United Phosphorous Ltd (UPL)’s diversified product portfolio, strong distribution network and presence across geographies make it a good investment play in the agrochemical space.
UPL derives its revenues from various geographies across the world, with India contributing around one-fifth of the revenues.
Such well-diversified client markets act as a natural hedge for the company during times of slowdown or drought in any particular region.
Globally, the agrochemical industry is divided into products protected by patents and generic products.
With a significant number of agrochemicals going off patent in the next couple of years, opportunities for global generic players like UPL are likely to be immense. UPL has a strong pipeline of products in the generic crop protection space.
Domestically too, in view of the increasing focus on improving productivity and the lower penetration of agrochemicals in the country, the demand for crop protection products is likely to remain buoyant going forward.
Despite its strong positioning in the crop protection market and the healthy growth in its earnings, UPL trades at a huge discount to its one-year forward average EV/EBITDA multiple of 9.4x, leaving scope for substantial upside.
Moreover, we have not factored in any possible upside from its seed business that is currently margin dilutive but is expected to witness improvement in profitability.
At the current market price of Rs163, the stock is discounting its FY2010E and FY2011E EPS at 10.7x and 8.8x respectively.
We initiate coverage on UPL with a BUY recommendation. We arrive at a price target of Rs225 after valuing the company at 8.5x its FY2011E EV/EBITDA, which is at ~10% discount to its historical average.