1QFY2018 Result Update | Agrichemical

August 8, 2017

United Phosphorus

REDUCE

CMP

`887

Performance Highlights

Target Price

820

Y/E March (` cr)

1QFY2018

4QFY2017

% chg (qoq)

1QFY2017

% chg (yoy)

Investment Period

12 months

Net sales

3,723

5341

(30.3)

3452

7.8

Other income

101

147

(31.3)

52.0

Stock Info

Gross profit

2204

2569

(14.2)

1852

19.0

Sector

Agrichemical

Operating profit

691

1037

(33.4)

612

12.8

Market Cap (` cr)

45,034

Adj. net profit

491

740

(33.6)

387

27.1

Net Debt (` cr)

3,231

Source: Company, Angel Research,

Beta

1.0

UPL posted good set of numbers for 1QFY2018. Sales came in at `3,723cr v/s.

52 Week High / Low

902/584

`3,644cr, a yoy growth of 7.8%. On operating front, the Gross profit margins

came in at 59.2% v/s. 53.6% in 1QFY2017, which in part aided the OPM to come

Avg. Daily Volume

1,06,314

in at 18.6% v/s. 17.7% in 1QFY2017. The expansion in OPM was lower than the

Face Value (`)

expansion in gross profit margins mainly aided by a lower sales growth during the

BSE Sensex

32,325

quarter. Thus, net profit came in at `475cr v/s. `362cr in 1QFY2017, a yoy growth

Nifty

10,066

of 31.2%. Adj. net profit came in at `491cr v/s. `387cr, a yoy growth of 27.1%.

Reuters Code

UNPO.BO

Management maintained FY2018 guidance for 12-15% revenue growth, 50-75

Bloomberg Code

UNTP@IN

bps Ebitda margin expansion, and a 20-22% effective tax rate. We maintain

recommend a reduce given the valuations.

Shareholding Pattern (%)

Promoters

27.9

Quarterly highlights: UPL posted good set of numbers for 1QFY2018. Sales came

MF / Banks / Indian Fls

14.0

in at `3,723cr v/s. `3,644cr, a yoy growth of 7.8%. On operating front, the Gross

FII / NRIs / OCBs

51.3

profit margins came in at 59.2% v/s. 53.6% in 1QFY2017, which in part aided the

Indian Public / Others

6.8

OPM to come in at 18.6% v/s. 17.7% in 1QFY2017. The expansion in OPM was

lower than the expansion in gross profit margins mainly aided by a lower sales

growth during the quarter. The PBT during the quarter, posted a yoy growth of

Abs. (%)

3m 1yr

3yr

37.2%, aided by a 52.0% yoy growth in other income (`101cr v/s. `66cr in

Sensex

8.0

16.6

25.7

1QFY2017). Thus, net profit came in at `475cr v/s. `361cr in 1QFY2017, a yoy

UPL

10.3

47.3

165.1

growth of 31.6%. Adj. net profit came in at `491cr v/s. `387cr a yoy growth of

27.1%.

Outlook and Valuation: We expect UPL to post a CAGR of 16.0% and 13.3% in its

3-year price chart

sales and PAT respectively over FY2017-19E. At the current market price, we

recommend a reduce, given the valuations.

Key financials (Consolidated)

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

Total revenue

14,048

16,312

18,922

21,949

% chg

17.9

16.1

16.0

Adj. profit

1,051

1,800

1,834

2,310

% chg

(8.3)

71.3

1.9

25.9

EBITDA (%)

16.1

17.8

18.0

18.5

Source: Company, Angel Research

EPS (`)

24.5

35.5

36.2

45.6

P/E (x)

36.2

25.0

24.5

19.5

P/BV (x)

6.5

6.1

5.1

4.2

RoE (%)

17.9

27.1

22.7

23.8

RoCE (%)

15.4

19.1

19.8

21.6

Sarabjit Kour Nangra

EV/Sales (x)

3.4

2.9

2.5

2.1

+91-22-3935 7800 ext. 6806

EV/EBITDA (x)

21.4

16.3

13.9

11.3

[email protected]

Source: Company, Angel Research; Note: CMP as of August 4, 2017

Please refer to important disclosures at the end of this report

United Phosphorus | 1QFY2018 Result Update

Exhibit 1: 1QFY2018 Performance (Consolidated)

