2QFY2016 Result Update | Agrichemical

November 4, 2015

United Phosphorus

ACCUMULATE

CMP

`451

Performance Highlights

Target Price

`510

Y/E March (` cr)

2QFY2016 1QFY2016

% chg (qoq) 2QFY2015

% chg (yoy)

Investment Period

12 Months

Net sales

2,729

3012

(9.4)

2618

4.2

Other income

89.3

(16.8)

Stock Info

Gross profit

1362

1510

(9.8)

1323

2.9

Sector

Agrichemical

Operating profit

450

535

(15.8)

436

3.3

Market Cap (` cr)

19,347

Adj. net profit

190

285

(33.2)

181

5.5

Source: Company, Angel Research

Net Debt (` cr)

1,113

Beta

0.9

For 2QFY2016, United Phosphorous (UPL) posted a 4.2% yoy growth in sales to

52 Week High / Low

576/300

`2,729cr. The volume growth during the period was of 13% yoy, while price increases

Avg. Daily Volume

184430

contributed around 2% yoy. The exchange rate on the other hand, impacted adversely

Face Value (`)

by 11% yoy. On the operating front, the gross margins came in at 49.9% V/s 50.5% in

2QFY2015, which led the OPM to come in at 16.5% V/s 16.7% in 2QFY2015. The

BSE Sensex

26,591

company posted a

12.3% yoy dip in its PAT for the quarter excluding the

Nifty

8,061

extra-ordinaries and profits from associates and subsidiaries. However, a higher share

Reuters Code

UNPO.BO

of profitability from associates and subsidiaries has enabled the company posted to post

Bloomberg Code

UNTP@IN

an Adj. PAT of `190cr V/s `180cr in 2QFY2015, a yoy growth of 5.5%. We maintain

our Accumulate rating on the stock with a price target of `510.

Shareholding Pattern (%)

Quarterly highlights: For 2QFY2016, the company posted a 4.2% yoy growth in sales to

Promoters

29.8

`2,729cr. Its key markets - India and Latin America, posted a 5% and 8% yoy growth,

MF / Banks / Indian Fls

14.1

respectively. ROW and USA posted a yoy growth of 12% and 10%, respectively. The

FII / NRIs / OCBs

49.1

only market to decline was Europe, which posted a 10% yoy dip in sales. The volume

Indian Public / Others

7.0

growth during the period was 13% yoy, while price increases contributed around

2% yoy. The exchange rate on the other hand impacted adversely by 11% yoy. On the

operating front, the gross margin came in at 49.9% V/s 50.5% in 2QFY2015, which led

Abs. (%)

3m 1yr

3yr

the OPM to come in at 16.5% V/s 16.7% in 2QFY2015. The company posted an Adj.

Sensex

(5.7)

(4.6)

41.8

PAT of `190cr V/s `180cr in 2QFY2015, a yoy growth of 5.5%.

UPL

(16.5)

31.6

282.9

Outlook and valuation: We expect UPL to post a CAGR of 15.0% and 20.0% in its sales

and PAT respectively, over FY2015-17E. At the current market price, we recommend an

3-year price chart

600

Accumulate on the stock with a price target of `510.

500

Key financials (Consolidated)

400

Y/E March (` cr)

FY2014

FY2015

FY2016E

FY2017E

300

200

Total revenue

10,580

11,911

13,698

15,752

100

% chg

17.4

12.6

15.0

Adj. profit

1,040

1,147

1,376

1,651

O M

% chg

38.0

10.2

20.0

EBITDA (%)

17.3

18.3

17.6

Source: Company, Angel Research

EPS (`)

24.3

26.7

32.1

38.5

P/E (x)

18.5

16.8

14.0

11.6

P/BV (x)

3.7

3.3

2.7

2.3

RoE (%)

21.0

20.6

21.4

21.3

RoCE (%)

17.7

19.9

19.8

20.5

Sarabjit Kour Nangra

EV/Sales (x)

2.4

2.1

1.8

1.5

+91-22-3935 7800 ext. 6806

EV/EBITDA (x)

13.9

11.6

10.3

8.6

[email protected]

Source: Company, Angel Research; Note: CMP as of November 3, 2015

Please refer to important disclosures at the end of this report

United Phosphorus | 2QFY2016 Result Update

Exhibit 1: 2QFY2016 Performance (Consolidated)

