Initiating Coverage | Agrichemical Please refer to important disclosures at the end of this report United Phosphorus (UPL) ranks among the Top-5 generic agrichemical manufacturers in the world. The US $40bn (CY2008) global Agrichemical industry is dominated by Top-6 Innovators with a large share of patented (28%) and off patent market (32%), with the global Generic players accounting for the balance 40%. Additionally, with patents for products worth US $3-4bn expiring during 2009-14, global Generic players are likely to further benefit. We expect UPL to post 9% and 17% CAGR in Sales and PAT over FY2010-12E, respectively. At current valuations of 10.1x FY2012E EPS , the stock is attractively valued v/s its global (10.4x) and domestic peers (12.0x), and historic average (15.0x). We Initiate Coverage on the stock, with a Buy and Target Price of Rs226 valuing the stock at 13x FY2012E EPS. Global Generic Play: With Innovators controlling US $13bn of total off-patent market worth US $29bn, we believe there is vast opportunity for the generic players to increase their market share. Moreover, with patents for products worth US $3-4bn expiring over 2009-14 there exists ample growth opportunity for the generic players. The Industry also has high entry barriers by way of investments evident from the fact that 84% of the market is controlled by the Top-11 players, while in the Generic space 61% is controlled by the Top-5 players including UPL. Amidst this scenario, we believe that UPL, an integrated global generic player, is well placed to capitalise on the upcoming opportunity. Improving Profitability + attractive Valuation = Good Value Buy: Over FY2010-12E, we expect UPL to post 9% and 17% CAGR in Sales and PAT, respectively. UPL's Profitability is set to improve with EBITDA Margins improving owing to stable raw material prices, pick up in demand and restructuring of Cerexagri. We expect RoCE and RoE to improve from 15% and 19% in FY2010 to 19% and 20% in FY2012E, respectively. At current valuations of 10.1x FY2012E EPS, the stock is attractively valued vis-a-vis its global (10.4x) and domestic peers (12.0x), and historic average (15.0x). Sageraj Bariya +91 22 4040 3800 Ext: 346 Email: [email protected]June 1, 2010 United Phosphorus BUY A Premium Play CMP Rs175 Target Price Rs226 Stock Info Shareholding Pattern (%) Sector Agrichemical Market Cap (Rs cr) 7,709 Beta 1.0 52 Week High / Low 186/133 Avg. Daily Volume 385844 Face Value (Rs) 2 BSE Sensex 16,945 Nifty 5,086 Reuters Code UNPO.BO Bloomberg Code UNTP@IN Promoters 28.0 MF / Banks / Indian FIs 27.5 FII / NRIs / OCBs 37.4 Indian Public / Others 7.1 Abs. (%) 3m 1yr 3yr Sensex 0.9 11.7 13.7 UPL 15.8 7.1 20.0 Investment Period 12 Months Source: Company, Angel Research Key Financials (Consolidated) Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E Net Revenue 4,931 5,460 6,010 6,524 % chg 35.4 10.7 10.1 8.5 Adj Profit 468 556 622 765 % chg 19.8 19.0 11.7 23.1 Adj. EPS (Rs) 10.6 12.7 14.1 17.4 EBITDA Margin (%) 19.7 18.9 19.6 20.6 P/E (x) 16.5 13.9 12.4 10.1 RoE (%) 19.0 19.3 18.6 19.6 RoCE (%) 17.1 15.0 16.2 19.1 P/BV (x) 2.9 2.5 2.1 1.8 EV/Sales (x) 1.9 1.5 1.4 1.3 EV/EBITDA (x) 9.8 8.3 7.6 6.5
21
Embed
United Phosphorussmartinvestor.business-standard.com/BSCMS/PDF/...attractively valued vis-a-vis its global (10.4x) and domestic peers (12.0x), and historic average (15.0x). Sageraj
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Initiating Coverage | Agrichemical
Please refer to important disclosures at the end of this report
United Phosphorus (UPL) ranks among the Top-5 generic agrichemicalmanufacturers in the world. The US $40bn (CY2008) global Agrichemical industryis dominated by Top-6 Innovators with a large share of patented (28%) and offpatent market (32%), with the global Generic players accounting for the balance40%. Additionally, with patents for products worth US $3-4bn expiring during2009-14, global Generic players are likely to further benefit. We expect UPL topost 9% and 17% CAGR in Sales and PAT over FY2010-12E, respectively. At currentvaluations of 10.1x FY2012E EPS , the stock is attractively valued v/s its global(10.4x) and domestic peers (12.0x), and historic average (15.0x). We InitiateCoverage on the stock, with a Buy and Target Price of Rs226 valuing the stockat 13x FY2012E EPS.
