United Phosphorus - Buy

United Phosphorus- Buy

United Phosphorus (UPL), as one of the top five generic agrochemical players in the world, will be a key beneficiary of trends such as emerging food shortages, rising farm produce prices and the resulting pressure on farm productivity.

Investors have a good opportunity to buy the stock after its 38 per cent fall since November, triggered by poor December quarter numbers and unwinding by foreign institutional investors. The stock is now poised at its cheapest level in five years, at a price earnings (PE) multiple of 10.5 times its trailing 12-month earnings. UPL's PE based on future earnings too is compelling, at just 8.5 times estimated 2011-12 earnings, while global peers such as Makhteshim Agan (Israel) and Nufarm (Australia) trade at 22 and 16 times respectively.

A tepid 7 per cent growth in its consolidated sales for the quarter ended December 2010 (profits expanded 33 per cent), was a key trigger to the stock's fall, as this suggests UPL will miss its targeted 15 per cent growth for this fiscal. UPL's sales (Rs.3947 crore) and profits (Rs 340.9 crore) showed only marginal growth in the first nine months of 2010-11. UPL's 9 per cent growth in sales volumes was offset partly by adverse currency swing of 5 per cent and price declines of 4 per cent.

However, the company's prospects over a 2-3 year period appear quite bright for three reasons. One, even in a fluid global scenario, UPL has managed above-industry growth in its sales volumes, demonstrating the shift towards generics. With an improving economic outlook for both the US and Europe, the 3 per cent appreciation in the Euro since January and likely revival in Indian demand, the sales picture for UPL may look up in the coming year.

In fact, with 70 per cent of its sales originating from exports, and a diversified geographic presence across North America, LatAm and Europe, UPL is a good play on the global recovery theme. Two, UPL's operating profit margins are likely to improve from the current levels of 20 per cent, with product mix changes and higher contributions from Europe. Though agro-chem inputs are partly pegged to crude oil, generic players usually manage to pass on cost increases to clients with the lag of a quarter or so. Three, UPL's recent buyouts of Manzate from DuPont, Propanil herbicide through Rice Co LLC and its recent Brazilian foray may be small in the context of its balance sheet, but hold strong revenue potential over the medium term. The company is seasoned at the inorganic growth strategy, managing a 23 per cent compounded sales growth over the last five years mainly through successful acquisitions.

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