Y/E March (` cr)

1QFY2018

4QFY2017

% chg (qoq)

1QFY2017

% chg (yoy)

FY2017

FY2016

% chg

Net sales

3,723

5,341

(30.3)

3,452

7.8

16,312

14,048

16.1

Other income

101

147

(31.3)

52.0

444

316

40.5

Total income

3,824

5,488

(30.3)

3,518

8.7

16,755

14,364

16.6

Gross profit

2204

2569

(14.2)

1852

19.0

8496

7268

16.9

Gross margin (%)

59.2

48.1

53.6

52.1

51.7

Operating profit

691

1037

(33.4)

612

12.8

2904

2266

28.2

Operating margin (%)

18.6

19.4

17.7

17.8

16.1

Financial cost

213

(62.4)

106

(24.5)

735

704

Depreciation

158

187

(15.3)

169

(6.5)

672

676

-0.6

PBT

554

785

(29.4)

404

37.2

1941

1202

61.5

Provision for taxation

10.1

189

165

14.6

PAT Before Exc. And MI

506

729

(30.6)

360

40.5

1753

1037

69.0

Minority Income/ ( Exp.)

Income from Associate/ (Exp)

(12)

(19)

(85)

Extra ordinary Income/( Exp.)

(19)

(28)

(73)

(111)

Reported PAT

475

741

(35.9)

362

31.2

1,727

940

83.8

Adjusted PAT

491

740

(33.6)

387

27.1

1800

1051

71.3

EPS (`)

9.7

14.6

9.0

35.5

24.5

Source: Company, Angel Research,

Top-line growth mainly led by ROW & North America

In sales, the company posted gross revenues of `5,341cr v/s. `4,434cr in

4QFY2016, growth of 20.5% yoy. The growth was driven by volume (10% yoy),

while pricing dip was around 1% and exchange gains deducted 3% to the top-line

rise.

In terms of geography - Latin America (`737cr, up 6.0% yoy), India (`1,246cr,

rose by 4%), ROW (`602cr, yoy rise of 9.0%), Europe (`585cr, yoy growth of

4.0%). USA (`681cr), the key market, posted a yoy growth of 7.0%.

Latin America sales grew by 6.0%. Poor commodity prices and high inventories

effecting cash flow and advance purchases in the region. Also, Mexico suffered

severe drought situation in the quarter, leading to 25% replanting of corn.

Indian sales grew lower during the quarter, on the back of the GST

implementation. Company’s vegetable seeds business is facing challenges due to

low prices. During the quarter the company launched 3 new products (1 plant

health product), 4 launches planned for 2QFY2018.

European sales grew 4% during the quarter. Higher beet acreage and extended

season positively impact its herbicide portfolio. Also, its fungicide business was

affected by dry, hot weather in Southern Europe.

August 8, 2017

United Phosphorus | 1QFY2018 Result Update

EBITDA margin expands

On EBITDA front, the company posted an EBITDA of 18.6% v/s. 17.7% in

1QFY2017. The expansion in OPM was less than the gross margin expansion (was

59.2% v/s. 53.6% in 1QFY2017), on the back of forex losses, which was around

`59cr v/s. `25cr in 1QFY2017.

Exhibit 6: EBITDA margin trend

Source: Company, Angel Research

Adjusted Net Profit grew 27.1% yoy

Along with this, dip of 6.5% in the deprecation, 24.5% dip in the finance expenses

& 52.0% yoy growth in other income aided the PBT to grow by 37.2% yoy.

However, a loss from the Associate of `12cr during the quarter v/s. `2cr profit in

1QFY2017, lead Adj. PAT to come in at `491cr v/s. `387cr in 1QFY2017, growth

of 27.1% yoy.

Exhibit 7: Adjusted PAT trend

Source: Company, Angel Research

August 8, 2017

United Phosphorus | 1QFY2018 Result Update

Invvestment arguments

Innovators dominant in the off-patent space; Generic firms in

a sweet spot

The global agrichemical industry, valued at US$56bn (CY2015), is dominated by

the top six innovators, viz. Bayer, Syngenta, Monsanto, BASF, DuPont and Dow,

which enjoy a large market share of the patented (23%) and off-patent (54%)

market. The top six innovators enjoy a large share of the off-patent market due to

high entry barriers for pure generic players. Thus, of the total pie worth US$30bn,

which is controlled by the top six innovators through proprietary

off-patent products, provides a high-growth opportunity for larger integrated

generic players like UPL.