Y/E March (` cr)

2QFY2016

1QFY2016

% chg (qoq) 2QFY2015

% chg (yoy) 1HFY2016 1HFY2015

% chg

Net sales

2,729

3,012

(9.4)

2,618

4.2

5,740

5,338

7.5

Other income

89.3

(16.8)

114

(31.1)

Total income

2,780

3,039

(8.5)

2,680

3.7

5,819

5,452

6.7

Gross profit

1362

1510

(9.8)

1323

2.9

2871

2723

5.5

Gross margin (%)

49.9

50.1

50.5

50.0

51.0

Operating profit

450

535

(15.8)

436

3.3

985

922

6.8

Operating margin (%)

16.5

17.8

16.7

17.2

17.3

Financial cost

135

102

33.0

140

(3.3)

237

257

Depreciation

111

108

2.8

109

2.1

220

213

3.1

PBT

255

352

(27.6)

249

2.5

607

566

7.2

Provision for taxation

11.4

67.4

146

134

9.1

PAT Before Exc. And MI

178

281

(36.7)

203

(12.3)

456

432

5.5

Minority Income/ ( Exp.)

(2)

Income from Associate/ (Exp)

Extra ordinary Income/( Exp.)

(8)

(13)

(18)

(20)

(19)

Reported PAT

185

275

(32.6)

166

11.5

453

416

8.9

Adjusted PAT

190

285

(33.2)

181

5.5

468

431

8.8

EPS (`)

4.4

6.7

4.1

10.9

10.0

Source: Company, Angel Research

Top-line growth mainly led by ROW and Latin America

For the quarter, the company posted sales (including export incentives) of `2,801cr

V/s `2,662cr in 2QFY2015, registering a yoy growth of 4.2%. Domestic sales

(`715cr) rose by 5% yoy, while exports, including related incentives (`2,086cr),

posted a growth of 5.4% yoy.

The growth was aided by volume growth of 13% yoy while pricing grew by 2% yoy.

An 11% yoy adverse impact on account of the exchange rate proportionately

weighed on growth.

In terms of geographies, RoW (`396cr) posted a 12.0% yoy growth, while India

(`715cr) posted a 5% yoy growth, during the quarter. Europe (`358cr) on the other

hand de-grew by 10% yoy, while Latin America (`958cr) grew by 8.0% yoy. USA

(`374cr), the key market for the company, posted a yoy growth

of 10.0%.

The Indian market posted a moderate growth owing to lower-than-expected

rainfall in the country, which is likely to impact the Rabi crop as well. Europe

witnessed dry and high temperatures and is likely to report flat growth or possibly

a decline.

November 4, 2015

United Phosphorus | 2QFY2016 Result Update

Exhibit 2: Sales Break-up (Marketwise)

100%

923

80%

1,557

1,250

1,354

1,594

60%

505

401

805

358

332

40%

1,083

401

686

603

715

20%

861

532

553

342

374

2QFY2015

3QFY2015

4QFY2015

1QFY2016

2QFY2016

North America

India

Others

Source: Company

Exhibit 3: Sales performance (including export incentives)

Exhibit 4: Growth break-up

3900

3,563

3600

3300

3,010

3,064

3000

2,801

2,662

2700

2400

2100

1800

1500

(5)

1200

900

600

(10)

300

(11)

(15)

2QFY2015

3QFY2015

4QFY2015

1QFY2016

2QFY2016

Exchange impact

Realisation

Volume

Source: Company, Angel Research

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

(2)

2QFY2015

3QFY2015

4QFY2015

1QFY2016

2QFY2016

Realisation

Volume

Source: Company, Angel Research

November 4, 2015

United Phosphorus | 2QFY2016 Result Update

Invvestment 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 CY2015-16, the global economy is expected to

grow by 3-4%. 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.

November 4, 2015

United Phosphorus | 2QFY2016 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 15.0% and 20.0% CAGR in sales and PAT, respectively,

over FY2015-17E. The stock is trading at 11.6x FY2017E EPS, which we believe,

provides some room for appreciation, hence we recommend an Accumulate rating

on the stock.