Global Generic Play: With Innovators controlling US $13bn of total off-patentmarket worth US $29bn, we believe there is vast opportunity for the generic playersto increase their market share. Moreover, with patents for products worthUS $3-4bn expiring over 2009-14 there exists ample growth opportunity for thegeneric players. The Industry also has high entry barriers by way of investmentsevident from the fact that 84% of the market is controlled by the Top-11 players,while in the Generic space 61% is controlled by the Top-5 players including UPL.Amidst this scenario, we believe that UPL, an integrated global generic player, iswell placed to capitalise on the upcoming opportunity.
Improving Profitability + attractive Valuation = Good Value Buy: OverFY2010-12E, we expect UPL to post 9% and 17% CAGR in Sales and PAT, respectively.UPL's Profitability is set to improve with EBITDA Margins improving owing to stableraw material prices, pick up in demand and restructuring of Cerexagri. We expectRoCE and RoE to improve from 15% and 19% in FY2010 to 19% and 20% inFY2012E, respectively. At current valuations of 10.1x FY2012E EPS, the stock isattractively valued vis-a-vis its global (10.4x) and domestic peers (12.0x), andhistoric average (15.0x).
Key Financials (Consolidated)Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Revenue 4,931 5,460 6,010 6,524
% chg 35.4 10.7 10.1 8.5
Adj Profit 468 556 622 765
% chg 19.8 19.0 11.7 23.1
Adj. EPS (Rs) 10.6 12.7 14.1 17.4
EBITDA Margin (%) 19.7 18.9 19.6 20.6
P/E (x) 16.5 13.9 12.4 10.1
RoE (%) 19.0 19.3 18.6 19.6
RoCE (%) 17.1 15.0 16.2 19.1
P/BV (x) 2.9 2.5 2.1 1.8
EV/Sales (x) 1.9 1.5 1.4 1.3
EV/EBITDA (x) 9.8 8.3 7.6 6.5
June 1, 2010 2
United Phosphorus | Initiating Coverage
Investment Arguments
Innovators dominant in Off-patent space - Generic players in sweet spot
The global Agrichem industry, valued at US $40bn (CY2008), is dominated by theTop-6 Innovators, viz. Bayer, Syngenta, Monsanto, BASF, DuPont and Dow, whichenjoy large market share of patented (28%) and off patent market (32%). Pertinently,the Top-6 Innovators also enjoy a large share of the Off-patent market due to thehigh entry barriers for the pure generic players. Thus, 1/3rd of the total pie worthUS $13bn (controlled by the Top-6 Innovators through proprietary off-patent products)provides high growth opportunity for larger integrated Generic players like UPL.
Category 2007 Sales (US $mn)
Herbicides 800
Insecticides 1,350
Fungicides 1,448
Other 50
Total 3,648
Exhibit 2: Products going off-patent 2009-2014
Source - NuFarm, MAI
Additional products going off-patent to boost growth
As per NuFarm and MAI, patents worth approx. US $3-4bn (Sales as on 2007) would
expire during 2009-2014, further widening the opportunity for the generic players.
Over 1998-2006, while Industry
registered CAGR of 3%, the Generic
players outpaced industry posting
CAGR of 6% during the mentioned
period
Generic Segment market share to increase
The Generic players have been garnering high market share, increasing from32% levels in 1998 to 40% by end 2006. Over 1998-2006, while Industry registeredCAGR of 3%, the Generic players outpaced industry posting CAGR of 6% during theperiod. Going ahead, given the opportunities and drop in rate of new moleculeintroduction by the Innovators, we expect the Generic players to continue to outpaceindustry growth and increase their market share in the overall pie. Historically, theglobal Agrichem has been logging in-line growth with global GDP. Going ahead,over CY2009-11E, the global economy is expected to grow at around 3-4%. Assumingthis trend plays out in terms of growth for the Agrichem Industry and the same rate ofGenericisation occurs, the Agrichemical Generic Industry can log in growth of 6-8%during the period and garner market share of 44-45%.
