1QFY2017 Result Update | Agrichemical

August 5, 2016

United Phosphorus

BUY

CMP

`584

Performance Highlights

Target Price

`684

Y/E March (` cr)

1QFY2017 4QFY2016

% chg (QoQ) 1QFY2016

% chg (yoy)

Investment Period

12 Months

Net sales

3,452

4292

(19.6)

3206

7.7

Other income

120

(44.8)

38.1

Stock Info

Sector

Agrichemical

Gross profit

1852

2143

(13.6)

1666

11.1

Market Cap (` cr)

25,026

Operating profit

640

927

(30.9)

534

19.8

Net Debt (` cr)

1,113

Adj. net profit

430

574

(25.2)

340

26.4

Source: Company, Angel Research

Beta

1.0

52 Week High / Low

635/342

For 1QFY2017, United Phosphorus (UPL) posted sales of `3,452cr V/s `3,205cr

Avg. Daily Volume

126,828

in 1QFY2016, ie a growth of 7.7% yoy. All markets posted double digit growth

Face Value (`)

except for India and the USA, which posted growth of 1% and 5% respectively.

BSE Sensex

27,698

Growth was on the back of 8% volume growth, while price dip contributed 2%,

Nifty

8,545

and exchange rate accounted for 2%. On the operating front, the OPM came in

Reuters Code

UNPO.BO

at 18.6% V/s 16.7% in 1QFY2016. This led to an Adj. net profit of `430cr V/s

Bloomberg Code

UNTP@IN

`340cr in 1QFY2016, ie a growth of 26.4% yoy. The Management maintains its

guidance of 12-15% revenue growth and 60-100bp margin expansion. We

maintain our Buy rating on the stock.

Shareholding Pattern (%)

Promoters

29.7

Quarterly highlights: For 1QFY2017, the company posted sales of `3,452cr V/s

MF / Banks / Indian Fls

15.0

`3,205cr in 1QFY2016, ie a growth of 7.7% yoy. All markets posted double digit

FII / NRIs / OCBs

47.8

growth except for India and the USA, which posted growth of 1% and 5%

Indian Public / Others

7.5

respectively. Growth was on the back of 8% volume growth, while price dip

contributed 2%, and exchange rate accounted for 2% gain. On the operating

front, the OPM came in at 18.6% V/s 16.7% in 1QFY2016. The improvement in

Abs. (%)

3m 1yr

3yr

the OPM was on back of higher gross margins, which came in at 53.6% V/s

Sensex

9.8

(1.7)

44.5

52.0% in 1QFY2016. This led the company to post a net-profit of `430cr V/s

UPL

0.9

8.0

368.4

`340cr in 1QFY2016, a growth of 26.4% yoy.

Outlook and valuation: We expect UPL to post a CAGR of 16.0% and 18.9% in

3-year price chart

sales and PAT, respectively, over FY2016-18E. The Management has given its

700

guidance of 12-15% volume growth with 60-100bp margin expansion in FY2017.

600

We recommend a Buy rating on the stock.

500

400

Key financials (Consolidated)

300

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

200

Total revenue

11,911

13,083

15,176

17,604

100

% chg

12.6

9.8

16.0

Adj. profit

1,147

1,352

1,601

1,912

% chg

10.2

17.9

18.5

19.4

EBITDA (%)

18.3

18.5

Source: Company, Angel Research

EPS (`)

26.7

31.5

37.4

44.6

P/E (x)

21.8

18.5

15.6

13.1

P/BV (x)

4.3

3.7

3.1

2.5

RoE (%)

20.6

21.4

21.2

RoCE (%)

19.9

20.8

20.6

21.1

Sarabjit Kour Nangra

EV/Sales (x)

2.1

2.0

1.7

1.4

+91-22-3935 7800 ext. 6806

EV/EBITDA (x)

11.6

10.8

9.1

7.6

[email protected]

Source: Company, Angel Research; Note: CMP as of August 3, 2016

Please refer to important disclosures at the end of this report

United Phosphorus | 1QFY2017 Result Update

Exhibit 1: 1QFY2017 Performance (Consolidated)

Y/E March (` cr)

1QFY2017

4QFY2016

% chg (qoq) 1QFY2016

% chg (yoy)

FY2016 FY2015

% chg

Net sales

3,452

4,292

(19.6)