Generic segment’s market share to increase

The industry registered a CAGR of 3% over 1998-2006, while generic players

outpaced the industry with a CAGR of 6%. Going ahead, given the opportunities

and a drop in the rate of new molecule introduction by innovators, we expect

generic players to continue to outpace the industry’s growth rate and augment

their market share in the overall pie. Historically, global agrichem players have

been logging in-line growth with global GDP. Going ahead, over CY2016-17, the

global economy is expected to grow by 3-4%. Assuming this trend plays out in

terms of growth for the agrichemical industry and the same rate of genericization

occurs, the agrichemical generic industry could log in 6-8% yoy growth during the

period and garner a higher market share.

A global generic play

UPL is the third largest global generic agrichemical player with presence across

major markets including the US, EU, Latin America, and India. Given the high

entry barriers by way of high investments, entry of new players is restricted. Thus,

amidst this scenario and on account of having a low-cost base,

we believe UPL enjoys an edge over competition and is placed in a sweet spot to

leverage the upcoming opportunities in the global generic space.

Advanta - An Entry into seeds business

During FY2016, UPL announced a merger of Advanta with itself. With this, the

company has made its foray into the seed business, thus, widening its business

offerings in the Agri-business. The company had sales of around US$204mn in

2015, with OPM of around 15-16%. It is the 11^th largest seeds company globally,

with world leadership in Sorghum. Along with this, it also completes the company’s

business portfolio, in-line with the other major Agri-businesses, who have around

5-20% (Monsanto and DuPont have around 65% of their sales mix through seeds)

of their sales mix through seeds business. While the acquisition improves the

presence of the company in the low capital intensive industry coupled with the

propriety products, which will yield long term profitability; the near term challenges

include high R&D cost coupled with long legislation period for the product

commercialization.

According to the industry numbers, the international seeds sector is growing at 6%

per annum. In value terms, the Indian hybrid seed sector, estimated to be worth

August 8, 2017

United Phosphorus | 1QFY2018 Result Update

`12,000cr comprises some 14 states seeds corporations and two national-level

corporations, 20 large players including multinationals and around 500 small

regional players. About 10 domestic and multinational companies control over

80% of the market. The market has been growing at 15-20% annually over the

past several years, and is projected to reach around `18,000cr by 2018. Though

we have included the Advanta numbers in our projections, we have been

conservative on the same.

Outlook and valuation

Over the last few years, the global agriculture sector has been reviving on the back

of rising food prices. Food security is also a top priority for most governments, and

reducing food loss is one of the easiest ways to boost food inventory. Hence, we

believe agrichemical companies would continue to do well in the wake of

heightened food security risks, and strong demand is likely to be witnessed across

the world. Overall, we expect the global agrichemical industry to perform well

from here on. Generics are expected to register a healthy growth due to - (a)

increasing penetration and wresting market share from innovators, and (b) patent

expiries worth US$3bn-4bn during the next five years.

We estimate UPL to post a 16.0% and 13.3% CAGR in sales and PAT respectively

over FY2017-19E. The stock is trading at 19.5x FY2019E EPS, which we believe

provides very little room for appreciation. Hence, we recommend a reduce rating

on the stock.

Exhibit 8: Key assumption

FY2018E

FY2019E

Sales growth

16.0

EBITDA margin

18.0

18.5

Tax rate

20.0

Source: Company, Angel Research

Exhibit 9: P/E band

Source: Company, Angel Research

August 8, 2017

United Phosphorus | 1QFY2018 Result Update

Exhibit 10: Peer valuation

Company

Reco

Mcap

CMP

Upside

P/E (x)

EV/Sales (x)

EV/EBITDA (x)

RoE (%)

CAGR (%)

(` cr)

(`)

(%)

FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 Sales PAT

Rallis

Reduce

4,743

243

209

(14.3)

25.8

23.1

2.1

1.9

13.7

12.4

15.8

16.0

11.5

21.6

UPL

Reduce

45,034

887

820

(8.0)

23.8

19.8

2.4

2.0

13.5

11.3

22.7

23.8

16.0

13.3

Source: Company, Angel Research, Bloomberg, All numbers in FY18 and FY19 are expected numbers

Company background

United Phosphorus (UPL) is a global generic crop protection, chemicals and seeds

company. The company is fully backward and forward integrated by taking

advantage of the consolidation opportunities within the agrochemical industry. UPL

is the largest Indian agrochemical company and had revenue of about `11,911cr

for the year ended March 2015. During FY2016, UPL announced its merger with

Advanta. With this, the company has made its foray into the seed business, thus,

widening its business offerings in the Agri-business.

