>UNITED PHOSPHORUS (CITI)

Buy: Handsome Beat in 1Q; Maintain as Top Pick

■ Strengths shining through — Trends in 1Q reflect the resilience in UPL’s business model, as it absorbed the impact of high cost RM inventory & postponement of sales in key markets to materially beat estimates (rec. PAT by 16%). Concerns over the impact of poor/delayed monsoon in India & pricing pressure in global markets appear overdone to us. Maintain as Top Pick.

■1Q: Strong beat — Rec. PAT beat our estimate by 16%. Reported figures up to EBIDTA (sales up 26% YoY; margins down 56bps) are skewed by seeds sales on behalf of Advanta. Excluding this, sales grew 20% YoY despite postponement of sales in India (+2% YoY) & US (+24% YoY) and EBIDTA margins expanded 36bps, despite use of high cost RM in stock. Rec. PAT grew 6% YoY (lower other income & higher interest), which was impressive, given
the high base last year.

■ Exploring synergies with Advanta — UPL is exploring front-end synergies with Advanta by integrating the sales & distribution teams in India. It has started using its distribution network to sell seeds on Advanta’s behalf (Rs770m sales in 1Q). This will likely remain on a no-profit-no-loss basis (source & sell at the same price) for a year as they figure out the extent of synergies – which would then be shared between the two companies.

■ Other key takeaways — a) Benefit of lower RM cost to reflect in future quarters as high cost inventory has been used up; b) India: Some pushing out of sales but off-take has picked up over last 15 days; c) Debt higher by cRs3.6bn to fund higher working capital – likely to ease over the year; d) Pricing: EU is still strong, US is better for UPL due to low base last year, and India is competitive.

To see full report: UNITED PHOSPHORUS