UPL: Strengthening its Brazil presence

UPL is buying a 40% equity stake in Brazilian firm Sinagro group, which is a distributor of farm inputs-crop protection, fertilisers and seeds in the Cerrado region of Brazil. While the price for the deal are not known, the deal is unlikely to be of the size of its 2011 acquisition of Brazil's DVA Agro where it got a 51% stake for $150 million. Thus the deal is unlikely to drain UPL's cash flows and given its comfortable debt to equity ratio, it can easily finance the same, according to Sarabjit Kour Nangra of Angel Broking.

While not a major acquisition from the deal size point of view, the Sinagro buy according to analysts at Morgan Stanley is strategic to UPL's sales. DVA Agro products will now have better access to Sinagro's distribution and contract farming business overall and in particular its Unizeb Gold (Mancozeb) brand used for soyabeans. Brazil is the world's largest soybeans agri-chemical market in the world.

The $11.5 billion Brazilian market is key for UPL given that it now contributes about 16% to the company's revenues and has been growing at 25% annually. The company's market share in this key region is 2.7%. The company has been enhancing its presence in the Brazilian market. Last year, it had increased its shareholding in Brazilian firm UPL do Brasil from 51% to 73%.

While the company is on right track of enhancing its reach in the agri-chemical market, it is facing an adverse environment on account of subdued global crop prices which has kept prospects of agro players muted. Despite this, the company had outperformed analyst expectations during the December 2014 quarter. UPL saw its sales rise by 15% y-o-y and its EBITDA margins also improved by 130 bps y-o-y.

The sales growth was aided by 25% rise in the Indian market as well as reasonable performance in other key markets such as the US, Latin America, Europe, and rest of the world. The company expects to sustain the momentum led by new launches that will enable market share gains and shift in preference of farmers for lower-cost products. In this backdrop the company has seen its stock hit a 52-week high of Rs 447.5 a fortnight ago, a 48% return since closing lows of Rs 302 levels in December 2013.

Analysts at Kotak Institutional Equities had increased their operating numbers led by higher sales and margins but their profit estimates remained unchanged on adjustments to interest costs and minority interest. The subdued commodity environment has to change for further upgrades feel analysts. The stock which is trading at Rs 421 levels however has some steam left given Bloomberg consensus target prices of Rs 476. For the longer term the key growth areas would be generic opportunity, with $3 billion of products going off-patent, differentiated formulations and branded products.