August 8, 2017

United Phosphorus | 1QFY2018 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E

FY2019E

Net Sales

10,580

11,911

14,048

16,312

18,922

21,949

Other operating income

191

128

Total operating income

10,771

11,956

14,048

16,440

19,049

22,077

% chg

17.1

11.0

17.5

17.0

15.9

Total Expenditure

8,751

9,736

11,782

13,407

15,515

17,887

Net Raw Materials

5,441

6,016

6,780

7,816

9,067

10,517

Other Mfg costs

942

842

1,250

1,452

1,646

1,800

Personnel

946

1,043

1,434

1,627

1,887

2,189

Other

1,422

1,835

2,318

2,512

2,914

3,381

EBITDA

1,829

2,175

2,266

2,904

3,407

4,062

% chg

26.8

19.0

4.2

28.2

17.3

19.2

(% of Net Sales)

17.3

18.3

16.1

17.8

18.0

18.5

Dep. & Amortization

407

425

676

672

736

792

EBIT

1,613

1,796

1,590

2,361

2,799

3,398

% chg

26.7

11.4

(11.5)

48.5

18.6

21.4

(% of Net Sales)

15.0

11.3

14.4

14.7

15.4

Interest & other Charges

487

517

704

735

788

Other Income

131

316

(% of PBT)

Recurring PBT

1,257

1,410

1,202

1,941

2,327

2,926

% chg

37.1

12.2

(14.8)

61.6

19.9

25.7

Extraordinary Exp./(Inc.)

(2)

(111)

(73)

PBT (reported)

1,172

1,413

1,313

1,941

2,327

2,926

Tax

222

244

165

189

465

585

(% of PBT)

18.9

17.3

12.6

9.7

20.0

PAT (reported)

950

1,169

1,148

1,753

1,862

2,341

Add: Share of earnings of

(85)

(19)

(21)

(24)

asso.

Less: Minority interest (MI)

Prior period items

PAT after MI (reported)

950

1,144

940

1,727

1,834

2,310

ADJ. PAT

1,040

1,147

1,051

1,800

1,834

2,310

% chg

38.0

10.2

(8.3)

71.3

1.9

25.9

(% of Net Sales)

9.8

9.6

7.5

11.0

9.7

10.5

Basic EPS (`)

24.3

26.7

24.5

35.5

36.2

45.6

Fully Diluted EPS (`)

24.3

26.7

24.5

35.5

36.2

45.6

% chg

42.5

10.2

(8.3)

44.8

1.9

25.9

August 8, 2017

United Phosphorus | 1QFY2018 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E

FY2019E

SOURCES OF FUNDS

Equity Share Capital

183

Preference Capital

Reserves& Surplus

5,162

5,775

5,803

7,214

8,590

10,441

Shareholders’ Funds

5,247

5,860

5,889

7,398

8,773

10,625

Minority Interest

172

Total Loans

2,873

2,781

5,258

6,058

Other Long term liab.

311

594

449

446

Long Term Provisions

Deferred Tax Liability

(390)

(501)

Total Liabilities

8,714

9,378

11,303

13,434

14,815

16,672

APPLICATION OF FUNDS

Gross Block

6,039

6,792

9,315

10,115

10,915

11,715

Less: Acc. Depreciation

3,580

4,005

5,870

6,542

7,278

8,070

Net Block

2,459

2,787

3,445

2,632

3,637

3,645

Capital Work-in-Progress

378

484

Goodwill / Intangilbles

1,212

1,449

417

1,747

Investments

737

764

335

379

Long Term Loan & Adv.

