3QFY2017 Result Update | Agrichemical

January 27, 2017

United Phosphorus

NEUTRAL

CMP

`740

Performance Highlights

Target Price

Y/E March (` cr)

3QFY2017 2QFY2017

% chg (qoq) 3QFY2016

% chg (yoy)

Investment Period

Net sales

3,855

3510

9.8

3259

18.3

Other income

164

1,945.4

198

(17.6)

Stock Info

Gross profit

2052

1483

38.4

1763

16.4

Sector

Agrichemical

Operating profit

685

699

(1.9)

479

43.0

Market Cap (` cr)

37,506

Adj. net profit

457

430

6.2

300

52.4

Source: Company, Angel Research, 2QFY2017 and 2QFY2016 numbers include Advanta seed numbers

Net Debt (` cr)

1,113

Beta

1.0

UPL posted robust numbers for 3QFY2017. In sales, the company posted gross

52 Week High / Low

755/342

revenues of `3,987cr v/s `3,377cr in 3QFY2016, growth of 18% yoy. The growth

Avg. Daily Volume

124,988

was driven by volume (18% yoy), while price dip was around 3% and exchange

Face Value (`)

gains added 3% to the top-line rise. On EBITDA front, the company posted an

BSE Sensex

27,708

EBITDA of 17.8% v/s 14.7% in 3QFY2016. Along with this, dip of 15% and 2% in

Nifty

8,603

the deprecation & finance cost respectively aided the PBT to grow by 68% yoy.

Reuters Code

UNPO.BO

Consequently, PAT came in at `457cr v/s `300cr in 3QFY2016, growth of 52.4%

Bloomberg Code

UNTP@IN

yoy. The management has maintained guidance of 12-15% revenue growth (owing

to presence in fast-growing countries) and 60-100bps improvement in EBITDA margin.

We maintain our neutral rating on the stock.

Shareholding Pattern (%)

Promoters

27.7

Quarterly highlights: In sales, the company posted gross revenues of `3,987cr v/s

MF / Banks / Indian Fls

12.5

`3,377cr in 3QFY2016, growth of 18.0% yoy. The growth was driven by volume

FII / NRIs / OCBs

53.0

(18% yoy), while price dip was around 3% and exchange gains added 3% to the

Indian Public / Others

6.8

top-line rise. In terms of geography - Latin America (`1,736cr, rose by 37% yoy),

India (`626, rose by 20%), ROW (`636cr, yoy rise of 2%), Europe (`329, posted a

yoy growth of 8%). However, US (`660cr) sales were flat during the quarter. On

Abs. (%)

3m 1yr

3yr

EBITDA front, the company posted an EBITDA of 17.8% v/s 14.7% in 3QFY2016.

Sensex

(1.4)

13.2

31.1

Along with this, dip of 15% and 2% in the deprecation & finance cost respectively

UPL

4.0

84.5

261.8

aided the PBT to grow by 68% yoy. Consequently, PAT, came in at `457cr v/s

`300cr in 3QFY2016, growth of 52.4% yoy.

3-year price chart

Outlook and Valuation: We expect UPL to post a CAGR of 25.9% and 17.7% in its

800

700

sales and PAT respectively over FY2016-18E. At the current market price, we

600

recommend a Neutral 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

16,516

20,722

100

% chg

12.6

9.8

26.2

25.5

Adj. profit

1,147

1,352

1,800

2,215

% chg

10.2

17.9

33.2

23.1

EBITDA (%)

18.3

18.5

17.5

Source: Company, Angel Research

EPS (`)

26.7

31.5

32.4

43.7

P/E (x)

26.0

22.1

21.5

15.9

P/BV (x)

5.1

4.4

4.3

3.5

RoE (%)

20.6

21.4

21.9

24.1

RoCE (%)

19.9

20.8

21.3

23.7

Sarabjit Kour Nangra

EV/Sales (x)

3.0

2.8

2.2

1.7

+91-22-3935 7800 ext. 6806

EV/EBITDA (x)

16.7

15.3

12.6

9.9

[email protected]

Source: Company, Angel Research; Note: CMP as of January 25, 2017, Includes Advanta sales

Please refer to important disclosures at the end of this report

United Phosphorus | 3QFY2017 Result Update

Exhibit 1: 3QFY2016 Performance (Consolidated)

Y/E March (` cr)

3QFY2017 2QFY2017

% chg (qoq) 3QFY2016

% chg (yoy) 9MFY2017 9MFY2016

% chg

Net sales

3,855

3,510

9.8

3,259

18.3

10,784

9,413

14.6

Other income

164

1,945.4

198

(17.6)

