, GM seeds, for future growth.

The Indian agrochemicals market is highly fragmented in nature with over 800 formulators. The competition is fierce with large number of organized sector players and significant share of spurious pesticides. The market has been witnessing mergers and acquisitions with large players buying out small manufacturers. Key market participants include United Phosphorus Ltd, Bayer Cropscience Ltd, Rallis India Ltd, Gharda Chemicals Ltd, Syngenta India Ltd, BASF India Ltd, etc. The industry is working capital intensive. Due to seasonal nature of the business and the uncertainties related to timing and coverage of monsoon, level of pest infestation etc., a large inventory is required to be maintained by the companies. Further, the industry needs to offer long credit periods to farmers due to intense competition and low off take.


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Investment Rationale

Growing need to increase world per hectare productivity In last 20 year there is continues rise in the global population(Exhibit 2), that has gone up from 5.28 bn in 1990 to around 6.92 bn now and is expected to be 7.15 bn by 2015. However, the arable land has seen a fall (Exhibit 2) from 1.40 million hectare (mn ha) in 1980 to around 1.38 mn ha in 2009 and the scope of increasing it is very limited. With the fall in arable land, it is important to increase the productivity per hectare to feed the rising population. This will lead to increase in demand for agrochemicals. Also the growth in Horticulture and Floriculture will increase the demand for agrochemicals globally. Exhibit 2: World population and arable land

Source: Bloomberg, SIHL Research * Population in million and Arable land in thousand hectares Large global business opportunity The global agrochemical business is valued at around $38 bn, of this around 80% of the global agrochemical business is held by the 6 large players that include Syngenta, Bayer, Monsanto, BASF, DOW and DuPont. About 75% of the global agrochemical business is off-patent (generic) business where UPL is largely present. Out of the 75% off-patent market about 1/4th is held by the proprietary brands of the large players. Rest 3/4th is a large opportunity of around $21 bn for the generic manufacturers. This gives a good sales growth opportunity to the global generic players like UPL, Nufarm, Sunmitomo.

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Diversification a hedge against seasonal imbalance

UPL holds a diversified product portfolio (Exhibit 12) with a strong presence in the various agrochemical segments. Of the total product portfolio the largest contributor is insecticides segment which constitute of 35%, fungicides constitute of 30%, herbicides is 25% and 10% constitute of fumigants and rodenticides. Over the years, the company has expanded its business by diversifying across various regions and now has presence in more than 100 countries across the world. It is also fairly diversified across regions which are broadly divided into four, North America (22%), India (25%), Europe (21%) and Rest of World (32%). Both the product and regional diversification will act as a hedge for the company protecting the business against the seasonal atrocities.

Exhibit 3: Product Portfolio


35%

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Insecticides FungicidesHerbicides Fumigants & Rodenticides

Exhibit 4: Geographical Distribution


21.7%

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North America India Europe Rest of World

$4 bn worth of agrochemical products to be off-patent by 2014 The global agrochemical industry has grown at a CAGR of 7.1% over CY01-09 and is expected to maintain the momentum. We expect that with close to $4 bn worth of agrochemical products to be off-patent (Exhibit 11) in next 3 to 4 years and relatively lower pace of introduction of new agrochemical products by innovator companies, the generic agrochemical market will see higher than the agrochemical industry growth. This provides a huge opportunity for global generic players like Nufarm, Sumitomo Chemicals, UPL etc. UPL the India’s largest agrochemical company with diversified product portfolio and geographical presence is in a sweet spot to tap the opportunity.