1/3rd of the total global Agrichemindust ry p ie worth US $13bn(controlled by the Top-6 Innovatorsthrough their proprietary off-patentproducts) provides substantial growthopportunity for the larger integratedGeneric players like UPL
Source: Industry, Company, Bloomberg, Angel Research
Exhibit 1: Global Agrichemical Market (US $40bn)
June 1, 2010 3
United Phosphorus | Initiating Coverage
High Investments - Formidable entry barrier
The global Agrichemical industry is highly consolidated primarily due to the high
entry barriers of significant and upfront investments required for product registration
and to set up manufacturing facilities. As a result, price competition is limited due to
the substantial investments involved. Moreover, unlike in the Pharmaceutical Sector
where bioequivalence of molecule can help a company get the permission to sell
medicines, in the Agrichemical Sector companies have to compulsorily undergo field
trials for each molecule and in each geography where the products would be marketed.
Field trials are carried out by independent agencies across crops and seasons, which
could take anywhere between 2-5 years depending on the market (US, EU, etc) and
government regulations. Thus, the process requires high investments both monetary
and time thereby restricting competition.
New entrants are also faced with another challenge of gaining entry into the existing
distribution network. In most markets, agrichemical sales and distribution have evolved
to become organised businesses and are controlled by few players. For instance,
Tenkoz Inc is the largest agrichemical distributor in the USA, with combined purchases
representing 25% of the US Agrichemical market. Hence, to enter this market a new
player needs to have a basket of products to gain shelf space. But, a large product
offering entails substantial investments in terms of time and money. This is evident
Price war is limited due to the huge
investments involved
Exhibit 4: Marketshare of Generic
Source: Phillips McDougall
Exhibit 3: Drop in rate of new Molecule Introductions
Source: Phillips McDougall
Exhibit 5: Agrichem v/s Pharma Sector - Registeration Process
Source: Company, Angel Research
June 1, 2010 4
United Phosphorus | Initiating Coverage
UPL well placed to leverage the opportunity
A Global Generic Play
UPL figures among the Top-5 generic agrichemical players in the world, with a presence
across major markets like the US, EU, Latina America and India. Total off-patent
market is worth US $29bn, of which a mere US $16bn is currently being catered to by
the generic players. Furthermore, 61% of the same is controlled by the five largest
generic players including UPL. Further, given the high entry barriers by way of high
investments, entry of new players is also restricted. Thus, amidst this scenario and on
account of having a low cost base, we believe that UPL enjoys an edge over competition
and is placed in sweet spot to leverage the upcoming opportunities in the global
Generic space.
UPL figures among the Top-5 generic
agrochemical players in the world
from the fact that 53% of the Generic market (1/3rd of the Agrichem Industy) iscontrolled by the four largest generic players including UPL. In all, around 81% of theindustry is controlled by few players making Agrichemicals a highly consolidatedsector.
Source: Company, Angel Research
Exhibit 7: Key Agrichemical players (2008)
Source: Industry, Company, Bloomberg, Angel Research. Note: Top-4 comprising of MAI, NuFarm,Sumitomo Chem and UPL
Exhibit 6: Market share of Top-4 players in US$16bn Generic segment
June 1, 2010 5
United Phosphorus | Initiating Coverage
Sound M&A moves driving growth
UPL has been one of the fastest growing global agrichemical company compared to
its larger MNC peers like Makhteshim-Agan Industries, Sumitomo Chemical and
Nufarm Ltd . During 2005-2009, the three largest generic agrichemical companies
grew at an average CAGR of 9% v/s UPL, which registered CAGR of 31% during the
mentioned period.
UPL has been one of the fastest growing
global agr ichemical company
compared to its larger MNC peers
Acquisitions at right price
UPL's two-fold acquisition strategy has been primarily responsible for such stupendous
growth. The company's strategy entails:
Acquiring original brands from the Innovators - Innovators have been selling out
old brands to focus on new brands (molecules) with higher growth opportunities and
higher margins.
Acquiring small/ regional players - Acquires small players dominant in a
region/single product/small product portfolios but lacking scale and capability to
become a global player.
UPL also targets a 3-4 year payback period at the time of the acquisition.