335

454

(26.3)

Total income

4,018

3,518

14.2

3,457

16.2

11,119

9,868

12.7

Gross profit

2052

1483

38.4

1763

16.4

5717

4901

16.7

Gross margin (%)

53.2

42.3

54.1

53.0

52.1

Operating profit

685

699

(1.9)

479

43.0

1806

1411

28.0

Operating margin (%)

17.8

19.9

14.7

16.7

15.0

Financial cost

176

106

66.3

209

(15.5)

499

508

Depreciation

162

169

(4.2)

166

(2.2)

485

477

1.7

PBT

511

432

18.3

304

68.3

1156

880

31.4

Provision for taxation

(23)

133

53.9

PAT Before Exc. And MI

464

430

8.0

326

42.3

1024

794

28.9

Minority Income/ ( Exp.)

Income from Associate/ (Exp)

(3)

(37)

(32)

(44)

Extra ordinary Income/( Exp.)

(28)

(19)

(82)

(46)

Reported PAT

459

402

14.2

281

63.3

986

746

32.2

Adjusted PAT

457

430

6.2

300

52.4

1068

792

34.9

EPS (`)

9.0

8.5

7.0

24.9

18.5

Source: Company, Angel Research, 2QFY2017 and 1QFY2017 results include Advanta numbers, rest are excluding the same

Top-line growth mainly led by Latin America and India

In sales, the company posted gross revenues of `3,987cr v/s

`3,377cr in

3QFY2016, growth of 18% yoy. The growth was driven by volume (18% yoy), while

price dip was around 3% and exchange gains added 3% rise to the top-line. In

terms of geography - Latin America (`1,736cr, rose by 37% yoy), India (`626,

rose by 20%), ROW (`636cr, yoy rise of 2%), Europe (`329, yoy growth of 8%).

However, US (`660cr) sales were flat during the quarter.

India witnessed good rainfall except for the states of Karnataka, Tamil Nadu and

Gujarat. However, there was a decline in seeds sales compared to last year. In

Latin America, Brazil witnessed a favorable season this year with expansion in area

and yield improvements. Hence, UPL benefited from its well positioned fungicide

portfolio to manage Asian Rust disease. UPL continued to grow across Latin

America in spite of currency headwinds. Due to lower margins and poor payment

terms, operations in Argentina are being consciously curtailed and focus is shifted

to high margin products. Advanta seeds continued to see improved acceptance in

Brazil.

In Europe, the company witnessed good herbicides season for Sugar beet, where

UPL has good product portfolio. Good rains in Southern Europe supported

fungicide sales, mainly on Horticulture Crops (Potato and Vines); though cereals

fungicides sale was lower. Medium term outlook is static in Europe, with moderate

growth in CIS

January 27, 2017

United Phosphorus | 3QFY2017 Result Update

Exhibit 2: Sales Break-up (Marketwise)

100%

1,250

80%

2,080

1,893

1,916

2,282

60%

562

872

341

40%

304

329

1,060

521

417

1,026

626

20%

659

971

638

660

375

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

North America

India

Others

Source: Company

Exhibit 3: Sales performance (including export incentives)

Exhibit 4: Growth break-up

4,292

4200

3,987

3,658

3,510

3600

3,377

3000

2400

1800

1200

600

(5)

(3)

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Exchange impact

Realisation

Volume

Source: Company, Angel Research

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

(5)

(2)

(3)

(5)

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Realisation

Volume

Source: Company, Angel Research

January 27, 2017

United Phosphorus | 3QFY2017 Result Update

EBITDA margin expands

On the operating front, the gross margin came in at 53.2% (v/s 54.1% in

3QFY2016), which aided the OPM for the quarter to come in at 17.8% (v/s 14.7%

in 3QFY2016). The expansion in OPM was more than the gross margin

expansion, on the back of other expenses, which rose only by 1.1% yoy.

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

17.8

16.0

15.0

14.0

14.7

14.6

13.0

12.0

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research

Adjusted Net Profit grew 52.4% yoy

The company posted a 52.4% yoy growth in its Adjusted PAT, excluding the extra-

ordinaries and profits from associates and subsidiaries.

Exhibit 7: Adjusted PAT trend

700

600

500

400

300

200

100

300

574

430

222

457.1

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Adj PAT

% YoY

Source: Company, Angel Research

January 27, 2017

United Phosphorus | 3QFY2017 Result Update

Invvestment arguments

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

a sweet spot

The global agrichemical industry, valued at US$56bn (CY2015), is dominated by

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

which enjoy a large market share of the patented (23%) and off-patent (54%)

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

high entry barriers for pure generic players. Thus, of the total pie worth US$30bn,

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

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 3-4%. Assuming this trend plays out in

terms of growth for the agrichemical industry and the same rate of genericization

occurs, then the agrichemical generic industry could log in 6-8% yoy growth during

the period and garner a higher market share.