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Inorganic growth by global acquisitions

UPL has taken prudent steps to increase its global presence both by organic as well as inorganic route. It scouts the global agrochemicals industry to acquire companies or brands that are available at cheap valuation and has growth potentials. The company follows a general 3 to 4 year payback period policy for acquisition. It also integrates its low cost Indian operation with the global business to increase its operating efficiency. The inorganic route has helped the company to grow by 5 to 6% above the industry growth average. We expect the recent acquisitions by the company will enable the company to maintain its upward growth trajectory. Recent acquisitions In June 2010, The Company has announced that it has acquired the global non-mixture mancozeb fungicide business and related assets from DuPont, including existing inventory, manufacturing and formulation production facilities in Barranquilla, Colombia. The company has not disclosed the financial terms of acquisition. By this acquisition UPL will receive rights to registered brands for non-mixture mancozeb products, trademarks, as well as registrations and support regulatory data for those products, will include Manzate brand fungicides. This acquisition provides UPL an opportunity to further strengthen its already strong fungicide business catering to the high value crops and the high growth emerging markets including South and Central America. In December 2010, The Company has announced that it has acquired RiceCo LLC, USA along with its subsidiaries and certain assets of the international business of its affiliate company. RiceCo based out of Tennesee in USA does business in more than 20 countries with major markets in US and other countries like Mexico, Thailand, Nigeria and Sri Lanka. RiceCo mainly caters to the rice market and has a wide range of product offerings based on the herbicide Propanil for this segment. RiceCo is a focused crop (rice) company and will benefit by leveraging UPL’s global sales and marketing network in taking the product offerings to the global rice markets. The company will add strong brands for the rice segment to UPL’s branded product portfolio. In April 2011 the company has acquired 50% stake in Sipcam Isagro (SIB) a Brazil based crop protection manufacturer and distributor from Isagro.SIB was a 50:50 JV between Sipcam-Oxon group and Isagro. SIB specializes in manufacturing through one plant in Brazil and distribution of formulations, with strengths in insecticides and fungicides. The acquisition of SIB strengthens United Phosphorus’ presence in the $7 bn Brazilian agro-chemical market, where it has nascent operations. United phosphorus will leverage its distribution network to increase the sales of its products registered in Brazil. Strong entry barriers for new entrants The global agrochemical industry is highly consolidated with the top 6 players holding 80% market share. It is due to the high entry barriers of huge investments required to setup manufacturing facilities and high cost and prolonged period of product registration. In the agrichemical sector, companies have to compulsorily undergo field trials for each molecule and each of the geographies where the products would be marketed. The product registration process can take anywhere between 3 to 5 years depending on the region.

About 75% of the generic market is held by the top 6 large players which will act as a high competition for the new player to enter. UPL is among the top 5 generic players globally having strong presence in the global generic market with its well designed product portfolio.


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Peer Comparison (2011)

Company Yr End Currency Price EV/TTM EBITDA TTM PE RoE %

RoCE %

Debt Equity

United Phos. Mar 2011 INR 156 6.5 12.8 14.9% 14.4% 0.73 Nufarm Jul 2010 AUD 4.25 13.5 53.3 -12.9% 3.7% 0.46 BASF Dec 2010 EUR 64.7 5.4 9.9 21.3% 21.3% 0.66 Dow Dec 2010 USD 35.5 9.9 14.9 10.6% 9.3% 1.05 Monsanto Aug 2010 USD 67 14.1 25.7 11.0% 13.2% 0.21 Rallis India Mar 2011 INR 1,505 14.6 23.2 24.1% 30.1% 0.23

Bayer Cropsci. Mar 2011 INR 842 13.7 25.3 19.6% 24.6% 0.34

Source: Bloomberg, SIHL Research

*We believe UPL’s valuation is more comparable with MNC generic companies such as Nufarm, Sumitomo etc. than its Indian peers. Business strategies of MNCs are very similar to UPL, such as: to build geographically diversified revenue streams through a broad range of generic products. We believe Indian generic companies like Rallis India are less appropriate comparables for UPL as they are smaller, less diversified and may have different growth strategies. Valuation Exhibit 5: 1 Year forward PE graph

Source: Company, SIHL Research With close to $4 bn worth of agrochemical products to be off-patent in next 3 to 4 years and relatively lower pace of introduction of new agrochemical products by innovator companies, the generic agrochemical market will see higher than the agrochemical industry growth. With large product portfolio and global presence United Phosphorus Ltd is in a sweet spot to tap the global demand.