3,206

7.7

13,083

11,911

9.8

Other income

120

(44.8)

38.1

383

177

117.0

Total income

3,518

4,413

(20.3)

3,254

8.1

13,466

12,088

11.4

Gross profit

1852

2143

(13.6)

1666

11.1

6671

5895

13.2

Gross margin (%)

53.6

49.9

52.0

51.0

49.5

Operating profit

640

927

(30.9)

534

19.8

2419

2175

11.2

Operating margin (%)

18.6

21.6

16.7

18.5

18.3

Financial cost

106

203

(47.9)

56.9

622

517

Depreciation

169

159

6.3

155

9.2

502

425

18.2

PBT

432

684

(36.9)

360

19.9

1679

1410

19.0

Provision for taxation

(95.9)

(92.4)

283

244

16.0

PAT Before Exc. And MI

429

620

(30.8)

326

31.7

1396

1166

19.7

Minority Income/ ( Exp.)

(16)

(8)

(2)

(13)

(43)

Income from Associate/ (Exp)

(35)

(3)

(31)

Extra ordinary Income/( Exp.)

(28)

(25)

(15)

(53)

(2)

Reported PAT

402

552

(27.2)

325

23.7

1299

1144

13.5

Adjusted PAT

430

574

(25.2)

340

26.4

1343

1147

17.1

EPS (`)

10.0

13.4

7.9

31.3

26.7

Source: Company, Angel Research

Top-line growth mainly led by Latin America, Europe & RoW

UPL posted a 7.7% yoy growth in sales for the quarter to `3,452cr, mainly on the

back of 13%, 12%, and 13% yoy growth in Latin America, Europe, and RoW

respectively. Other key markets like India and the USA posted a growth of 1% and

5% yoy, respectively. Overall growth breakup was- price and volume dip and 2%

and gain of 8% respectively, while exchange enhanced growth by 2%.

India (`1,060cr) posted a 1% yoy rise on back of delayed monsoon and high

opening inventory from last year. However, widespread rains across India starting

from late June 2016 are expected to perk up demand and performance in

subsequent quarters should stand to benefit.

Europe (`562cr) posted a 12% yoy rise, benefitting from good rains. However, the

company noted that registration guidelines are becoming much more stringent for

agrochemicals.

Latin America (`697cr) posted a strong 13% yoy growth. The company has an

excellent fungicide portfolio to manage Asian rust diseases. However, the market is

sensitive to existing and future peso devaluation in Mexico. On the positive side,

the license requirement for agrochemical import in Argentina has been removed.

ROW (`553cr) posted a 13% yoy growth. Overall, the season is recovering in Asia

and Australia after a prolonged drought. The company had geographic expansion

of its non-selective herbicides portfolio in Asia and good growth in Turkey due to

institutional business despite a slow season. Business is recovering in selected

countries in Africa with new products.

August 5, 2016

United Phosphorus | 1QFY2017 Result Update

Exhibit 2: Sales Break-up (Marketwise)

100%

1,109

1,250

80%

1,354

2,080

1,705

60%

503

562

358

40%

300

872

1,055

1,060

715

498

417

20%

971

608

594

638

374

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

North America

India

Others

Source: Company

Exhibit 3: Sales performance (including export incentives)

Exhibit 4: Growth break-up

4,292

4,200

3,510

3,600

3,275

3,050

2,801

3,000

2,400

1,800

1,200

600

(2)

(4)

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Exchange impact

Realisation

Volume

Source: Company, Angel Research

Exhibit 5: Volume and realisation break-up (yoy)

(5)

(2)

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Realisation

Volume

Source: Company, Angel Research

August 5, 2016

United Phosphorus | 1QFY2017 Result Update

EBITDA margin improves

On the operating front, strong sales growth (supported by healthy volume growth

and price rise) led the gross margin to come in at 53.6% V/s (52.0% in1QFY2016)

and the OPM to come in at 18.6% (V/s 16.7% in 1QFY2016).

Exhibit 6: EBITDA margin trend

25.0

24.0

23.0

22.0

21.0

21.6

20.0

19.0

18.0

18.6

17.0

16.0

16.7

16.5

15.0

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Source: Company, Angel Research

Adj net profit grew 26.4% yoy

Top-line and operating performance aided the Adj. net profit to come in at `430cr

V/s `340cr in 1QFY2016, a growth of 26.4% yoy. Other income during the

quarter came in at `66cr V/s `48cr in 1QFY2016, a yoy growth of 38.1%.

