Some positives, but slowdown likely

United Phosphorus’s (UPL) acquisition of RiceCo LLC, USA, last week is beneficial for both the companies and will reflect in UPL’s financials from the March quarter. RiceCo, which has a strong herbicides product portfolio with a focus on rice, will benefit by leveraging UPL’s global sales and marketing network. The company will also be able to cross-sell UPL’s current portfolio of products to its existing customers, while adding strong brands to UPL’s branded product portfolio. For UPL though, while the deal valuations and funding is not a concern, the abnormal monsoon in India and some key markets has impacted crop production, leading analysts to lower the company’s earnings estimates. However, UPL shares have corrected 28 per cent since its one-year peak of Rs 219.70 and are now trading at eight times the 2011-12 estimated earnings. Analysts say investors are getting a good entry point.

Experts believe RiceCo’s estimated acquisition cost of Rs 225 crore is below UPL’s historic average valuation of two times the enterprise value to sales. With UPL sitting on a cash pile of Rs 2,000 crore, funding the deal shouldn’t be an issue. Notably, RiceCo is a debt-free company. In CY2009, RiceCo clocked in revenues of $25-30 million. This is the second acquisition by UPL this year, following the acquisition of Mancozeb’s global business and the Manzate brand, both from DuPont in June.

Meanwhile, UPL’s Spain production facilities are expected to be shifted to India soon, and should save the company about Rs 30 crore. The company intends to launch two new molecules every year in the US, with about seven products in the pipeline for registration currently.
 

ATTRACTIVE VALUATIONS
In Rs crore	FY10	FY11E	FY12E
Sales	5,412	5,956	6,691
Ebitda (%)	18.90	20.10	20.60
Net Profit	545	680	828
PE (x)	13.20	10.50	8.70
E:Estimates                                                Source: Bloomberg

While UPL’s longer-term prospects look good, prolonged rainfalls in India coupled with abnormal weather conditions in South America will impact the top line growth of UPL in the December quarter. Analysts have trimmed their December quarter estimates to reflect the same.

Sales growth is now expected at 2-5 per cent versus 15 per cent earlier, with the volume growth pegged at 6-8 per cent versus 20 per cent earlier. However, Ebitda margins are likely to expand 100-150 basis points, at 19 per cent, reflecting the impact of cost rationalisation and plant restructuring already completed in Europe in FY2010. Strengthening raw material prices will not result in a significant margin pressure because of the low quantum of the rise.

Overall, while analysts have reduced their 2010-11 and 2011-12 revenue and net profit growth estimates, the company is still expected to report an annual growth of 10-12 per cent in revenues and 21-24 per cent in net profit in these two years. These, however, could change as UPL continues to look for more acquisitions.