At current market price of Rs.157 the stock is trading at a PE of 9.8x its FY12E EPS* of Rs.16 and 8.9x its FY13E EPS of Rs.17.6. We value the stock at PE of 12.1x the FY12E EPS of Rs.16 and 11x its FY13E EPS of Rs.17.6 and arrive at our target price of Rs.193.

We recommend BUY for UPL with upside potential of 23% and investment horizon of 12 months.

*Consolidated EPS


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Financials

Exhibit 6: Profit & Loss Account (Consolidated)

Particulars, Rs cr. FY10 FY11 FY12E FY13E Net Sales & Other Op Inc 5,459 5,805 6,501 7,102 Total Expenditure 4,463 4,694 5,255 5,744 Raw Materials 2,954 2,988 3,340 3,640 Other Expenses 1,007 1,191 1,336 1,482 Employee Cost 502 515 579 621 EBITDA 995 1,111 1,246 1,359 Depreciation 215 214 232 248 EBIT 780 897 1,014 1,110 Interest 220 197 209 193 Other Income 61 94 104 112 Loss on Foreign Exchange - 115 - - Exceptional Items (27) (14) (18) (21) PBT 594 664 891 1,009 Tax 81 73 134 177 PAT 513 591 757 832 Minority Interest (6) (10) (11) (14) Shares of Associates 19 (23) (9) (6) Consolidated Net Profit 526 558 737 812 EPS 11.4 12.1 16.0 17.6

Source: Company, SIHL Research Exhibit 7: Balance Sheet Statement (Consolidated)

Particulars, Rs. cr. FY10 FY11E FY12E FY13E

Source of Funds

Shareholder's Funds 2,992 3,746 4,350 5,029

Minority Interest 14 14 14 14

Total Debts 2,419 2,503 2,527 2,292

Total Liabilities 5,425 6,263 6,891 7,335

Application of Funds

Net Fixed Assets 1,813 1,949 2,047 2,138

Investments 761 761 761 761

Net Current Assets 2,863 3,564 4,095 4,447

Miscellaneous Expenses not written off - - - -

Deferred Tax Assets / Liabilities (11) (11) (11) (11)

Total Assets 5,425 6,263 6,891 7,335 Source: Company, SIHL Research


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Exhibit 8: Cash Flow Statement (Consolidated)

Particulars, Rs cr. FY 10 FY 11E FY 12E FY 13E Net Income +Depreciation 741 771 969 1,060 Non-Cash Adjustments 80 - - - Change in Working Capital 450 (303) (233) (178) Cash Flow from Operations 1,271 469 736 882 Capital Expenditure (232) (350) (330) (340) Change in Investment Dec/(inc) (41) - - - Other Items - - - - Cash Flow used in Investing (273) (350) (330) (340) Issue of Equity - - - - Issue/(Repay Debt) 285 387 24 (235) Dividend Paid (77) (106) (133) (133) Other Financing Cash Flows - - - - Cash Flow from Financing 208 280 (109) (368) Net Cash 1,207 399 297 174

Source: Company, SIHL Research Exhibit 9: Ratios (Consolidated)

Particulars FY 10 FY 11E FY 12E FY 13E Margins

EBITDA 18.2% 19.1% 19.2% 19.1%

EBIT 14.3% 15.5% 15.6% 15.6% PAT 9.6% 9.6% 11.3% 11.4% Valuation

RoE 17.6% 14.9% 16.9% 16.1% RoCE 14.4% 14.4% 14.7% 15.2% EPS 11.4 12.1 16.0 17.6 BV 64.8 81.1 94.2 108.9 P/E 13.8 13.0 9.8 8.9 P/BV 2.4 1.9 1.7 1.4 EV/EBITDA 7.6 6.5 5.6 4.8 Debt Equity 0.8 0.7 0.6 0.5 Interest Coverage Ratio 3.5 4.5 4.9 5.8