Exhibit 7: Adjusted PAT trend

700

574

600

500

430

400

340

306

300

190

200

100

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Adj PAT

% YoY

Source: Company, Angel Research

August 5, 2016

United Phosphorus | 1QFY2017 Result Update

Concall highlights

 The company targets a revenue growth of 12-15% (at constant currency) for

FY2017 on the back of volumes. It expects EBITDA margin to improve 60-

100bp, driven by improvement in gross margins.

 The company is targeting a RoCE of 23-25% over the next 3-5 years. It plans

to invest `850cr including on product registrations.

 The Management has indicated that the integration of Advanta with UPL has

been progressing as per plan and synergistic benefits will be availed over the

next two years.

 The Management also sounded confident of achieving 10-11% growth in

Advanta for the next two years despite a challenging demand environment for

some of its key crops like canola and sorghum.

Investment arguments

Innovators dominant in the off-patent space; Generic firms in

a sweet spot

The global agrichem industry, valued at US$53bn (CY2014), is dominated by the

top six innovators, viz Bayer, Syngenta, Monsanto, BASF, DuPont and Dow, which

enjoy a large market share of the patented (28%) and off-patent (32%) market.

The top six innovators enjoy a large share of the off-patent market due to high

entry barriers for pure generic players. Thus, one-third of the total pie worth

US$18bn, which is controlled by the top six innovators through proprietary

off-patent products, provides a high-growth opportunity for larger integrated

generic players like UPL.

Generic segment’s market share to increase

Generic players have been garnering a high market share; their share has

increased from 32% levels in 1998 to 40% by 2006-end. The industry registered a

CAGR of 3% over 1998-2006, while generic players outpaced the industry with a

CAGR of 6%. Going ahead, given the opportunities and a drop in the rate of new

molecule introduction by innovators, we expect generic players to continue to

outpace the industry’s growth rate and augment their market share in the overall

pie. Historically, global agrichem players have been logging in-line growth with

global GDP. Going ahead, over CY2016-17, the global economy is expected to

grow by 2-3%. Assuming this trend plays out in terms of growth for the agrichem

industry, and the same rate of genericisation occurs, then the agrichemical generic

industry could log in 6-8% yoy growth during the period and garner a market

share of 44-45%.

A global generic play

UPL figures among the top five global generic agrichemical players with presence

across major markets including the US, EU, Latin America, and India. Given the

high entry barriers by way of high investments, entry of new players is restricted.

Thus, amidst this scenario and on account of having a low-cost base,

we believe UPL enjoys an edge over competition and is placed in a sweet spot to

leverage the upcoming opportunities in the global generic space.

August 5, 2016

United Phosphorus | 1QFY2017 Result Update

Outlook and valuation

Over the last few years, the global agriculture sector has been reviving on the back

of rising food prices. Food security is also a top priority for most governments;

reducing food loss is one of the easiest ways to boost food inventory. Hence, we

believe agrichemical companies would continue to do well in the wake of

heightened food security risks, and strong demand is likely to be witnessed across

the world. Overall, we expect the global agrichemical industry to perform well

from here on. Generics are expected to register a healthy growth due to a)

increasing penetration and wresting market share from innovators and b) patent

expiries worth US$3bn-4bn during the next five years.

We estimate UPL to post a 16.0% and 18.9% CAGR in sales and PAT, respectively,

over FY2016-18E. We believe at the current market price the stock provides decent

upsides (13.3x FY2018E EPS). Hence we recommend a Buy rating on the stock.

