United Phosphorus - Focus on increasing share of proprietary/patented products - Motilal Oswal

Margin improvement, working capital management to drive RoE/RoCE improvement

We met with the senior global management team of United Phosphorus to get an update on their strategy, growth plans and understand their perspective on financial management.

Key takeaways:

- Key demand drivers in form of Food, Feed and Fuel are intact, limited arable land and water scarcity would continue to act as constraining factors. Further, increasing demand for quality would drive usage of agro-chemicals. However, climate variability is causing stress at farm level and volatility in the business.

- Focus to increase share of patented, proprietary products and branded formulations. Has dedicated teams focusing on innovation and patent products. It is targeting innovation rate with portfolio turnaround time of 6 years.

- Brazil is expected to be next big growth driver, as it ramps-up operations over next 3-4 years. UPL would be launching over 15 new products in next 3-4 years, based on its current registration pipeline. It would have complete product portfolio covering all major crops, which will help them to attain top-5 position.

- In developed markets (US & EU), it is building product portfolio on broad acre crops, where it has limited presence. It has infrastructure to cater to these crops now. Further, it is also focusing on new formulations with product enhancement and IP protection (for combination products). It would also leverage its current product portfolio by extending usage in new space/segment.

- Indian crop protection market is expected to grow at ~6.5% CAGR in next 5 years. UPL is targeting to developing and leveraging 5 mega brands with annual revenues of ~INR1b each. Further, it plans to launch 9 new products, majority of which would be proprietary/ patented.

- While it expects EBITDA margins to improve 100bp in FY14, there are multiple levers for further margin improvement over next 2-3 years. It is confident of controlling working capital despite scale-up in working capital intensive Brazilian market. The management indicated that it would continue to maintain cash/liquidity of INR10-12b atleast, which is about 1 month trade flow.

- Valuation and view: The stock trades at very attractive valuation of 6.7x/5.6x FY14/FY15 EPS and 1.2x/1x FY14/FY15 P/B. Maintain Buy with target price of INR203 (~8x FY15E EPS).

Source : Equity Bulls

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