389

418

591

811

664

770

Current Assets

7,572

8,372

11,207

13,657

15,512

18,473

Cash

1,023

1,010

1,189

2,894

3,167

4,404

Loans & Advances

771

586

840

1,380

1,581

1,582

Other

5,779

6,776

9,178

9,383

10,764

12,487

Current liabilities

4,033

4,789

5,176

6,277

7,608

8,825

Net Current Assets

3,539

3,582

6,031

7,380

7,904

9,647

Others

Total Assets

8,714

9,378

11,303

13,434

14,815

16,672

August 8, 2017

United Phosphorus | 1QFY2018 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E

FY2019E

Profit before tax

1,172

1,413

1,313

1,941

2,327

2,926

Depreciation

407

425

676

672

736

792

Change in Working Capital

171

(86)

(2,443)

135

(103)

(612)

Less: Other income

Direct taxes paid

(222)

(244)

(165)

(189)

(465)

(585)

Cash Flow from Operations

1,528

1,508

(619)

2,559

2,494

2,521

(Inc.)/ Dec. in Fixed Assets

(653)

(753)

(2,630)

(800)

(Inc.)/ Dec. in Investments

Inc./ (Dec.) in loans and adv.

Other income

Cash Flow from Investing

(653)

(753)

(2,630)

(800)

Issue of Equity

(3)

Inc./(Dec.) in loans

1,413

(192)

(2,331)

(744)

(0)

Dividend Paid (Incl. Tax)

(201)

(214)

(642)

(458)

Others

(2,612)

(362)

5,973

1,331

(963)

(25)

Cash Flow from Financing

(1,403)

(768)

3,427

(1,421)

(484)

Inc./(Dec.) in Cash

(525)

(13)

179

1,705

273

1,237

Opening Cash balances

1,548

1,023

1,010

1,189

2,894

3,167

Closing Cash balances

1,023

1,010

1,189

2,894

3,167

4,404

August 8, 2017

United Phosphorus | 1QFY2018 Result Update

Key Ratios

Y/E March

FY2014

FY2015

FY2016

FY2017

FY2018E

FY2019E

Valuation Ratio (x)

P/E (on FDEPS)

36.6

33.2

36.2

25.0

24.5

19.5

P/CEPS

26.3

24.2

22.0

18.2

17.5

14.5

P/BV

7.2

6.5

6.1

5.1

4.2

Dividend yield (%)

0.6

0.7

1.0

EV/Sales

4.3

3.8

3.4

2.9

2.5

2.1

EV/EBITDA

25.1

21.0

21.4

16.3

13.9

11.3

EV / Total Assets

5.3

4.9

4.3

3.5

3.2

2.8

Per Share Data (`)

EPS (Basic)

24.3

26.7

24.5

35.5

36.2

45.6

EPS (fully diluted)

24.3

26.7

24.5

35.5

36.2

45.6

Cash EPS

33.8

36.7

40.3

48.8

50.7

61.2

DPS

4.0

5.0

7.0

Book Value

122.4

136.7

137.4

145.9

173.0

209.6

DuPont Analysis

EBIT margin

15.0

11.3

14.4

14.7

15.4

Tax retention ratio

81.1

82.7

87.4

90.3

80.0

Asset turnover (x)

1.5

1.6

1.8

1.9

ROIC (Post-tax)

18.5

20.3

16.0

21.2

20.8

23.3

Cost of Debt (Post Tax)

11.2

15.1

15.3

11.7

10.4

Leverage (x)

0.5

0.3

0.5

0.6

0.4

0.2

Operating ROE

21.9

22.0

16.3

26.5

24.7

26.5

Returns (%)

ROCE (Pre-tax)

17.7

19.9

15.4

19.1

19.8

21.6

Angel ROIC (Pre-tax)

23.2

24.7

18.3

23.7

26.1

29.3

ROE

21.0

20.6

17.9

27.1

22.7

23.8

Turnover ratios (x)

Asset Turnover (Gross Block)

1.9

1.7

1.8

2.0

Inventory / Sales (days)

Receivables (days)

Payables (days)

WCcycle (ex-cash) (days)

104

Solvency ratios (x)

Net debt to equity

0.6

0.4

0.3

0.7

0.4

0.3

Net debt to EBITDA

1.8

1.0

0.8

1.8

1.1

0.8

Interest Coverage (EBIT / Int.)

3.3

3.5

2.3

3.2

3.6

4.3

August 8, 2017

United Phosphorus | 1QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public

offering of securities of the company covered by Analyst during the past twelve months.

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the merits and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

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contrary view, if any.

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Disclosure of Interest Statement

UPL

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

August 8, 2017