Exhibit 8: Key assumption

FY2017E

FY2018E

Sales growth

16.0

EBITDA margin

18.5

19.4

Tax rate

20.0

Source: Company, Angel Research

Exhibit 9: P/E band

700

600

500

400

300

200

100

Price

10x

12x

14x

Source: Company, Angel Research

Exhibit 10: Peer valuation

Company Reco

Mcap CMP TP Upside

P/E (x)

EV/Sales (x)

EV/EBITDA (x)

RoE (%)

CAGR (%)

(` cr)

(`)

(%) FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E Sales PAT

Rallis

Neutral

4,237

218

24.1

19.8

2.2

1.9

16.4

13.3

18.4

19.8

15.0

22.3

UPL

Buy

25,026

584

684

17.1

15.6

13.1

1.7

1.4

9.3

7.8

21.4

21.2

16.0

18.9

Source: Company, Angel Research, Bloomberg

August 5, 2016

United Phosphorus | 1QFY2017 Result Update

Company background

United Phosphorus (UPL) is a global generic crop protection, chemicals and seeds

company. The company is fully backward and forward integrated by taking

advantage of the consolidation opportunities within the agrochemical industry. UPL

is the largest Indian agrochemical company and had revenue of about `13,083cr

for the year ended March 2016.

Profit & Loss Statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Net Sales

9,010

10,580

11,911

13,083

15,176

17,604

Other operating income

184

191

219

Total operating income

9,195

10,771

11,956

13,302

15,395

17,823

% chg

19.9

17.1

11.0

11.3

15.7

15.8

Total Expenditure

7,568

8,751

9,736

10,663

12,369

14,349

Net Raw Materials

4,687

5,441

6,016

6,411

7,437

8,627

Other Mfg costs

741

942

980

1,164

1,351

1,567

Personnel

853

946

1,043

1,224

1,420

1,647

Other

1,287

1,422

1,697

1,864

2,162

2,508

EBITDA

1,442

1,829

2,175

2,419

2,806

3,255

% chg

19.6

26.8

19.0

11.2

16.0

(% of Net Sales)

16.0

17.3

18.3

18.5

Depreciation& Amortisation

354

407

425

502

573

629

EBIT

1,273

1,613

1,796

2,137

2,452

2,845

% chg

21.1

26.7

11.4

19.0

14.8

16.0

(% of Net Sales)

13.8

15.0

16.1

15.9

16.0

Interest & other Charges

429

487

517

622

502

Other Income

131

112

(% of PBT)

Recurring PBT

917

1,257

1,410

1,626

2,062

2,455

% chg

25.0

37.1

12.2

15.3

26.8

19.1

Extraordinary Expense/(Inc.)

(2)

(53)

PBT (reported)

944

1,172

1,413

1,679

2,062

2,455

Tax

203

222

244

283

412

491

(% of PBT)

21.5

18.9

17.3

16.9

20.0

PAT (reported)

741

950

1,169

1,396

1,649

1,964

Add: Share of earnings of asso.

(31)

(35)

(39)

Less: Minority interest (MI)

(2)

Prior period items

PAT after MI (reported)

775

950

1,144

1,299

1,601

1,912

ADJ. PAT

754

1,040

1,147

1,352

1,601

1,912

% chg

34.3

38.0

10.2

17.9

18.5

19.4

(% of Net Sales)

8.4

9.8

9.6

10.3

10.6

10.9

Basic EPS (`)

17.0

24.3

26.7

31.5

37.4

44.6

Fully Diluted EPS (`)

17.0

24.3

26.7

31.5

37.4

44.6

% chg

40.1

42.5

10.2

17.9

18.5

19.4

August 5, 2016

United Phosphorus | 1QFY2017 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

SOURCES OF FUNDS

Equity Share Capital

Preference Capital

Reserves& Surplus

4,557

5,162

5,775

6,705

8,092

9,790

Shareholders’ Funds

4,645

5,247

5,860

6,791

8,178

9,875

Minority Interest

234

172

Total Loans

4,203

2,873

2,781

3,860

Other Long term liab.

395

311

594

464

Long Term Provisions

Deferred Tax Liability

(13)

(5)

Total Liabilities

9,516

8,714

9,378

11,205

12,605

14,315

APPLICATION OF FUNDS

Gross Block

5,386

6,039

6,792

7,791

8,591

9,391

Less: Acc. Depreciation

3,173

3,580

4,005

4,507

5,080

5,709

Net Block

2,213

2,459

2,787

3,285

3,511

3,682

Capital Work-in-Progress

378

Goodwill / Intangilbles

1,277

1,212

1,449

1,463

Investments

1,025

737

764

1,066

Long Term Loan & Adv.