Exhibit 8: Key assumption

FY2016E

FY2017E

Sales growth

15.0

EBITDA margin

17.6

Tax rate

20.0

Source: Company, Angel Research

Exhibit 9: P/E band

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)

(`)

(%) FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E Sales PAT

Rallis

Neutral

4,011

206

21.8

18.7

2.0

1.7

14.0

11.9

21.1

21.3

15.1

16.7

United Phosphorus Accumulate

19,347

451

510

13.1

14.0

11.6

1.8

1.5

10.3

8.6

21.4

21.3

15.0

20.0

Source: Company, Angel Research, Bloomberg

November 4, 2015

United Phosphorus | 2QFY2016 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 `11,911cr

for the year ended March 2015.

Profit & Loss Statement (Consolidated)

Y/E March (` cr)

FY2012

FY2013

FY2014

FY2015

FY2016E

FY2017E

Net Sales

7,534

9,010

10,580

11,911

13,698

15,752

Other operating income

137

184

191

Total operating income

7,671

9,195

10,771

11,956

13,743

15,798

% chg

33.2

19.9

17.1

11.0

14.9

15.0

Total Expenditure

6,328

7,568

8,751

9,736

11,281

12,973

Net Raw Materials

4,058

4,687

5,441

6,016

7,027

8,081

Other Mfg costs

590

741

1,034

1,164

1,315

1,512

Personnel

686

853

946

1,043

1,199

1,379

Other

994

1,287

1,330

1,513

1,740

2,001

EBITDA

1,206

1,442

1,829

2,175

2,417

2,780

% chg

28.1

19.6

26.8

19.0

11.1

15.0

(% of Net Sales)

16.0

17.3

18.3

17.6

Depreciation& Amortisation

292

354

407

425

486

507

EBIT

1,051

1,273

1,613

1,796

1,976

2,318

% chg

25.3

21.1

26.7

11.4

10.0

17.3

(% of Net Sales)

13.7

13.8

15.0

14.4

14.7

Interest & other Charges

415

429

487

517

362

Other Income

131

(% of PBT)

Recurring PBT

734

917

1,257

1,410

1,746

2,088

% chg

11.4

25.0

37.1

12.2

23.8

19.6

Extraordinary Expense/(Inc.)

(5)

(2)

PBT (reported)

729

944

1,172

1,413

1,746

2,088

Tax

128

203

222

244

349

418

(% of PBT)

17.6

21.5

18.9

17.3

20.0

PAT (reported)

601

741

950

1,169

1,397

1,670

Add: Share of earnings of asso.

(40)

Less: Minority interest (MI)

(2)

Prior period items

PAT after MI (reported)

556

775

950

1,144

1,376

1,651

ADJ. PAT

561

754

1,040

1,147

1,376

1,651

% chg

1.6

34.3

38.0

10.2

20.0

(% of Net Sales)

7.5

8.4

9.8

9.6

10.0

10.5

Basic EPS (`)

12.2

17.0

24.3

26.7

32.1

38.5

Fully Diluted EPS (`)

12.2

17.0

24.3

26.7

32.1

38.5

% chg

1.6

40.1

42.5

10.2

20.0

November 4, 2015

United Phosphorus | 2QFY2016 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2012

FY2013

FY2014

FY2015

FY2016E

FY2017E

SOURCES OF FUNDS

Equity Share Capital

Preference Capital

Reserves& Surplus

4,081

4,557

5,162

5,775

6,936

8,373

Shareholders’ Funds

4,173

4,645

5,247

5,860

7,022

8,459

Minority Interest

250

234

172

131

Total Loans

3,389

4,203

2,873

2,781

Other Long term liabilities

301

395

311

594

Long Term Provisions

Deferred Tax Liability

(6)

(13)

Total Liabilities

8,158

9,516

8,714

9,378

10,583

12,063

APPLICATION OF FUNDS

Gross Block

4,687

5,386

6,039

6,792

7,092

7,392

Less: Acc. Depreciation

2,605

3,173

3,580

4,005

4,491

4,998

Net Block

2,082

2,213

2,459

2,787

2,601

2,394

Capital Work-in-Progress

306

378

Goodwill / Intangilbles

1,141

1,277

1,212

1,449

Investments

795

1,025

737

764

Long Term Loan & Adv.