A global generic play

UPL is the third largest global generic agrichemical player 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.

Advanta - An Entry into seeds business

During FY2016, UPL announced a merger of Advanta with itself. With this, the

company has made its foray into the seed business, thus, widening its business

offerings in the Agri-business. The company had sales of around US$204mn in

2015, with OPM of around 15-16%. It is the 11^th largest seed company globally,

with world leadership in Sorghum. Along with this, it also completes the company’s

business portfolio, in-line with the other major Agri-businesses, who have around

5-20% (Monsanto and DuPont have around 65% of their sales mix through seeds)

of their sales mix through seeds business. While the acquisition improves the

presence of the company in the low capital intensive industry coupled with the

propriety products, which will yield long term profitability; the near term challenges

include high R&D cost coupled with long legislation period for the product

commercialization.

According to the industry numbers, the international seed sector is growing at 6%

per annum. In value terms, the Indian hybrid seed sector, estimated to be worth

January 27, 2017

United Phosphorus | 3QFY2017 Result Update

`12,000cr comprises some 14 states seed corporations and two national-level

corporations, 20 large players including multinationals and around 500 small

regional players. About 10 domestic and multinational companies control over

80% of the market. The market has been growing at 15-20% annually over the

past several years, and is projected to reach around `18,000cr by 2018. Though,

we have included the Advanta numbers in our projections, we have been

conservative on the same.

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, and

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 25.9% and 17.7% CAGR in sales and PAT respectively

over FY2016-18E. The stock is trading at 15.9x FY2018E EPS, which we believe

provides very little room for appreciation. Hence, we recommend a Neutral rating

on the stock.

Exhibit 8: Key assumption

FY2017E

FY2018E

Sales growth

26.2

25.5

EBITDA margin

17.5

Tax rate

20.0

Source: Company, Angel Research

Exhibit 9: P/E band

800

700

600

500

400

300

200

100

Price

10x

12x

14x

Source: Company, Angel Research

January 27, 2017

United Phosphorus | 3QFY2017 Result Update

Exhibit 10: Peer valuation

Company Reco

Mcap

CMP TP Upside

P/E (x)

EV/Sales (x)

EV/EBITDA (x)

RoE (%)

CAGR (%)

(` cr)

(`)

(%)

FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 Sales PAT

Rallis

Neutral

4,424

228

22.4

17.5

2.1

1.8

14.7

12.8

16.5

18.0

15.0

22.3

UPL

Neutral

37,505

740

21.5

15.9

2.2

1.7

12.6

9.9

21.4

24.1

25.9

17.7

Source: Company, Angel Research, Bloomberg, All numbers in FY17 and FY18 are expected numbers

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. During FY2016, UPL announced its merger with

Advanta. With this, the company has made its foray into the seed business, thus,

widening its business offerings in the Agri-business.

January 27, 2017

United Phosphorus | 3QFY2017 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Net Sales

9,010

10,580

11,911

13,083

16,516

20,722

Other operating income

184

191

219

Total operating income

9,195

10,771

11,956

13,302

16,735

20,941

% chg

19.9

17.1

11.0

11.3

25.8

25.1

Total Expenditure

7,568

8,751

9,736

10,663

13,619

17,088

Net Raw Materials

4,687

5,441

6,016

6,411

8,094

10,155

Other Mfg costs

741

942

866

1,164

1,470

1,844

Personnel

853

946

1,043

1,224

1,545

1,939

Other

1,287

1,422

1,810

1,864

2,510

3,150

EBITDA

1,442

1,829

2,175

2,419

2,897

3,634

% chg

19.6

26.8

19.0

11.2

26.2

25.5

(% of Net Sales)

16.0

17.3

18.3

18.5

17.5

Dep. & Amortisation

354

407

425

502

573

629

EBIT

1,273

1,613

1,796

2,137

2,542

3,224

% chg

21.1

26.7

11.4

19.0

26.4

26.8

(% of Net Sales)

13.8

15.0

16.1

15.4

Interest & other Charges

429

487

517

622

502

Other Income

131

112

(% of PBT)

Recurring PBT

917

1,257

1,410

1,626

2,152

2,834

% chg

25.0

37.1

12.2

15.3

42.0

31.7

Extraordinary Exp./(Inc.)

