Better days ahead for United Phosphorus

When a company buys its own shares, it gives out a positive message which is value-accretive for investors. United Phosphorus has concluded its large buyback of 19.2 million shares recently as it believed that its stock was trading cheaply.

On valuation parameters, the stock hit its lowest value in the last five years after the Competition Commission of India imposed a penalty of Rs 252 crore on the company. Given the low valuation at which the company now trades and the fact that buyback is going to be earnings per share (EPS) accretive, analysts are changing their view on the company and are expecting better valuations.

At the current price of Rs 123.4, the stock trade at 6.7 times its FY14 earnings, which seems to be attractive for a company which has a debt to equity ratio of 0.5 times and generates positive free cash flow. Further, United Phosphorus is expected to generate 16 per cent return on equity and its earnings are expected to grow at 16-18 per cent annually over the next two years.
 

STEADY MARGINS, GROWTH
In Rs crore	FY12	FY13E	FY14E
Sales	7,655	8,607	9,802
% chg y-o-y	32.9	12.4	13.9
Ebitda (%)	14.0	14.0	13.8
Net profit	556	695	831
% chg y-o-y	–

25.0 19.6 EPS (Rs)12.815.318.3 RoE (%)20.819.619.2 PE (x)10.38.67.2 E: Estimates                                Source: Deutsche Bank, analyst reports

“We continue to be positive on the stock from the long-term perspective considering its position in the global agri-inputs market. Additionally, the valuation too, looks attractive at this point in time,” says an analyst with a leading broking house. Leading research houses have shortlisted the company as one of their top picks in 2013.

EPS value accretive
Through its buyback, the company bought 19.2 million shares at an average of Rs 116 per share, amounting to an outflow of Rs 223.49 crore. Though marginal, the company could have used these funds to repay its debt, which was Rs 2,845 crore (net debt) in FY12. When the stock prices are low buying back its shares is a better strategy than repaying debt.

Instead, if the company would have utilised the amount for repayment of debt (assuming a 10 per cent interest rate and tax rate of 17.7 per cent for FY12) benefit to the EPS would have been about 0.40 paisa on its FY14 numbers. However, through buyback, the number of shares will come down by 19.2 million, which would add about 0.75 paisa to its EPS in FY14. Effectively, its buyback has not only been a value-accretive exercise but also worked as a support to its share price in the past.

Added to this is its improving business outlook. “We estimate a 13 per cent annual growth in revenue and 17 per cent annual growth in EPS over FY12-15E, driven by its strong presence in the key emerging markets of India and Latin America (in particular Brazil),” says Amit Murarka, at Deutsche Bank equity research. The analyst also mentioned that the company, through its twin acquisitions in Brazil last year, was well positioned to benefit from rising demand for generic agrochemicals in developing markets, which have emerged as the key driver of global agrochemical sales.