BackStrong American sales boost United Phosphorus profits
The significant improvement in working capital performance comes as a positive surprise
Premium(Favourable crop economics helps the firm sell more crop protection products in the US.)
United Phosphorus Ltd was able to shrug off the sluggishness in the domestic agriculture inputs market because of its focus on international markets and inorganic growth.
For the quarter ended 31 March, total income surged 32% to ₹ 2,820 crore. What is heartening is half of the incremental sales growth came from volume. In the first nine months of the last fiscal, only 6% of the incremental sales growth (15%) came from volumes. Geographically, more than half of the incremental sales came from the American markets. Despite drought conditions in some parts of the US, favourable crop economics helped the company sell more crop protection products in the US. Growth in Latin America is driven by the Brazilian market. Delayed sowing of corn crop and higher soybean acreage helped the firm sell more products in January-March this year.
While overall sales in the American markets grew by a robust 40%, a 4% hike in product prices and 44 basis points (bps) drop in raw material costs as a percentage of net sales helped the company report a 36% jump in operating profits to ₹ 537 crore. The earnings before interest, tax, depreciation and amortization (Ebitda) margin expanded 65bps to more than 19%.
The strong growth in operating earnings, though, did not translate into profits. Finance costs surged 88% to ₹ 129 crore. As the company continued to consolidate its subsidiaries, one-time items and prior-period adjustments continued to impact profit. Profit from ordinary activities grew by 18%. But with an associate company turning in a profit worth ₹ 18 crore, net profit surged 37% to ₹ 278 crore.
The robust performance, nevertheless, come as a pleasant surprise. The stock surged 2.40% to ₹ 132.15 on Thursday when its benchmark S&P BSE Mid-cap index closed with a gain of 0.5%. Apart from strong sales, the company also reported significant improvement in working capital performance. Long-term receivables came down to a trickle. Improved product off-take and advances against shipments helped the company reduce the net working capital days from 113 at the end of March 2011-12 to 89 days in March 2012-13. Similarly, receivable days came down from 116 to 109 days. Longer credit terms with raw material suppliers meant that payables days were extended from 90 to 103 days.
The significant improvement in working capital performance was a positive surprise. With Latin American markets usually having longer credit-cycles, analysts were not expecting the receivable days to fall significantly in the short term. By continuing its focus on cash generation, the firm aims to contain net working capital days at 90-100 days.
For the current fiscal, the management has forecasted revenue growth of 12-15% and hopes to improve margins by around 100 bps points. While it expects the US and Brazil to drive growth, steady improvement in the working capital situation and margins can help the stock continue its outperformance.
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