(2)

(53)

PBT (reported)

944

1,172

1,413

1,679

2,152

2,834

Tax

203

222

244

283

462

567

(% of PBT)

21.5

18.9

17.3

16.9

20.0

PAT (reported)

741

950

1,169

1,396

1,690

2,267

Add: Share of earnings of

(31)

(35)

(39)

asso.

Less: Minority interest (MI)

(2)

Prior period items

PAT after MI (reported)

775

950

1,144

1,299

1,642

2,215

ADJ. PAT

754

1,040

1,147

1,352

1,642

2,215

% chg

34.3

38.0

10.2

17.9

33.2

34.9

(% of Net Sales)

8.4

9.8

9.6

10.3

10.9

10.7

Basic EPS (`)

17.0

24.3

26.7

31.5

32.4

43.7

Fully Diluted EPS (`)

17.0

24.3

26.7

31.5

32.4

43.7

% chg

40.1

42.5

10.2

17.9

2.7

34.9

January 27, 2017

United Phosphorus | 3QFY2017 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity Share Capital

101

Preference Capital

Reserves& Surplus

4,557

5,162

5,775

6,705

8,094

10,055

Shareholders’ Funds

4,645

5,247

5,860

6,791

8,195

10,156

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

12,622

14,597

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

579

727

Current Assets

7,154

7,572

8,372

10,069

12,265

15,613

Cash

1,548

1,023

1,010

1,068

1,489

2,243

Loans & Advances

852

771

586

840

1,380

1,581

Other

4,754

5,779

6,776

8,162

9,396

11,789

Current liabilities

2,807

4,033

4,789

5,593

6,641

8,332

Net Current Assets

4,346

3,539

3,582

4,476

5,624

7,281

Others

Total Assets

9,516

8,714

9,378

11,205

12,622

14,597

January 27, 2017

United Phosphorus | 3QFY2017 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

2,310

2,834

Depreciation

354

407

425

502

573

629

Change in Working Capital

(806)

171

(86)

(955)

(950)

(1,247)

Less: Other income

Direct taxes paid

(203)

(222)

(244)

(283)

(462)

(567)

Cash Flow from Operations

288

1,528

1,508

942

1,471

1,649

(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)

(253)

Others

1,733

(2,612)

(362)

1,278

158

Cash Flow from Financing

696

(1,403)

(768)

115

(234)

(95)

Inc./(Dec.) in Cash

(18)

(525)

(13)

421

754

Opening Cash balances

1,566

1,548

1,023

1,010

1,068

1,489

Closing Cash balances

1,548

1,023

1,010

1,068

1,489

2,243

January 27, 2017

United Phosphorus | 3QFY2017 Result Update

Key Ratios

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

40.8

28.7

26.0

22.1

21.5

15.9

P/CEPS

27.8

20.6

19.0

16.1

15.9

12.4

P/BV

6.6

5.7

5.1

4.4

4.3

3.5

Dividend yield (%)

0.4

EV/Sales

4.1

3.4

3.0

2.8

2.2

1.7

EV/EBITDA

25.6

19.9

16.7

15.3

12.6

9.9

EV / Total Assets

3.9

4.2

3.9

3.3

2.9

2.5

Per Share Data (`)

EPS (Basic)

17.0

24.3

26.7

31.5

32.4

43.7

EPS (fully diluted)

17.0

24.3

26.7

31.5

32.4

43.7

Cash EPS

25.0

33.8

36.7

43.2

43.7

56.1

DPS

2.5

Book Value

105.0

122.4

136.7

158.4

161.7

200.4

DuPont Analysis

EBIT margin

13.8

15.0

16.1

15.4

Tax retention ratio

78.5

81.1

82.7

83.1

80.0

Asset turnover (x)

1.4

1.5

1.6

1.7

1.9

ROIC (Post-tax)

15.4

18.5

20.3

21.0

22.3

23.9

Cost of Debt (Post Tax)

8.9

11.2

15.1

15.6

10.4

Leverage (x)

0.5

0.3

0.4

0.2

Operating ROE

18.6

21.9

22.0

22.9

26.4

26.9

Returns (%)

ROCE (Pre-tax)

14.4

17.7

19.9

20.8

21.2

23.2

Angel ROIC (Pre-tax)

20.0

23.2

24.7

25.6

26.6

30.2

ROE

17.1

21.0

20.6

21.4

21.9

24.1

Turnover ratios (x)

Asset Turnover (Gross Block)

1.8

1.9

1.8

2.0

2.3

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

5.4

6.4

January 27, 2017

United Phosphorus | 3QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public

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

UPL

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)

January 27, 2017