United Phosphorus: Sept nos don’t back up co’s high valuation

The results of United Phosphorous showing a doubledigit profit growth failed to cheer the market as the scrip tumbled over 7%. The company has been showing a muted growth over the last several quarters, which does not support its current high valuations.

Considering the results of the September quarter, the scrip is now trading 17.4 times its earnings for the trailing
12 months. Over the last four quarters, UPL has been facing pressure on its sales growth, which has always remained
in single digits.

In the September 2010 quarter, too, the trend continued, with the consolidated sales growing 9.6% against the year-ago period. This was mainly due to the rupee’s appreciation. The company’s revenues in the two key geographies of North America and Europe, which together contributed 37% of its total sales during the September quarter, fell in comparison with year-ago period. The contribution from India grew substantially to 35% as domestic revenues showed a
huge jump of 45%.

The company improved its operating margins by 150 basis points to 18.5% in the quarter as raw material and staff costs stagnated. The 47.7% growth in other income, which stood at Rs 25.9 crore, pushed up the PBDIT by 20.8%.

However, a 61% jump in interest cost and a substantial jump in the effective tax rate limited the growth in net profit to 13.3% at Rs 114.7 crore. The company is currently carrying cash or equivalents amounting to nearly Rs 2,100 crore on a consolidated basis and is scouting for acquisition targets. Its latest acquisition was Mancozeb, the fungicide business of DuPont, in June 2010. The September quarter was the first quarter of this business contributing to the company’s revenues.

Going forward, the company is expecting to achieve around 8% to 10% organic growth in its topline, excluding this newly acquired Mancozeb business. If Mancozeb is also included, the growth could touch 15% for the whole FY11.

Increasing volumes will mainly lead this growth. It appears that the key to its high valuations remains in the success of its M&A strategy.