277

389

418

537

532

618

Current Assets

7,154

7,572

8,372

10,069

11,756

14,187

Cash

1,548

1,023

1,010

1,068

1,688

2,508

Loans & Advances

852

771

586

840

1,435

1,664

Other

4,754

5,779

6,776

8,162

8,633

10,015

Current liabilities

2,807

4,033

4,789

5,593

6,102

7,078

Net Current Assets

4,346

3,539

3,582

4,476

5,654

7,109

Others

Total Assets

9,516

8,714

9,378

11,205

12,605

14,315

August 5, 2016

United Phosphorus | 1QFY2017 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2013 FY2014 FY2015 FY2016 FY2017E FY2018E

Profit before tax

944

1,172

1,413

1,679

2,062

2,455

Depreciation

354

407

425

502

573

629

Change in Working Capital

(806)

171

(86)

(955)

(553)

(720)

Less: Other income

Direct taxes paid

(203)

(222)

(244)

(283)

(412)

(491)

Cash Flow from Operations

288

1,528

1,508

942

1,670

1,873

(Inc.)/ Dec. in Fixed Assets

(771)

(653)

(753)

(1,000)

(800)

(Inc.)/ Dec. in Investments

(231)

Inc./ (Dec.) in loans and adv.

Other income

Cash Flow from Investing

(1,002)

(653)

(753)

(1,000)

(800)

Issue of Equity

(3)

Inc./(Dec.) in loans

(908)

1,413

(192)

(949)

Dividend Paid (Incl. Tax)

(129)

(201)

(214)

Others

1,733

(2,612)

(362)

1,278

(35)

(39)

Cash Flow from Financing

696

(1,403)

(768)

115

(249)

(253)

Inc./(Dec.) in Cash

(18)

(525)

(13)

620

820

Opening Cash balances

1,566

1,548

1,023

1,010

1,068

1,688

Closing Cash balances

1,548

1,023

1,010

1,068

1,688

2,508

August 5, 2016

United Phosphorus | 1QFY2017 Result Update

Key Ratios

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

34.3

24.1

21.8

18.5

15.6

13.1

P/CEPS

23.3

17.3

15.9

13.5

11.5

9.8

P/BV

5.6

4.8

4.3

3.7

3.1

2.5

Dividend yield (%)

0.4

EV/Sales

3.0

2.5

2.2

2.0

1.7

1.4

EV/EBITDA

18.5

14.3

12.0

11.1

9.3

7.8

EV / Total Assets

2.8

3.0

2.8

2.4

2.1

1.8

Per Share Data (`)

EPS (Basic)

17.0

24.3

26.7

31.5

37.4

44.6

EPS (fully diluted)

17.0

24.3

26.7

31.5

37.4

44.6

Cash EPS

25.0

33.8

36.7

43.2

50.7

59.3

DPS

2.5

Book Value

105.0

122.4

136.7

158.4

190.8

230.4

DuPont Analysis

EBIT margin

13.8

15.0

16.1

15.9

16.0

Tax retention ratio

78.5

81.1

82.7

83.1

80.0

Asset turnover (x)

1.4

1.5

1.6

1.7

ROIC (Post-tax)

15.4

18.5

20.3

21.0

20.4

21.8

Cost of Debt (Post Tax)

8.9

11.2

15.1

15.6

10.4

Leverage (x)

0.5

0.3

0.4

0.3

0.2

Operating ROE

18.6

21.9

22.0

22.9

23.8

24.1

Returns (%)

ROCE (Pre-tax)

14.4

17.7

19.9

20.8

20.6

21.1

Angel ROIC (Pre-tax)

20.0

23.2

24.7

25.6

25.9

27.6

ROE

17.1

21.0

20.6

21.4

21.2

Turnover ratios (x)

Asset Turnover (Gross Block)

1.8

1.9

1.8

1.9

2.0

Inventory / Sales (days)

Receivables (days)

102

Payables (days)

108

WCcycle (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

0.4

0.6

0.4

0.3

0.4

0.3

Net debt to EBITDA

1.5

1.8

1.0

0.8

1.2

0.8

Interest Coverage (EBIT / Int.)

3.0

3.3

3.5

3.4

4.9

5.7

August 5, 2016

United Phosphorus | 1QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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offering of securities of the company covered by Analyst during the past twelve months.

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contrary view, if any.

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Disclosure of Interest Statement

United Phosphorus

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

August 5, 2016