UPL has a sound strategy in place tobolster growth through acquisitions
Exhibit 9: One of the fastest growing Agrichemical companies
Source: Industry, Company, Bloomberg, Angel Research
Exhibit 8: Sales trend of Top-3 generic players
Source: Bloomberg, Angel Research. Top-3 comprises of MAI, NuFarm,Sumitomo Chem. Sumitomo sales also contains contribution of fertiliser.
June 1, 2010 6
United Phosphorus | Initiating Coverage
Low-cost India advantage + Superior integration skills = Enhancesefficiencies of acquired companies
Overall, UPL has a sound strategy in place to bolster growth through acquisitions, asthough the US and EU markets are developed and offer high margins, they havesignificant entry barriers by way of the registration norms. Post an acquisition, UPLshifts work (manufacturing or administrative) of the acquired company to low-costdestinations like India in its bid to derive cost efficiencies and better profitability forthe acquired company. Moreover, with UPL being vertically integrated in operations,manufactures large amount of intermediates (low-cost raw material) that are suppliedto the acquired company, in turn enhancing the latter's Margins. In case of the smallerplayers, UPL scales up their operations and enhance sales using its own network.
Even on higher working capital we
expect Net Debt:Equity of mere 0.2x,
offering ample opportunity to leverage
and further enhance inorganic growth
UPL's superior acquisition strategy is also visible from the better performance registeredby the target companies (by way of increased revenues, improvement in margins)and reasonable acquisition costs (minimal equity dilution and stable Debt-Equity).
Under-leveraged Balance Sheet provides headroom for further acquisitions
UPL's overall working capital touched a peak of 87 days in 2009. However, the
company's agile model managed to trim the same to 68 days in FY2010. We believe
that better working capital management was the key reason for the drop in Net
Debt:Equity from 0.6x in FY2009 to 0.2x in FY2010. Nevertheless, going ahead,
even on higher working capital days we expect the company's Net Debt:Equity to
remain at comfortable levels of mere 0.2x due to better free cashflow generation,
offering ample opportunity to leverage and further enhance growth through inorganic
route.
Company/ Year of Remarks
Brand acquisition
Reposo 2005 Revenues improved from US $11mn in 2005 to US $21mn in 2008
SWAL 2006 Revenues improved from Rs70cr in 2006 to Rs212cr in 2009
Cerexagri 2007 EBITDA Margin improved from 5% in 2007 to 10% in 2008
Source: Company, Angel Research
Exhibit 10: Track record of acquired companies
Source: Company, Angel Research
Exhibit 11: Working capital trend
Source: Company, Angel Research
Exhibit 12: Under-leveraged Balance Sheet
June 1, 2010 7
United Phosphorus | Initiating Coverage
Financials
Recovery from FY2011E onwards - India, RoW to outperform
Realisations stabilised in FY2010 on account of the decline in Raw Material prices.
Management has guided for 8-10% growth in FY2011E excluding acquisitions, and
10-15% including acquisitions. We estimate Sales to record CAGR of 9% over
FY2010-12E (excluding acquisitions). The US and EU markets are expected to recover
from FY2011E onwards with the global scenario expected to look up following which
dealers are expected to begin re-stocking inventory. The developed markets of US
and EU are likely to register moderate growth going ahead, while India and the Rest
of the World (RoW) are expected to outperform these developed markets.
Stabilising Raw Material Prices...
OPM contracted in FY2010 due to decline in realisation and high-cost inventory.
Management has guided for 21% OPM in FY2011. However, we have factored in
Margins of 20% and 21% for FY2011E and FY2012E, respectively. Key factors resulting
in the improvement of OPM include: a) Pickup in demand as economic recovery
gathers pace and retailers/distributors start re-stocking, b) Stabilisation of raw material
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investmentdecision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should makesuch investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companiesreferred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits andrisks of such an investment.
Angel Securities Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investmentdecisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document arethose of the analyst, and the company may or may not subscribe to all the views expressed within.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and tradingvolume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable sourcesbelieved to be true, and is for general guidance only. Angel Securities Limited has not independently verified all the information containedwithin this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contentsor data contained within this document. While Angel Securities Limited endeavours to update on a reasonable basis the informationdiscussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so.
This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributedor passed on, directly or indirectly.
Angel Securities Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or otheradvisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.
Neither Angel Securities Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or inconnection with the use of this information.
Note: Please refer to the important ̀ Stock Holding Disclosure' report on the Angel website (Research Section).
Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)
Ratings (Returns) :
Disclosure of Interest Statement United Phosphorus
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.