Source: Company, SIHL Research Exhibit 10: DuPont Analysis (Consolidated)

Particulars FY10 FY11E FY12E FY13E

Profit Margin 9.6% 9.6% 11.3% 11.4%

Asset Turnover 1.0 0.9 0.9 1.0

Equity Multiplier 1.8 1.7 1.6 1.5

RoE 17.6% 14.9% 16.9% 16.1% Source: Company, SIHL Research


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Annexure

Exhibit 11: Features 24 active substances whose patents will expire between 2011 - 2015 (In some countries patent term extension beyond 2015 may exist)

Sr. No Product Company

1 Benthiavalicarb (Kumiai and Ihara)

2 Chromafenozide (Nippon Nohyaku and Sankyo)

3 Cyflufenamid (Nippon Soda)

4 Dinotefuran (Mitsui Toatsu)

5 Flonicamid (ISK Biosciences)

6 Iodosulfuron-methyl-sodium (Bayer CropScience)

7 Mesosulfuron-methyl (Bayer CropScience)

8 Oxasulfuron (Syngenta)

9 Prothioconazole (Bayer CropScience)

10 Simeconazole (Sankyo)

11 Spiromesifen (Bayer CropScience)

12 Tolfenpyrad (Mitsubishi)

13 Ethaboxam (Lucky Ltd)

14 Florasulam (Dow AgroSciences)

15 Isoxadifen-ethyl (Bayer CropScience)

16 Nitenpyram (Takeda)

17 Oxaziclomefone (Kumiai and Ihara)

18 Pyriftalid (Syngenta)

19 Spirodiclofen (Bayer CropScience)

20 Thiamethoxam (Syngenta)

21 Trifloxysulfuron (Syngenta)

22 Boscalid (BASF)

23 Cloransulam-methyl (Dow AgroSciences)

24 Dimoxystrobin (BASF) Source: Enigma Marketing Research, SIHL Research


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Exhibit 12: UPL Products

Fungicides Brand Name Technical Name

Rampart Metalaxyl 35% WS

Conquer Hexaconozole 5% EC

Saaf carbendazine 12% + Mancozeb 63% WP

Samar Tricyclazone 75% WP

Unilax Metalaxyl 8% + Mancozeb 64% WP

Uthane M 55 Mancozeb 75% WP

Insecticides Brand Name Technical Name

Aceta Acetamiprid 20% SP

Cyrux Cypermethrin 25% EC

Doom Dichlorvos 78% EC

Fego Indoxacarb 14.5% SC

Guru Alphacypermethrince 10% EC

Imida Gold Imidachlorpid 17.8% SL

Imigo 600FS Imidachlorpid 48% FS

Josh Triazophose 40% EC

Kaardon 4G Cartap Hydrochlorid 4G

Kaardon 50 SP Cartap Hydrochlorid 50 SP

Kinadon plus Phosphamidon 40% SL

Lancer Acephate 75% SP

Phoskill Monocrotophos 36% SL

Renova Thiomethoxam 25% WG

Spolit Emamectin Benzoate 5% SG

Umet Phorate 10 CG

Ustaad Cypermethrin 10% EC

Viraat Quinalphos 20% + Cypermethrin 3%

Herbicides Brand Name Technical Name

Jhatka Clodinafop Propargyl 15% WP

Metsy Metsulfuran Methyl 20% WP

Saathi Pyrazosulfuran Ethyl 10% WP

SF-10 Sulfosulfuran 75% WG

Sweep Glyphosate 41% SL

Total Sulfosulfuran 75% WG + Metasulfuran Methyl 5% WG

Uniquat Paraquant di-chloride 24% SL

Rodenticide Brand Name Technical Name

Ratol Zinc Phosphide

Plant Growth Regulator Brand Name Technical Name Aishwarya Granules Aminoacids



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united phosphorus - myirisbreport.myiris.com/sihl/seachein_20110629.pdf · 6/29/2011 · united...

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