"United Phosphorus (UPL) continues to trade at ~50% discount to peers due to investor concerns related to piling up of debt, further deterioration in working capital, margin dilutive acquisitions and decline in return ratios. However, we believe, concerns are overdone and CMP factors in all negatives. We would like to highlight that despite decline in return ratios from their peak, current RoE/RoA at 16.4%/6.1% are significantly higher than the global generic players, Nufarm & Makhteshim-Agan (MAI).
Despite increasing contribution from Brazil which has longer credit cycles, we do not expect working capital to deteriorate further. On the contrary, we have modelled for working capital improvement of three days over the next two years to 143/142 in FY14E/FY15E. We believe there is room for improvement in inventory/receivables across multiple geographies as unfavourable weather conditions this year have resulted in piling up of inventory and longer credit days. However, rebound in these markets over the next two years would result in marginal improvement of working capital.
UPL's higher exposure to emerging markets positions it well to deliver sustainable revenue growth over the medium term. EBITDA margins are likely to improve by 60bps over the next two years, driven by a turnaround in DVA (expect DVA to contribute 20-30 bps of improvement), significant cost savings initiatives and shift in product mix. We expect UPL to register 12.5%/14.1% CAGR in Revenue/PAT over FY12-15E. RoE/ROCEs are likely to improve ~150bps to 17.8%/12.6% from FY13E-FY15E. With sustainable earnings growth and improvement in return ratios, stock is likely to get re-rated. We value UPL at 9x FY14 earnings and recommend buy with target of Rs 170 (43% upside to CMP)," says Prabhudas Lilladher research report.
Bodies Corporate holding more than 50% in Indian cos
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