Dear Friends,
We are recommending Buy on our Actionable Ideas "United Phosphorus (UPL)" as per following:-
CMP: Rs 622 Target: Rs 710 (14% Upside)
Key Points:
UPL Q2FY19 Result Update - In-line operational performance, maintain Buy
· Broadly in-line operational performance, PAT below estimates: UPL reported a revenue growth of 12.9% y-o-y at Rs 4,257 crores. The increase was largely driven by higher volumes (up by 8% y-o-y) supported by improved blended realisation of 4% y-o-y and exchange benefit of 2%. Gross margin witnessed a slight contraction of 14 bps to 55.9% due to input cost pressures and volatile commodity and currency movement during the quarter. However, gross profit witnessed an increase of 12.6% y-o-y to Rs 2,381 crores. Despite gross margin contraction, EBITDA margin expanded by 53 bps on a y-o-y basis to 18.5% led by lower employee cost (down by 86 bps to 11.0% of sales) partly offset by an increase in other operating expenditure (up by 19 bps to 26.5% of sales). As a result, EBITDA witnessed a growth of 16.2% y-o-y to Rs 787 crores. Lower other income (down by 58% y-o-y and higher depreciation (up by 10% y-o-y) restricted the Reported PAT growth to 13.9% y-o-y at Rs 270 crores despite interest expense remaining at an almost similar level. However adjusted for exceptional items {Rs 37 crores, front loaded integration cost of Arysta LifeSciences and Rs 20 crores LATAM restructuring expenses (including severance pay) and loss on dilution in associates} adjusted PAT grew by 22% y-o-y to Rs 327 crores.
· Geography-wise Latin America registers highest revenue growth of 26% y-o-y and contributes the maximum (41%) to the overall revenue during the quarter: Latin America & India contributed to 66% of the revenue as against 63% in Q2FY18 and register a growth of 18.3% y-o-y. During the quarter, the company saw a good response by farmers for its newly introduced products such as Sweep Power, Avancer Glow and Delma, but got slightly impacted on the cotton product portfolio due to erratic rainfall in Maharashtra and Andhra Pradesh. In LATAM, all countries except Argentina witnessed a strong performance during the quarter. Performance in Europe was mixed. Despite reduction in beet acreage, the company maintained its volumes as a result of lower opening inventory. Also, Southern Europe witnessed increased consumption of fungicides as a result of good rainfall whereas dry weather in North Europe affected consumption of potato and the OSR product portfolio. In rest of the world, growth in Africa was driven largely by new product registrations such as Lifeline, Strim, Glory, Tridium, Zeba.
· Management guided for strong outlook for 2HFY19: In India, the management anticipates encouraging growth prospects for Rabi crops as dams are full in southern India. Further, the biological portfolio is witnessing significant growth. However, the contribution is very low to overall revenues. Also restriction on sale of certain registered products by few states has an adverse impact on the respective product sales. As the growth performance was not encouraging in Argentina during Q2FY19, the management is focusing on improving the quality of business in the region. Also, the company launched IMI tolerant sorghum in Argentina which is also expected improve the performance. The company launched a strong campaign in South Cone to drive business in fungicide resistance in soybean for the upcoming season. Post a strong performance in Brazil during Q2 & H1, the management is provided a positive outlook for Q3FY19 as well. In North America the company received registrations for Argyle, Tridium, Lifeline GT and Intermoc and is eyeing their launches in next season.
· Valuation – Maintain BUY with revised PT of Rs 710: The management is confident of achieving its earlier guidance of revenue growth in the range of 10-12% whereas EBITDA growth in the range of 12-15% for FY2019, based on the global demand outlook coupled with lower inventory in key geographies. UPL is better placed to benefit from global recovery in the agri commodity space over the next 2-3 years. We have revised out earnings to factor in front loaded integration cost of Arysta and impact of volatile currency. We expect the company to post a CAGR of 14%/16%/12% at revenue/ EBITDA/ PAT level during FY2018-2020. We maintain our Buy recommendation on the stock with revised price target of Rs 710.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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