321

277

389

418

481

553

Current Assets

5,625

7,154

7,572

8,372

10,419

12,860

Cash

1,566

1,548

1,023

1,010

1,331

2,409

Loans & Advances

602

852

771

586

1,295

1,489

Other

3,458

4,754

5,779

6,776

7,793

8,961

Current liabilities

2,111

2,807

4,033

4,789

5,508

6,334

Net Current Assets

3,514

4,346

3,539

3,582

4,911

6,526

Others

Total Assets

8,158

9,516

8,714

9,378

10,583

12,063

November 4, 2015

United Phosphorus | 2QFY2016 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E

Profit before tax

729

944

1,172

1,413

1,746

2,088

Depreciation

292

354

407

425

486

507

Change in Working Capital

318

(806)

171

(86)

(1,070)

(609)

Less: Other income

Direct taxes paid

(128)

(203)

(222)

(244)

(349)

(418)

Cash Flow from Operations

1,211

288

1,528

1,508

813

1,568

(Inc.)/ Dec. in Fixed Assets

(989)

(771)

(653)

(753)

(300)

(Inc.)/ Dec. in Investments

(231)

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

Other income

Cash Flow from Investing

(961)

(1,002)

(653)

(753)

(300)

Issue of Equity

(3)

Inc./(Dec.) in loans

(989)

(908)

1,413

(192)

(0)

Dividend Paid (Incl. Tax)

(134)

(129)

(201)

(214)

Others

1,738

1,733

(2,612)

(362)

Cash Flow from Financing

615

696

(1,403)

(768)

(192)

(190)

Inc./(Dec.) in Cash

866

(18)

(525)

(13)

321

1,078

Opening Cash balances

700

1,566

1,548

1,023

1,010

1,331

Closing Cash balances

1,566

1,548

1,023

1,010

1,331

2,409

November 4, 2015

United Phosphorus | 2QFY2016 Result Update

Key Ratios

Y/E March

FY2012

FY2013

FY2014

FY2015

FY2016E

FY2017E

Valuation Ratio (x)

P/E (on FDEPS)

36.9

26.3

18.5

16.8

14.0

11.6

P/CEPS

24.3

17.9

13.3

12.2

10.3

8.9

P/BV

5.0

4.3

3.7

3.3

2.7

2.3

Dividend yield (%)

0.6

EV/Sales

3.4

2.9

2.4

2.1

1.8

1.5

EV/EBITDA

21.0

18.0

13.9

11.6

10.3

8.6

EV / Total Assets

3.1

2.7

2.9

2.7

2.4

2.0

Per Share Data (`)

EPS (Basic)

12.2

17.0

24.3

26.7

32.1

38.5

EPS (fully diluted)

12.2

17.0

24.3

26.7

32.1

38.5

Cash EPS

18.5

25.0

33.8

36.7

43.4

50.4

DPS

2.5

Book Value

90.4

105.0

122.4

136.7

163.8

197.4

DuPont Analysis

EBIT margin

13.7

13.8

15.0

14.4

14.7

Tax retention ratio

82.4

78.5

81.1

82.7

80.0

Asset turnover (x)

1.4

1.5

1.6

1.7

1.8

ROIC (Post-tax)

15.8

15.4

18.5

20.3

19.6

21.3

Cost of Debt (Post Tax)

11.3

8.9

11.2

15.1

10.4

Leverage (x)

0.5

0.3

0.1

Operating ROE

18.0

18.6

21.9

22.0

21.9

22.6

Returns (%)

ROCE (Pre-tax)

14.4

17.7

19.9

19.8

20.5

Angel ROIC (Pre-tax)

19.5

20.0

23.2

24.7

24.6

26.7

ROE

14.2

17.1

21.0

20.6

21.4

21.3

Turnover ratios (x)

Asset Turnover (Gross Block)

1.8

1.9

2.0

2.2

Inventory / Sales (days)

Receivables (days)

102

Payables (days)

102

108

WCcycle (ex-cash) (days)

105

Solvency ratios (x)

Net debt to equity

0.5

0.4

0.6

0.4

0.3

0.2

Net debt to EBITDA

2.1

1.5

1.8

1.0

0.8

0.6

Interest Coverage (EBIT / Int.)

2.5

3.0

3.3

3.5

5.5

6.4

November 4, 2015

United Phosphorus | 2QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.

While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed 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,

redistributed or passed on, directly or indirectly.

Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from

or in connection with the use of this information.

Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the

latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may

have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

UPL

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

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)

November 4, 2015