United Phosphorus still a good bet for long-term investors

India's biggest agrochemicals maker United Phosphorus (UPL) is trading at attractive valuations given its growth prospects and large size. Improved global agrochemicals demand and the company's growing foothold in the Brazilian market via recent acquisitions will maintain its growth in coming quarters. Long term investors should take exposure to the stock.

Growth drivers

Traditionally, United Phosphorus has adopted an inorganic route to expand its market reach and product portfolio. Last month, UPL acquired 51% stake in DVA Agro Brazil for $150 million. DVA had revenues of $130 million in 2010. It has a formulations plant and is expanding capacity to include a wider range of crop protection products. This is UPL's second acquisition in the current fiscal in the fast growing Brazilian crop protection market which is estimated at $7 billion.

The company had acquired 50% stake in Sipcam Isagro Brazil (SIB) in April 2011. With the stake acquisitions in SIB and DVA, UPL will be able to penetrate deeper into the Brazilian market with a larger product portfolio. In December 2010, the company had also acquired US-based RiceCo, which specialises in products for rice crops. These acquisitions are expected to drive growth for UPL over the next 2-3 years.

The company, which derives 70% of its total revenues from overseas, is already seeing a strong volume growth and has posted two consecutive quarters of strong profit growth. Even the European market posted a 6% y-o-y volume growth in the June 2011 quarter after seven consecutive quarters of decline.

Financials

Although UPL benefitted from strong agrochemicals demand across the globe, rising input prices seem to have taken a toll. During the June quarter, UPL's operating margin dropped by 130 basis points to 18.8% on account of rising raw material costs. Its bottom line grew 29% to Rs 185 crore during the quarter against the year ago period. The top line grew 27% to Rs 1,885 crore.

UPL has revised its revenue guidance for FY12 upwards to 25-30% from 12-14% earlier thanks to acquisitions and improved volumes. Despite operating margin contraction during the quarter, UPL has maintained its profitability margin guidance of 20-21% for FY12.

Although the revenue guidance looks achievable with the consolidation of acquired businesses and volume growth, maintaining a high margin looks difficult given the rising raw material prices.

Valuations

At the current price of Rs 154, the stock trades at 11.7 times its consolidated earnings for the trailing 12 months. This compares with peers like Rallis India and Bayer Cropscience which are trading at a P/E of 20-22 currently. The company has been trading at a low valuation for the past two quarters now.